Financial and Economic crisis In Nigeria
Developed and developing countries around the world have been worried over the effect of the global financial crisis on their local economies. While major economies in the world are rolling out bail- out plans, Nigeria’s economy appears to be safe especially the financial markets but the dip in oil prices may hurt. The Nigeria economy continue to be dominated by oil which has risen from 29 percent of GDP in 1980 to over 80 percent in 2008. Oil and gas contributes about 99 percent of exports and provides about 85 percent of government revenues. Unfortunately, in addition to the global financial crisis, the price of oil also continues to dip from a high of more than $ 140 per barrel mid- year to $44. Our recent gains in economic growth and macroeconomics stability may be threatened by sustained fall in oil prices. There is greater threat of protectionism as Nigeria look in ward to protect against recession.
The Nigeria Economic summit Group also hinted that Nigeria is losing competitiveness because infrastructure remains inadequate in critical sectors- power, transportation. The framework for incentives neither adequately nor efficiently mobilizes resources.
But as the crisis intensified, the effects of financial turmoil on Nigeria increased. There was soaring risk a version, tumbling equity market, falling exchange rates, falling and capital flow decline, while the stock market bearish period deteriorated substantially leading to less of investors confidence. It is against this fact we want to know the effects of the global financial and economics crisis in Nigeria.
THE OVERVIEW OF SUBJECT MATTER
The term financial and economic crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. Many financial crisis were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crisis include stock market crashes and the bursting of other financial buddles, currency crisis, and sovereign defaults. Some economic theories that explained financial crises includes the world systems theory which explained the dangers and perils, which leading industrial nations will be facing and now facing at the end of the long economic cycle, which began after the oil crisis.
The global financial and economic crisis which started as tension in the United States financial market which emerged in early 2007 was believed not to affect other economies such as Nigeria’s as they do not operate the same system with U.S; The crisis which later transformed into a fall blown global financial crisis have started having effect on the Nigerian economy.
THE EFFECTS OF THE GLOBAL FINANCIAL AND ECONOMIC CRISIS ON THE NIGERIAN ECONOMY
The global financial and economic crisis have affected the Nigerian economy severely. The financial crisis affect many parts of the economy like the capital market, the financial markets, Banking sectors, increase in Oil prices and increase in debt etc.
The Nigeria stock exchange, the flagship of Nigeria’s capital market has witnessed unprecedented turbulence since April, 2008. First, the downward slide of the stocks on the market dominated by the banking sector made experts restive and regulatory authorities. The market began a free- fall never witnessed in the history of capital market operations in Nigeria.
Both local and foreign investors who had taken advantage of the optimal return on investments on the stock exchange began to scamper else where in desperation.
The director general of the Securities and Exchange Commission about the current liquidity squeeze in the capital market, says the economy will suffer if the situation continues. Acting as government directive, SEC, the apex regulator of the capital market. The rules appear to have only salutary effect on the market. High unemployment rate which can lead to inability of people investing in the market can be the direct fallout of both the fiscal and monetary policies starving the market the funds. If the government increases taxes disposable income will go down, which may lead to low level of investment in the capital market and people would have little money at their disposal for day to day activities. If the monetary authorities mop large money from the economy this can cause credit crunch which is a situation in which financial institution are not given credit as expected. In this kind of situation prospective investors will lack appropriate capital for business expansion such business will not grow, unemployment will rise, then disposal income will again go down and people will not be able to invest in the capital market.
The Government of the Central Bank of Nigeria, however said that institutional investors should be held responsible for the misfortune of the capital market speaking at a recent town hall meeting in Abuja, the governor said that the dwindling fortune of Nigeria’s capital market was as a result of divestment by institutional investors. According to Soludo, the reason for the down turn is simple, given the credit crunch in the advanced industrial world, several of the institutional investors in those markets began to pull out of our own markets. By the end of 2008 there was panic as the stock market was already at its lowest bear in level.
