By Babajide   Komolafe
LAGOS— THE Central Bank of Nigeria, CBN, yesterday, tightened money supply into the economy, in anticipation of further rise in inflation, saying  the economy grew by 7.85 per cent in 2010, up from 6.89 per cent in 2009.

The apex bank cautioned against debt-financed government spending, saying this fuels inflation and impedes flow of credit to the private sector. It also identified lack of flow of credit to critical sectors, political and security concerns as challenges to the economy in 2011.

At the end of its Monetary Policy Committee, MPC, meeting, the apex bank announced 25 basis points increase in the Monetary Policy Rate, the bench mark for  interest rate in the economy to 6.5 per cent. The apex bank also raise the Cash Reserve Requirement, CRR, of banks, which is the  portion of deposits that banks must keep as cash with it,  to 2.0 per cent  It also increased the Liquidity Ratio of banks, which is the portion of banks’deposit that they must keep in liquid assets, to 30 per cent from 20 per cent. The increase in the liquidity ratio is, however, effective March 1, 2011

Security, political concerns threaten economy

The CBN reported that the nation’s economy as reflected by the Gross Domestic Product, GDP, further grew in 2010 to 7.85 per cent, with growth driven by non-oil sector.

It, however, identified lack of flow of credit to critical sectors of the economy, political  and security concerns as challenges to the economy in 2011.

“The Committee noted the sustained output growth recorded in 2010. Provisional data from the National Bureau of Statistics, NBS, indicated that real Gross Domestic Product, GDP, grew by 8.29 per cent in the fourth quarter of 2010, up from 7.86 per cent recorded in the third quarter. The overall GDP growth for 2010 was estimated to be 7.85 per cent, compared to the revised growth rate of 6.96 per cent recorded in 2009.

“The non-oil sector remained the major driver of overall growth, with agriculture, wholesale and retail trade, and services contributing 2.39, 2.04 and 2.08 per cent, respectively. The outlook for 2011 is projected to be generally favourable in view of the continued improvement in the international oil market and emphasis on the development of the non_oil sector.”

Debt-financed govt spending hurting economy

The MPC  called for restraint on debt-financed government spending, saying this fuels inflation and impedes flow of credit to the private sector. In its review of  the economy in 2010, the  MPC  noted that while credit to the three tiers of government grew by 67.83 per cent, credit to the private sector contracted by 4.92 per.

“The Committee noted that although inflation has been trending downwards, the single digit benchmark was not achieved in 2010, despite the relatively good harvest, improved supply of petroleum products and lower growth in monetary aggregates. This, according to the Committee underscores the need to address both supply and demand side factors that determine inflation dynamics in Nigeria.

“One of the ways to keep aggregate demand in check is to restrain Debt_financed government spending in the medium_term. This calls for a review of subsidies and other recurrent expenditure categories that constitute a drain on the national budget as well as improving the revenue base. For this reason, the MPC believes that the risk to price stability posed by fiscal
operations will need to be constantly monitored if inflation is to be brought down to single digit levels in the short to medium term.

However, the Committee noted that the general thrust of fiscal policy pronouncements is in the desired direction”.