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AN APPRAISAL OF THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON THE NIGERIAN ECONOMY

CHAPTER ONE

INTRODUCTION

1.1     Background of the Study

The current global financial crisis, unprecedented in the history of the modern world, has been described as Wall Street’s biggest crisis since the Great Depression in October 1929. From the Wall Street financial headquarters in the United States, across to Europe, Japan and China, the global financial system around which modern free market economy and capitalism is built is crashing like a pack of cards. The financial crisis, which had been brewing for a while, started to show its effects in October 2008. Around the world, stock markets began to crash as billions of mortgage-related investments went bad. Mighty investment banks which once ruled the financial world such as Lehman Brothers and Merrill Lynch have either crumbled or reinvented themselves as humdrum commercial banks.

The roots of the current global financial crisis can be traced back to the fallout of the US subprime mortgage lending, which started in early 2007. Without hesitation, it spread into other markets and economies via a combination of market failures and regulatory weaknesses.

In general, market failed because of poor corporate governance and incompatible executive remuneration structures. Moreover, the lack of transparency in trading procedures, financial instruments, and balance sheet positions of major financial institutions also exacerbated market failures. In regulatory terms, most countries have weak idiosyncratic rules pertaining to the operation of trading instruments and financial conglomerates. Poor capital regulation and accounting rules contributed to excessive risk-taking by banks. In addition, some rating agencies were also not subjected to the jurisdiction of the national regulators.

In turn, this had led to complete breakdown of short-term financial transactions in leading advanced and emerging market economies, and subsequently, meltdown in global securities exchanges. With the freezing of interbank lending and money markets, capital could not be channeled to economic agents operating across the entire production chain.

However, there are many similar views on the causes of the current economic meltdown. These include the inability of homeowners to make their mortgage payments, poor judgment by the borrowers and/ or the lender, speculation and overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, complex financial innovations, central bank policies and government regulation. The significant decline in housing prices led to delinquencies in mortgage payments and foreclosures in the US which caused a ripple effect across the financial market and global banking systems, as investments related to housing prices declined significantly in value, placing the health of key financial institutions and government sponsored enterprises at risk.

Dominique Strauss-Kahn (2008) said “At the core of the problem were falling house prices in the U.S. and the resulting loss in the value of securities linked to mortgage liabilities. Too many risky mortgages were approved. It worked for a while, and led to high earnings, but in the end, the carelessness led to the crisis”.

It is however noteworthy that this wild financial period is not confined to the United States. The world has become a global village sewn together through telecommunications and technological advancements. This is a clear indication that the global economy is inter – related, hence, what affects one country directly or indirectly affect the other. The economy of Nigeria, as a developing nation, largely depends on the economies of various foreign developed countries that are being plagued by the current global financial crisis.

Consequently, it is imperative to appraise how the global economic meltdown would affect the key sectors of the Nigerian economy. Since the commencement of the current global financial crisis, fears have been expressed on its likely implications on our economy, especially on the financial sector. Soludo (2008) was of the opinion that the crisis will not affect the Nigeria economy. He maintains that the banking consolidation programme was a pre-emptive measure ahead of the crisis. So, the Nigerian banks were among the most capitalized in the world.

Without prejudice to the assurance given by the authorities of the Central Bank of Nigeria (CBN) that the economy is immured to the global financial crisis, there is need to critically look at the wider implications of the crisis which has ravaged not only our economy, but also developed economies of United States, Europe and Asia.

1.2Statement of Research Problem

Undoubtedly, the Nigerian economy is not insulated from the impact of global financial meltdown owning to it’s interconnectedness with the global economy. The sectoral interconnectedness of Nigerian economy implies that the effects of global financial crisis will reverberate through a large section of the Nigerian economy.

The study is therefore, designed to address the following issues as it affects the Nigerian economy

    I. The chronology of events leading to the current global economic crisis and the channels of transmission of the crisis onto Nigerian economy.

  II  A critical appraisal of the implications of the crisis on the Nigerian macroeconomic indicators such as GDP, foreign reserve, oil revenue, inflation rates, exchange rates and stock price index.

III An appraisal of the various policy measures which have been adopted by the monetary authority to minimise the impacts of the global financial meltdown on the nation’s economy.

