THE EFFECT OF THE RECENT GLOBAL FINANCIAL MELTDOWN ON THE NIGERIA ECONOMY (AN EVALUATION)

THE EFFECT OF THE RECENT GLOBAL FINANCIAL MELTDOWN ON THE NIGERIA ECONOMY  (AN EVALUATION)

ABSTRACT

This study/research was necessitated owing to the recent financial crisis that enveloped the globe, commonly referred to as the global credit crunch. This crisis came about as a result of mismanagement of mortgaged that were made available to the masses abroad specifically the United States of America. The crisis has its root in a banking practice called sub-prime lending or supreme mortgage. Even when Banks got to realize that there was fire on the mountain, they were shy to admit it because they were scared of being undervalued. Like a wild fire, the whole globe was enveloped in the crisis. The researcher made use of secondary data, as many people had views that varied on the topic or issue. The research went a long way to show to what extent the meltdown affected the stock market capitalization and GDP of Nigeria during the specified period namely-March 2008 to February 2009, in doing this the researcher employed the technique namely regression and correlation analysis. From the study we came to see how adversely the stock market capitalization was affected whereas the GDP was not affected as such. More details are seen in the body of the research work.

CHAPTER ONE

1.0       INTRODUCTION

1.1       BACKGROUND OF THE STUDY

Never since the 1930’s great depression has the world faced such level of financial crisis as the current credit crunch that has threatened to undermine the stability of the world’s economic system and in turn rewrite economic theories that have hitherto been regarded as sacrosanct. The credit crisis which was ignited in the US, but took its first victims in the UK in 2007 resulting in the collapse of Northern Rock, was triggered by rising defaults by sub-prime US mortgage borrowers; (Simon E. and Tonia O. 2008). In US there are three types of mortgages namely:

Conventional, Interest-only and Sub-Prime

In conventional mortgages, part of each month’s payment goes towards paying off the principal and part goes towards interest (Fiakpa, L. et al: 2008). In an interest-only loan or mortgage, the borrower only pays interest each month. This makes it cheaper than a conventional mortgage.

Sub-prime mortgage is granted to borrowers whose credit history is not sufficient to get a conventional mortgage or who do not qualify for market interest rates owing to various risks factors such as income level, size of the down payment made, credit history and employment status. (Fiakpa, L. et al; 2008).

As the defaults in sub-prime US mortgage mounted, institutions had a rethink on their attitudes to risks and suddenly became scared of losing money. Banks became unwilling to lend to each other for fear of not getting their money back. The panic spread to shares and finally from financial markets to hit the wider economy. But the damage had been done and the global economy has taken a beating, the extent of which is yet to be determined.

In Nigeria, it first came by a meltdown of the capital market, but as price depreciation continued unabated, the authorities decided to have a second look at the market. The market fundamentals were strong, what could therefore be wrong with the market? Questions were asked.

Secondly, dwindling petroleum prices means a severe reduction in foreign exchange earnings, which in our case, affected the economy severely as the nation depends so much on the petroleum sector.

Deriving from the above, is the deficit in Federal Government budget narrowing down to State and Local Government allocation, there is also loss of jobs and a slow down in fight against poverty.

Thus, as Komolafe Babajide (2008:6) rightly puts it, the tragedy of the US economy soon became a global nightmare US investors in a bid to save some of their investment at home started calling home their foreign investments including those in Nigeria. This gave rise to a glut of shares in the market, which promoted the sharp depreciation of share prices. The impact of this on the Nigerian stock exchange has been quite severe as the market capitalization tumbled more than 30 percent within the period (vanguard 2008:8).

Contrary to earlier claims that the Nigerian economy is insulated, the crisis soon infected the entire capital market. This was due to the decision of foreign investors to pull out their funds from the market leaving it saturated with stocks. The problem thus spans from the indications that a sustained investment in stocks is needed to rally investor confidence.

Unfortunately, almost one month after the Nigerian stock market prices took a nose-dive and three weeks after the US economy posted their signs that a recession was imminent, there hasn’t been a coherent effort on the part of the organized private sector especially in Nigeria to salvage what is left of the economy.

This study is therefore out to investigate this global economic meltdown or downturn as it impacts on the Nigerian Economy. The basis of the study is on various sectors of our economy and because the Nigerian economy is mostly and hugely dependent on oil prices, the ongoing projects in Nigeria’s oil and gas industry is dependent on foreign financing. This then implies that some key sectors of the economy may suffer a set back and our oil and gas sector may not be spared.

Independent Daily (2009:43) captured it more vividly by saying that the crux of the project’s down turn was due to step up security concerns arising from the activities of militants operating in the Niger Delta region.

Economic meltdown may also attack a nation’s bureaucratic sector. Hence, the decision making machineries have come to agree indeed that there is a huge complex theory threatening their propaganda instinct. Financial meltdown can also take a steep price of consequence on the entire population. This is revealed in financial vanguard (2009:26) that because of high energy costs, consumers have reduced their gasoline consumption at the fastest rate since the oil shock of the 1970’s as prices peaked, oil consumption in Nigeria dropped by 12% in July to its lowest level since the return of democracy (Oti, B. 2008). The big question then was why did a domestic problem in faraway USA become so profound as to take a toll on the Nigeria people?

I personally, felt it is just one the negative consequences of globalization: as well as the evil side of capitalism as many authors have come to discover. The researcher also finds out that though not surprisingly that a complete new approach may prove to be a more viable solution to the current economic nightmare. The reason being that, in spite of various governments’ concerted efforts in re-aligning the economy, not much has been seen of the impact of the government’s bailout packages and nationalization policies. It is therefore not surprising as it is only a repeat of the 1930’s global depression method of correction.

