Federal Government, global crisis and bail-out plan

Proshare

For about six months, the Nigerian capital market has been in the doldrums against the background of an ailing and chafing national economy. The journey to the difficult economic terrain on which the Nigerian Stock Exchange (NSE) finds itself today started with the heat and restraints of the Central Bank of Nigeria\'s overhauling reform of the banking sub-sector a few years ago and the further decline in aggregate spending and the operating difficulties confronting the production sector.

 

Economic growth remains inadequate to stimulate sector-wide recovery and business activity. Since April 2008, market capitalisation has plummeted progressively from N15.3 trillion in the first quarter of 2008 to N14.2 trillion in the second quarter and further to N13 trillion at the end of September 2008.

 

The immediate cause of this unsavoury development in the capital market is traceable to the mass exodus of foreign portfolio investors in the country, which has led to persistent share price depreciation. Today, the bear rules the roost in the capital market. There are nagging speculations that all is not well in the financial market either, and that very little inter-bank lending may be going on.

 

The World Bank Human Development Index (2007/2008) ranked Nigeria 158th out of 177 countries. In the latest World Bank Doing Business Report, Nigeria was rated 118th out of 181 countries. In spite of all these indices of a tanked economy, the managers of this same economy confidently paint a sanguine picture of the nation\'s terrain, pointing out that the pains of the global financial crisis are far from our doorsteps. According to the Minister of Finance, Dr. Shamsudeen Usman, \"we don\'t have any crisis, but our utterances could start one....\" Prof. Chukwuma Soludo, the governor of the CBN, insists that \"no bank will fail\" and that we are in a solid economic space, while Yakubu Taminu, Economic Adviser to the President, affirms that \"we should not be frightened by the crisis but embrace the opportunities it brings\" (and that) \"with this we can shoot into prominence...\"

 

Quite clearly, the views expressed by the foregoing managers of the nation\'s economy distinguish Nigeria\'s problems from those of the developed world and suggest that Nigeria is insulated from the financial meltdown in the global community. However, some penetrating commentators in and outside the corridors of the government, such as Dr. Ngozi Okonjo-Iweala, Nigeria\'s former Minister of Finance (2003-2006), who is now a World Bank Managing Director, and the National Planning Minister Sanusi Daggash, veer in the opposite direction.

 

As far as the former is concerned, if the developed economies could be afflicted with a recession and the emerging markets, such as those of India and China, could experience the same thing, it stands to reason that Nigeria is bound to experience the impact of the global financial crunch on her exports, because our commodities exports \"will begin to have their prices trending down and demand will be falling off\", with the net result that \"we will be getting (smaller) revenues than we are used to get.\" Dr. Okonjo-Iweala further forcefully argues that African countries, including Nigeria, are bound to experience the negative effect of capital flight, particularly in terms of portfolio flow, which goes into investment in the nation\'s capital market, and the Foreign Direct Investment (FDI), which goes into investment in real sector enterprises and manufacturing.

 

All of these factors, according to this perfectly plausible argument, are bound to have a negative impact on the national economy. As far as the National Planning Minister is concerned, the foreign reserves may be safe, but as long as the foreign banks managing them are already being affected by the financial meltdown, we could not lie supine and be oblivious of the concomitant negative impact.

 

On November 15, 2008, world leaders, including the United States of America, the United Kingdom, France, Germany, Canada, Italy, the European Union, China, Russia, Brazil, South Korea, India and other major economies will be meeting in Washington, to discuss what could be done to mitigate what economists have predicted could be a long and deep downturn. We have our doubts if Nigeria could afford to insulate itself from a crisis that is engulfing the major and medium economies of the world.

 

That the nation\'s economy has even begun to develop some gnawing hiccups cannot be gainsaid: Ours is a monocultural economy, and the proceeds accruing from the nation\'s only source of foreign exchange, oil, have begun to diminish colossally as the price of oil has nosedived in recent times to below $65 per barrel. By reason of this, for example, the Federal Government has had to scale down the 2009 budget and to devise new economic measures, such as banning the purchase of new vehicles in the ministries, a drastic reduction in estacodes payable to civil and public servants, including the President, etc., to encourage strict economic belt-tightening.

 

Confronted with a financial crisis that may be dissimilar in its origin to ours, the United States of America, the UK, continental Europe and Asia formulated well-articulated bail-out policies to assuage the asperities of the financial meltdown and remove their countries from the grip of economic depression. In South Korea, the central bank slashed its key interest rate by three-quarters of a percentage point to prevent Asia\'s fourth-largest economy from lurching into recession. Similarly, the central banks of Australia and Hong Kong injected funds into their markets to ensure liquidity. In Japan, the prime minister instructed officials to draw up measures to calm volatile stock markets and fend off further fallout from the crisis.

 

We are persuaded that it would be imprudent on the part of Nigeria to be indifferent to what is happening in the developed world of America and Europe and in the emergent global markets, such as those in Asia. Accordingly, we suggest that the Federal Government should embark on rescue measures, which President Yar\'Adua\'s challenge to the Nigerian Economic Summit Group implies, to boost the financial and capital markets and create ramparts against the possible buffetings of the global financial crisis.

 

To insist that Nigeria is invulnerable to the global financial crisis, which has issued forth in the crash of Wall Street, is myopic. The Federal Government can ill-afford to allow itself to be tantalised into a false sense of security and hope by fawning officials, and allow the nation to drift to the verge of total economic breakdown. – Guardian Editorial

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