1.3   The Aims and  Objectives of the Study

The study is aimed at achieving the following specific objectives:

I.            To conduct an investigation into the causes of the current global financial crisis and its impacts on specified macroeconomic variables;

II.          To ascertain the impacts of the crisis on general price level, exchange rate, stock price index, external reserves, crude oil price, and the possible implications of these variables for the nation’s economic growth;

III.       And, to assess the efficacy of the various policy measures which have been adopted by the monetary authorities to curb the menace of global financial meltdown in Nigeria.

1.4Research Questions

The study provides appropriate responses to the following questions in relation to the impacts of the current global financial meltdown on the Nigerian economy.

    I.  What are likely causes of the current global economic crisis in Nigeria?

  II. What are the possible implications of the crisis on crude oil revenue in Nigeria?

III. What are the impacts of the crisis on the Nigerian economic growth?

1.5   The statement of Research Hypotheses

The following hypotheses were tested with the view of providing an analytical research of the study.

I.  Ho:  The variations in the stock price index, inflation   rate, exchange rate and external reserves do not     have significant impacts on Nigerian oil revenue.

Ha:   The variations in the stock price index, inflation   rate, exchange rate and external reserves have significant impacts on       Nigerian oil revenue.

II.        Ho:   The fluctuations in the stock price index, crude oil        price,       inflation rates, external reserves and        exchange rates do not        have significant impacts on Nigerian economic growth.

Ha:   The fluctuations in the stock price index, crude oil        price,       inflation rates, external reserves and        exchange rates have significant impacts on Nigerian    economic growth.

1.6 Significance of the Study

The significance of this study lies in its potential to contribute to the understanding of the relationship between global financial crises and national economies, particularly in the context of Nigeria. By examining the impact of the global financial crisis of 2007-2008 on Nigeria, this research will provide valuable insights for policymakers, economists, and stakeholders in the financial sector. Understanding the dynamics of the crisis will help in formulating effective policies to mitigate the adverse effects of future economic shocks. Additionally, this study aims to highlight the resilience and vulnerabilities of the Nigerian economy in the face of global economic challenges, thereby fostering informed discussions on economic reforms and development strategies.

1.7 Scope of the Study

This study focuses on the global financial crisis of 2007-2008 and its impact on the Nigerian economy, particularly examining key economic indicators such as GDP growth, inflation rates, employment levels, and foreign direct investment. The analysis will cover the period from 2007 to 2015 to assess both the immediate and subsequent effects of the crisis. While the study will primarily concentrate on the economic aspects, it will also consider the socio-political ramifications of the crisis in Nigeria, providing a holistic view of its impact. The geographical scope is limited to Nigeria, but the findings will also serve as a reference point for similar economies facing external economic shocks.

1.8 Limitations of the Study

Several limitations may affect the outcomes of this study. Firstly, the availability and reliability of data on economic indicators during and after the global financial crisis can pose challenges, as some data may be incomplete or inconsistent. Secondly, the analysis will primarily rely on secondary data sources, which may introduce biases or limitations inherent in those datasets. Furthermore, while the study will explore the broader implications of the crisis, it may not cover all possible factors influencing the Nigerian economy during this period, such as local political developments or sector-specific shocks. Finally, the study’s findings may not be generalizable to other countries, particularly those with different economic structures and responses to the crisis.

1.9 Definition of Terms

1.  Global Financial Crisis: A severe worldwide economic crisis that occurred in the late 2000s, characterized by the collapse of major financial institutions, severe disruptions in financial markets, and a significant decline in economic activity globally.

2.    Nigerian Economy: The economic system of Nigeria, which includes all activities related to the production, distribution, and consumption of goods and services within the country, and is influenced by various sectors such as agriculture, manufacturing, and services.

3.    GDP (Gross Domestic Product): The total monetary value of all finished goods and services produced within a country's borders in a specific time period, used as a broad measure of overall economic activity.

4.    Inflation Rate: The rate at which the general level of prices for goods and services rises, eroding purchasing power, often expressed as an annual percentage.

5.    Foreign Direct Investment (FDI): Investment made by a firm or individual in one country in business interests in another country, in the form of establishing business operations or acquiring business assets.

6.    Economic Resilience: The capacity of an economy to recover quickly from disturbances or shocks, such as financial crises, and to adapt to changing conditions.

7.  Socio-political Ramifications: The social and political consequences or effects resulting from economic events, which can influence governance, public policy, and social stability.

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