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GLOBAL ECONOMIC
MELTDOWN AND THE NIGERIAN CAPITAL MARKET
CHAPTER ONE
1.1
INTRODUCTION
The
global financial crisis began in the United States of America and the United
Kingdom when the global credit market came to a standstill in July 2007 (Avgouleas,
2008). The crisis, brewing for a while, really started to show its effects in
the middle of 2008. Around the world stock markets have fallen, large financial
institutions have collapsed or been bought out, and governments in even the
wealthiest nations have had to come up with rescue packages to bail out their
financial systems.
The
original root of the current financial mess is in the US- the world’s largest
Industrial-Military complex. With an estimated GDP of $14 trillion, the US
contributes about 25% of world output. If, as is being forecast, the US economy
contracts by just 1%, this will imply a direct output loss of approximately
$140 billion- equivalent to the GDP of Pakistan, the 47th largest
economy in the world! And the crises are not restricted to the US. Financial
markets have tumbled and slumped the world over: from London to Tokyo, Seoul to
Sydney, Sao Paulo to Moscow, Bombay to Frankfurt etc. No economy-whether
developed, emerging or developing is, so far, insulated from what Greenspan
refers to as ‘once-in-a-century credit tsunami’.
The
initial response of the policy makers in Nigeria was meek. Either they did not
understand the crises or underestimated its magnitude. In general, they thought
of the crisis as only a ‘storm in a tea cup’, an aberration, a ‘hiccup’. They
insisted that the ‘fundamentals of the financial system look impressively
strong’ even when the capital market has been bleeding uncontrollably. The
Minister of Planning stated, rather insensitively, ‘there is no problem in the
Nation’s capital market. What we have presently is just corrections and
adjustments….shareholders are getting dividends and bonuses and they are
happy…’ this was at a time when market capitalization had dropped from N12
trillion to less than N9 trillion. When they finally accepted there was a
crisis, they promised to take some unspecified ‘drastic and unusual action’ to
stem the global financial crises from causing havoc in the Nigerian financial
system (Abubakar, M., 2008).
That
initial response was, to put it mildly, naïve. The country’s dependence on the
export sector is very significant: 99% of FX and 85% of local revenues are
directly derived from activities related to export of a single commodity, which
is at the center of the current
financial
crises, oil. It is estimated that 58.4% of Nigeria’s exports are US bound and
up to 25% to the Euro zone. 67% of our non-oil exports go to Western Europe,
20% to Asia while ECOWAS accounted for only 11% in 2007. The stock of our FX
reserves is kept in European capitals where financial markets have tumbled and
banks distressed. How can anyone think we are insulated? International
financial crises which affect trade and investment flows are bound to impact on
the domestic economy.
The recent global
financial crisis had a deleterious impact on the world economy, especially on
the financial system in most countries, whether developed, emerging market or
developing countries. In the wake of the devastating effects of the crisis,
governments as well as central banks all around the world adopted several
measures including some unconventional ones to deal with the crisis. The
effects of the financial crisis still lingers too date as countries continue to
struggle to bring back their financial institutions and markets to a stage
where public confidence is fully restored and financial institutions,
especially banks resume their intermediation role through resumption of lending
activities (Sanusi Lamido Sanusi, 2010).
Like most developing
countries, Nigeria felt the effects of the financial crisis largely through
trade and capital flows because of the openness of the economy and the near
total reliance on crude oil exports for government revenue and foreign exchange
earnings. The impact of the crisis through the financial system was not as
direct or devastating as those of developed and emerging market economies where
there was a near obliteration of the entire financial system because of the
limited integration with the global financial markets. However, when the impact
of the crisis permeated Nigeria’s financial system, the soundness and stability
of the system was seriously threatened prompting a decisive intervention of the
Central Bank of Nigeria (CBN) to mitigate the emerging crisis and restore
public confidence (Sanusi Lamido Sanusi, 2010).
1.2
STATEMENT OF THE RESEARCH PROBLEM
The global economic
recession stares everyone in the face; and no responsible nation or leader will
run from the reality of the crisis by telling its nationals that all is well.
This consideration necessitated these questions:
i.
What is the impact of global economic meltdown on the Nigerian economy?
ii.
Did the crash in the price of crude oil affect the Nigerian economy?
iii.
Did the divestment of foreign investors affect the Nigerian
economy?
1.3
OBJECTIVES OF THE STUDY
i.
To ascertain the effect of global economic meltdown on the Nigerian economy.
ii.
To find out if the crash in the price of crude oil affected the Nigerian
economy.
iii.
To examine the impact of divestment of foreign investors on the Nigerian
economy.
1.4
SIGNIFICANCE OF THE STUDY
The problem of global
economic meltdown which has visited every nation is a serious one that cannot
be over looked. This problem will remain until the cause, the nature and how to
mitigate the residual affect has been completely taking care of.
This research work is
based on the impact of global economic meltdown on the Nigerian economy and
attempt to shed more light in this area will definitely constitute an important
addition to already existing researches in this area. The study as a result,
will try within the contest of the Nigerian economy to reveal the causes and
the effect of the global economic meltdown on the Nigerian economy. The results
obtained from the study will contribute to the formulation and implementation
of more effective policies that will help in salvaging the dawned Nigerian
economy.
1.5
STATEMENT OF RESEARCH HYPOTHESIS
i.
Ho: Global economic meltdown has no significant impact
on the Nigerian economy.
H1: Global economic meltdown has
significant impact on the Nigerian economy.
ii.
Ho: The crash in the price of crude oil has negatively
affected the Nigerian economy.
H1: The crash in the price of crude oil has
not affected the Nigerian economy.
iii.
Ho: Divestment of foreign investors has no effect on
the Nigerian economy.
H1: Divestment of foreign investors has a
strong effect on the Nigerian economy.
1.6
SCOPE OF THE STUDY
This study is within
the context of the Nigeria economy. It will deal on the past and current effect
of the global economic meltdown on the Nigeria economy.
1.7
STRUCTURE OF THE STUDY
This study is made up
of five chapters. Chapter one covers the introductory part, chapter two is on
literature review, chapter three deal on methodology, while chapter four is on
empirical analysis and chapter five covers the summary, findings,
recommendations and conclusion.
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