The world economy is facing the most severe financial crises since the great depression of the last century. The risk of global recession has heightened significantly and volatility of commodity prices, which is the main stay of most developing countries like Nigeria, has increased further. If this situation continues to deteriorate, developing countries could be in great jeopardy. This study examined the influence of the global financial crisis on Nigerian economy. It was discovered that the financial crisis will cause fall in commodity prices, decline in export, lower portfolio and FDI inflow, fall in equity market, decline in remittance abroad e.t.c. it was recommended that the federal government should come up with intervention polices that will minimize these effects and jump start the economy and that business operator should learn to do things using resources at their disposal to develop and expend at manageable level to stem the tide of the crises. The current global financial crisis is no longer news but a reality. Our policy makers in the country have been wrong based on their argument that the country was insulated. Some of the sectors that.
The Nigerian global banks would soon cry for bailout as many of them are quoted. The regulators for the economy such as the central bank of Nigeria (CBN), securities and exchange commission (SEC) repeatedly assured Nigerian banking public that in as much as the economy might not be insulated from the effects of the meltdown, the country’s 24 universal banks which was saved by the consolidation exercise of the sector in 2005, are strong to wither the crises. While the impact on banks is said to have higher operational costs as well as loss of income that could have been earned from facilitating the inflow of capital into the economy. Other areas where the economy was adversely affected by the meltdown is the loss of income from strategic business unit like the local foreign currency unit, desk in banks due to restrictive foreign exchange policies (such as the reduction in met open positions etc. enacted to defend the naira) which have virtually strangled the inter bank exchange market and related transaction income there has also been reduction and reprieving of credit lines from foreign banks and in some cases out right freezing of such lines. This led to loss of significant income usually earned from trade finance business. The capital market down turn and divestment by foreign investors leading to loss of investors confidence and increase in non performing loans from facilities granted to investors in the stock market is said to be the most severe effect of the global meltdown. The global economic crisis recent events are beginning to last doubts on the state of the Nigeria banking sector especially with effects of the crisis. The consistent decline in the stock market has affected banking stocks more than any other sectors.
However, the economy crisis has posed a lot of challenges in Nigeria which experts said have led to the shrinking of the economy. The falling Oil prices and dwindling revenue for government which leading to less deposit for banks which depend on the public sector for bulk of their deposit liabilities. The fall in oil price is also said to have affected the rate of accumulation of the external reserve. Consequently, the naira has been under a lot more pressure losing more than 25 percent of its value from last year to first quarter of the year. Also, the declining capital inflow into the economy, have the effect of relatively high operating cost occasioned by decaying infrastructure like power and transportation because of the depth of funds for investment in infrastructural development.
Government at national and sub national level have recently increased its borrowing to cover short fall in revenue and resultant crowding out of the private sector. The key development of the second half of 2008 has been a dramatic worsening of the first of the dimensions mentioned above, the financial crises based on the accumulation of debt. The main causes of this have been growing recognition that the quantity of bad debt in the system was much larger than was previously thought. This in the U.S ruling class about the way to respond to the rising number of loan defaults. Unwillingly forced to nationalize the mortgage companies. This threw the banking system into a diaper crisis in three ways. First, the rising tide of bad debt threatened the solvency of the bank. Second, the apparent change in Federal Reserve policy from the earlier rescue of bear stems create a panic in the inter- bank tending market. Uncertain of which banks would survive banks ceases to lend to any one at all in this market causing the system as a whole the seize up. Thirdly, stock market investors also panicked sending bank shares into free fall. Since bank regulation is based on the idea that loans can only be a certain multiple of bank capital and since the decline in shares reduced capital significantly. This is likely to lead to a massive decline in bank lending which would have further threatened the stability of the system.
The poverty impact of the crisis in Nigeria will depend or how it affects both average consumption and the distribution relative to the mean. The world bank has made projections for average consumption at country level, which can be compared to the bank’s pre- crisis projections to assess the expected impact of the crisis. We use the World Bank’s latest growth projections for 2009 and 2010 (as of mid- April 2009) as a post- crisis” growth rates, while the counter factual (pre- crisis) projections for those done by the bank in December 2007 for 2009 and 2010. We have used the growth projection for private consumption per capital. Consumption is more appropriate the GDP for predicting the short term impact on poverty. Since the shock to GDP is unlikely to be passed on fully to consumption in the short term. The crisis is expected to sharply reduce growth in 2009. In December 2007, the bank forecast a growth rate of consumption per capita of 5.1% for 2009. This is an expenditure weighted mean for the same set of countries for which we measure poverty using household surveys.
