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

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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.

 

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