However, as we watch events unfold, one thing is clear; the world’s most vulnerable people have been rendered more vulnerable; there is fear of great deprivation ahead as investment losses in Nigeria may trigger factory shutdowns and generate more unemployment.

1.2       STATEMENT OF THE PROBLEM

The overwhelming effect of the world’s credit crisis has called to question the efficacy of the global economic theories, be they capitalism or welfarism as practiced in the western and Eastern blocks respectively. As governments across the globe retreat to the drawing board in search of answers, operators and stakeholders in proffering solutions have stated that the remedies lie with no economic theory, but in confidence building measures.

Although the Nigerian government has rolled out series of bail out packages to cushion the effect of the crisis on both the private sector and the public ones, it appears the economy is still sinking deep into recession.

The issue of government intervention and its efficacy remains the crux of this research. This is borne out of the fact that economic destabilization remains the bane of national tragedy. Thus finding a better medium of recovery is often the big problem confronting the authorities. The questions now are as follows: Has the CBN done enough to really insulate the Nigerian banking sector from the crisis? Can the informal sector of the Nigerian economy be proactive enough to rescue the entire economy like the one in Europe and America? These and more are really the problems militating against survival of the global, economic meltdown.

 1.3       OBJECTIVES OF THE STUDY

From first principles, we must not forget that financial booms and busts are not a new phenomenon. What is disquieting about the current meltdown is that it is in the nature of a seismic tremor of earth showing proportions. Within a few months, some of the biggest financial giants have bellied-up while several more are in serious trouble.

Similar to this is the dwindling capacity of regulatory authorities. The reality is that the world of high finance has become so complex in our digital age, with capital traveling at the speed of light and several instruments engineered using the arcane language of quantum physics. Thus, in the light of the problems identified in the preceding section, the objectives of the research are as follows:

1. To examine the factors and sequences of event resulting in the meltdown and the impact of meltdown in Nigerian economy.
2. To determine the effectiveness of government monetary policies in addressing the situation.
3. To find out the approximate collateral damage the impact must have had on the entire Nigerian economic system.
4. And finally, to ensure through this research that suggested way out of the crisis is not only provided but appropriately streamlined.

1.4       HYPOTHESIS

1. Ho: The current financial crisis greatly affected marked capitalization on the Nigerian stock exchange.

Hi: The current financial meltdown has not greatly affected market capitalization on the Nigerian Stock Exchange.

2. Ho: The financial meltdown has influenced the GDP of Nigeria.

Hi: The financial meltdown has no impact on the GDP of Nigeria.

1.5       SIGNIFICANCE OF THE STUDY

With the festering financial crisis that is fast becoming a global hitch, declining national revenue, sharp fall on the value of shares and the continuing crash of the naira against foreign currencies are some of the major indicators that the global crisis is already affecting Nigeria.

This research bears quite some significance as it will unveil the extent to which this meltdown has no far inflicted one national economy.

The study will present in concise form the measures already taken by the relevant authorities and stakeholders to cushion the effects of the crisis and will finally present the views though varied and complex of scholars which can be of immense help in getting Nigeria off the hook.

1.6       SCOPE AND LIMITATIONS OF STUDY

This research will focus primarily on the financial meltdown as affecting the Nigerian Economy. The work is not conclusive in nature as the crisis is till bedeviling the national economy.

Because of global implications of the menace, only secondary data were consulted while the time horizon considered is from March 2008 to February 2010.

The scope of this study is quite broad. It pictures, from a historical perspective, the economic meltdown. However, quality time was devoted to X-ray the Nigerian economy in order to ascertain the extent of damage or danger the local economy is up against.

The study therefore covers issues on monetary policies, stock market manipulations, government intervention packages as well as political economics within the country.

Again, due to the spill of this economic crisis from the developed world, attention was also paid to the perceived origin of the crisis the USA was constantly referred to because of the role the country played in spreading the meltdown. Finally, some problems were encountered in the process of the research.

These are as follows:

1. The problem of the complex nature of the study which was basically new to scholars of this century. Thus this hindered the availability of published materials.
2. Getting the various data and appropriate materials also proved very difficult and time consuming.
3. Finally, due to the demand of other conventional academic engagements and constraints of financial resources, the work is inconclusive in nature. Above that, harnessing all the information gathered within the short time allotted to this study was not possible.

1.7       RELEVANT RESEARCH QUESTIONS

To cover the scope of this project satisfactorily, the research topic is broken down into several research questions. By the time these questions are duly answered through objective reasoning and the use of informative facts, the researcher would have met the research objectives. Such questions include.

1. To what extent has the meltdown affected the national economy?
2. Has the CBN efficiently, played its role in maintaining macroeconomic and financial stability?
3. What efforts are being put in place by the Federal Government in cushioning the effects of the crisis?
4. How can confidence be built again in investing public?

1.8       DEFINITION OF SPECIAL TERMS

The following terms, were presented in their technical sense.

Budget: This is the annual financial statement containing an estimate of all anticipated revenue and expenditure of the government of the coming year.

Budget deficit: This occurs when an entity (often a government) spends more money than it receives. The opposite of budget deficit is budget surplus. Debt is essentially an accumulated flow of deficit. In other words, a deficit is a flow and debt is a stock.

Buy back: Buy back refers to the redemption of outstanding debts by the issuer before the maturity.

Asset backed security: security collateral by loans, leases unsecured received or installment contracts on personal property, automobiles or credit cards. The cash flows generated by the underlying obligations are used to pay principal and interest to the asset-backed security holders.

Correlation: A statistical measure of the closeness of the variations in the values of another.

The correlation value lies in the interval-1 to 1-Margin here refers to the borrowing of stock for the purpose of getting more leverage, OECO countries, that is the Word’s net surplus and donor countries. (The Guardian: p.18).

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