RESPONSE TO THE GLOBAL ECONOMIC CRISIS
The response of Nigeria to the global economic crisis is expressed in the recommendation of the steering committee set up by president Umaru Musa Yar’ Adua in response to the crisis. The recommendation centre on.
Full deregulation of the down stream sector of the oil industry, the privatization of over refineries and the removal of fuel subsidies reforming the petroleum products pricing and regulatory Agency (PPPRA).
The adoption of a common year and for commercial banks and the adoption of international financial Reporting Standards (IFRS) by all banks in the system.
The establishment of an asset management company and the setting up of a regulatory financial services committee to the financial system.
According to Mr. Charles Mordi, Director Research Department, CBN, who presented a paper titled ‘the Global Economic Crisis and the Nigerian financial system: they way forward” at the recently held seminer for finance correspondents and Business Editors organized by the CBN in Markudi, Benue State, the way forward for the nation’s economy as well as the banking sector in the crisis is to insure access to liquidity for domestic financial institution.
He also noted that regulation and supervision functions have to be tightened while there is a need for collective action required to reduce over all risk in the banking system. While he mentioned that there is need for financial institutions to embrace transparency is need to also adopt the international financial Reporting Standards. The financial experts believe there is also need to review all relevant laws relating to the financial sector to strengthen its regulatory capacity amongst others.
These policy recommendations collectively demonstrate that in the first place, Nigeria admits that things are getting out of hand in terms of the impact of the global economic crisis on Nigeria and that Nigeria must adopt tough policy measure towards a comprehensive strengthening of the financial services sector. In the second place. Policy recommendations demonstrate that the foundation of the economy if Nigeria is based on the financial and oil sectors.
In effect, with crude oil contributing about 95% of the total foreign exchange earnings of Nigeria and the banking sector constitutes about 65% of the capitalization of the capital market of the country. The ultimate argument would be that once these two sectors work properly, every other thing will work alright. Accordingly, it was expected that fall policy recommendations are implemented to the letter, they would certainly alter the face of the entire financial system is the country and thus reposition Nigeria against the impact of the global economic meltdown.
Nigeria suffered form a set of complexes as a consequence of the global economic crisis. In this regard, the rises in food prices as well as the financial instability and uncertainty in industrialized nations are having a compounding effect on Nigeria. Accordingly, high fuel costs, soaring commodity prices together with fears of global recession constitute obstacles to development in many developing countries. In real terms, the uncertainly and instability in international financial, currency and commodity market, coupled with doubts about the direction of monetary policy in some major developed countries, are contributing to a gloomy outlook for the world economy and in fact present considerable risks for developing countries. This is particularly so because commodity dependent economic are exposed to considerable external shocks stemming from price booms and busts in international commodity market.
It is perhaps obvious that at the earliest manifest incidence of the global economic crisis, the Nigerian economic framework was taken unawares. As such, the key players in the Nigeria economy demonstrated evidence of ignorance about the real connection between the Nigerian economy and the larger global economy. This could have been very unfortunate for officials who should have been sufficiently knowledgeable about the facts of the Nigerian economy which is dependent on export trade and this subject to external influence in a determining manner.
In effect, in 2008, the Governor of the CBN announced that the Nigerian economy was immune to the global economic crisis. He noted that the banking consolidation which he pursued and realized in 2004 has repositioned the banking sector in Nigeria and made it impervious to any storm that could rage in the global financial system. The revenue of the government became immediately weakened in an irretrievable manner. Nigeria suddenly woke up in the middle of the night to the fact that the country is not an island therefore not immune to the raging global economic crisis.
Subsequently, it has become obvious that Nigeria is far from vulnerable to the global economic crisis than it could have been possible to imagine by members of the intelligence of the country. Accordingly, Nigeria has been confronted by several facets of the global economic crisis. The country has been facing a dwindling GDP since early 2009 and incapable to meet up with its social services obligations. In addition, the purchasing power of the citizens has been crippled while the banking sector which other wise constituted the point of reference of the immunity of the country has become more problematic than ever.
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