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:
- To examine the factors and sequences of event resulting in the meltdown and the impact of meltdown in Nigerian economy.
- To determine the effectiveness of government monetary policies in addressing the situation.
- To find out the approximate collateral damage the impact must have had on the entire Nigerian economic system.
- And finally, to ensure through this research that suggested way out of the crisis is not only provided but appropriately streamlined.
1.4 HYPOTHESIS
- 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.
- 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:
- 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.
- Getting the various data and appropriate materials also proved very difficult and time consuming.
- 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.
- To what extent has the meltdown affected the national economy?
- Has the CBN efficiently, played its role in maintaining macroeconomic and financial stability?
- What efforts are being put in place by the Federal Government in cushioning the effects of the crisis?
- 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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