Global financial crisis and Nigeria's economy
By Luke Onyekakeyah
THE last quarter of this year (Q4) has witnessed what some experts describe as the worst global financial crisis in decades. Alan Greenspan, the former head of the US Reserve system called it "an event that occurs once in 100 years". 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 pack of cards. Authorities across the spheres are alarmed at the spate of the meltdown in major stocks. Financial authorities are bemused, as there seems to be no handy solution to the crisis.
Could this be an historical imperative that must take its full course before correcting itself? If as Alan Greenspan opined it were an event that must occur, then it would naturally correct itself after the turmoil. On the other hand, was the crisis fallout of the rapacious and uncontrolled global capitalism that boomeranged with never anticipated consequences? Many think the latter is the case. This group attributes the crisis to the "law of jungle capitalism" or "casino capitalism" that pervades the global financial system.
What is the meaning of all this? We are in a system where capitalism no longer invests in production and job creation but instead invests money in stocks in a totally unfettered manner. Money is used to chase money artificially to amass stupendous profit, line the pockets with billions of dollars without commensurate work or productivity. It is akin to high-stake gambling. It could flourish for a long time during which time the gamblers lose sight of a possible down turn. Thus, in the event of an unpredicted crash like what we are currently witnessing, the recorded huge profits could be wiped out in one flash. This form of capitalism is destroying the world economy. Whereas, the West has the capacity to absorb the shock, the developing world is particularly imperiled because of lack of solid productive base and widespread poverty.
The shock wave came from the United States when the financial authorities announced the bankruptcy of Lehman Brothers, a development seen by many as the largest bankruptcy in the corporate history of the United States. Lehman Brothers is a global investment bank that services the financial needs of corporations, institutions, governments and high-net-worth investors worldwide. Since 1850 (over 150 years) when Lehman Brothers was founded, the corporation has impacted on development around the world particularly on the economies of the major industrial nations.
Amid the shock over the collapse of Lehman Brothers, another organization, American International Group (AIG), the largest insurance company in the United States was at the brink if collapse. News of the bankruptcy of these two giant financial institutions sent shockwaves that created turmoil around the world financial markets. It was surprising that the US financial authorities decided not to rescue Lehman Brothers. The Federal Reserve System reportedly was not ready to take risks as it were.
But in a patriotic move, the US Government assigned a $700 billion bailout fund to boost liquidity in an economy that contracted 0.3 per cent annualized rate in Q3 as consumer spending declined at the fastest rate in 28 years. The impact of the collapse of Lehman Brothers on the global economy would not be fully realized in the immediate term not until what is already injected into the system fades away.
Around the world, promptly measures were applied to mitigate the impact of the meltdown. For example, the Bank of Japan released $25 billion to maintain liquidity of the Japanese financial market. The European Union Central Bank invested 700 million euros as bailout fund. The Bank of England on its own offered its market members 20 billion pounds out of a demand of 60 billion. In the same vein, the Russian Federation injected 350 billion rubles to maintain liquidity in the Russian market. While these measures failed to provide the needed solution as stocks dipped, authorities in different countries are analysing what next to do to deal with the baffling situation.
The developing economies are the worst hit. By trying to model their economies along the path of casino capitalism, without solid productive base which the big economies already have, the developing world risks being thrown asunder if the current situation persists. For instance, without first creating a solid productive base whereby the citizenry could afford to live above the poverty line, many countries in the developing world have toed the path of the West in privatizing state enterprises, deregulating their currencies to float against the dollar and applying other painful measures to cut down debts (like subsidy removal) on essential services. When policies that were thought would turn around the economies failed, these countries would face worse condition and the result is mass poverty. The gains made in the past few decades are at risk of being wiped off if the crisis persists.
Here in Nigeria, how are we affected by the ravaging financial crisis? What measures are needed to cushion the impact on the economy and the people? It is important to stress that the global economy is inter-related. No country is isolated. What affects one country directly or indirectly affects the others.
Nigeria's economy is crude oil export oriented. We are therefore affected through international trade. Nigeria is a one commodity-based economy, which makes our situation more precarious. We produce the oil and must have to sale it to earn foreign exchange. Incidentally, the financial crisis is hitting hardest on our major trading partners in America, Europe and Asia. If the economy of these countries continues to face a crunch, we run the risk of reduced commodity export unlike when the economies of our trading partners are sound.
This in a way explains the rapidly falling price of oil in the world market from $140 three months ago to around $65! This development has forced government to review the 2009 budget benchmark downwards from $65 to $45. This would reduce government revenue and in turn affect the provision of goods and services in the coming year. But considering that a soaring oil price in the last eight years made no appreciable impacted on the economy, some think that a fall in the price of oil would be a blessing in disguise. Government would be forced to look inwards and be more judicious in spending. We operate a bubble economy, which cannot withstand pressure.
The other is the crash of share prices in the stock market. Many people have argued that government should bail out the stock market in the interest of the investing public. The stock market is a forum where investors buy and sale shares to their advantage. Buying and selling in this sense is a personal decision, which could result in profit or loss. Before the meltdown, the market capitalization at the stock market was over N15 trillion. This has fallen to about N9 trillion with a loss of investors fund of about N6 trillion. For government to bail out this sector, it requires about N6 trillion to boost the share prices. Once this is done, investors would likely sale off to quit leaving government to own practically all the shares in the stock market. Does it make economic sense, as this money would be held up while other services would be stalled?
The same goes with the banking sector. There is a call on government to bail out the banks as well. But Professor Soludo, the CBN Governor has maintained that our banks are sound and are not likely to be affected by the crisis. He explained that the bailout package being assigned in the developed world is meant to recapitalize the banks and maintain liquidity in the system. There is sense in the position of the CBN Governor. The logic is that you bail out a bank when it is insolvent and could no longer meet its financial obligations.
The pertinent question however is, what happens if the price of oil continues to fall. There is no guarantee that the price of oil might not go below the $45 benchmark. What happens in that situation? Again, as Nigerian banks have become global, how far can they go if the present crisis persists? There must be a re-thinking and readjustment in the way the present world financial system is fashioned.
