The Nigerian Economy in Crisis: Impacts and Implications of the 2007 - 2009 Financial Crisis on Nigerian economy. - Iloka Benneth Chiemelie, Mozie Charles

1. INTRODUCTION

The 2007 credit crunch that resulted in a reduction in the general availability of loans (or credit) and a sudden tightening of the conditions required to obtain a loan from the banks in the US is the caused financial crisis from 2007 to 2009, and it is considered the world financial crises witnesses in the past 6 decades. The extent and severity of the crises mirrors conflicts between numerous factors (IMF, 2009). Although the crises started in 2007 with the collapse of the US housing market, its influence touched every country in the world.

The crises resulted in spiral downward movement on the prices of most commodities and also downturn in global economic growth. The crises affected the advanced economies, emerging markets and low-income nations from different dimensions. The most affected were countries that relied on external borrowing as source of their credits, which include numerous Easter European and Central Asian nation (WB 2009).

Studies have identified numerous transmission channels such as currency contagion, stock market contagion, money market contagion and sovereign debt contagion (Tella, 2009); Reisen (2008) identified foreign trade; and Okonjo-Iweala (2009) identified FDI, remittance and commodity market as the transmission channel. IMF (2009) reported that the effect on lee-developed nations were on trade and growth.

It was initially thought that the Nigerian economy will be immune to the global crisis as it was not integrated into the global economic system, but this was wrong as indirect impact of the crisis strong affected the economy which was professed to be protected. By August 2008, the effect of the crises has reached the Nigerian territory, but the effect was pronounced on December 2008 (Akperan, 2009). Oil prices fell from a high of $147 in July 2008 to below $40 January 2009 (Muhtar, 2009), and this eventually transmitted the external effect of the crises to the Nigerian economy.

Studies identified some of the impact of the crisis on the Nigerian economy to include: reduced price of commodities and fall in demand for oil and non-oil products (e.g. Teriba, 2009; Okonjo-Iweala, 2009; Dike, 2008; Adamu, 2008; Olu and Tayo, 2009 and Chukwuma, 2009), but most of the studies didn't elaborate the extent of the impact and policies the government adopted in resolving such impact. Thus, this study aims to elaborate the impact of the financial crisis on the Nigerian economy, and policies the Nigerian government adopted to resolve these impacts.

1.0 ANALYSES OF THE ECONOMIC IMPACT ON NIGERIAN ECONOMY

The impact of the crisis on the Nigerian economy has different implications for the capital market, foreign exchange, the banking sector, real sector and balance of payment. In 2008, the market capitalization fell by 45.8%, which is a reversal of the 74.7% growth experience in 2007 (Okereke-Onyiuke, 2009). The crude oil price declined impulsively from US$147 per barrel in July 2008 to $47 per barrel in January 2009, resulting in the government having to seek other sources to finance its 2009 fiscal year, as the crude oil export became unreliable. Consequently, the government also implemented huge budget cut in all sectors and education as well as health were heavily affected by the cut. The Nigerian Naira also depreciated against the US dollars and this resulted in drop of the country's foreign reserve from $67 billion in June 2008 to $53 in December 2008. The impact of the financial crisis on Nigerian economy can then be elaborated as:

1.1 IMPACT ON GROWTH AND NIGERIA'S MILLENNIUM DEVELOPMENT GOALS

The global crisis caused inflation in Nigeria's economy and it slowed down growth. The country officially started experiencing a two-digit inflation rate by the third quarter of 2008, with fall in price of commodities, and rise in inflationary pressures. A strong and extended downward movement of the exchange rates kept inflation high as Nigeria is an import dependent country (Olu and Tayo, 2009).

Due to the inflation and high exchange rate, government investment on infrastructure especially raw material suffered greatly as a result of budget cuts. Adding more woes to this was the withdrawal of many foreign investments and decrease in the price of petroleum. Thus, the development of the country was delayed as numerous construction projects that would have enhanced the current infrastructure and create new ones were either delayed or cancelled by the government.

1.2 IMPACT ON THE EQUITY MARKET

The 233 listed equities within the Nigerian equity market capture activities of the share index and market capitalization experience in the Nigerian stock exchange during the financial crisis.  The index has been experience tremendous growth over the years from a value of 12, 137 in 2002 to 66, 371 in 2008, with estimated market capitalization of about N12.640 trillion, before the value fail precociously to 22, 349 in January 2009, at a market capitalization of N4.998 trillion as a result of the financial meltdown. The value declined further to 21, 608 points by the second week of March 2009 with a market capitalization of N4.836 trillion. This reveals a total loss of 67% shares between March 2008 and March 2009, with another 62% loss in the value of market capitalization.

Concerns about how the global economic crisis rapidly penetrated the Nigerian market started to grow, given that there is hardly any thriving domestic mortgage market. The decline in indictors of activities in the Nigerian stock exchange prior to the escalation of the crisis on the global scene in July 2008 serves as source of concern for many economists (Olu and Tayo, 2009). More investigations revealed that the crisis may have penetrated the capital market through numerous transmissions.

1. The withdrawals and withholdings of foreign portfolio investments in order to carter for the financial problems at the foreign investors' home, coupled with reduced FDI are destined to affect investors' confidence in the Nigerian economy. Evidence shows that the sum of financial inflows to the Nigerian economy between 2007 and 2008 increased by 21%, and reduced by 38.6% between 2008 and 2009. On the other hand, the adoption of public-private partnership (PPP) policy as means of increasing investments in huge plans such as oil and gas, power plants, railways, housing and roads also exposed the county to FDI uncertainties as government alone is not able to tackle the problems causes by withdrawals and withholdings of FDI plans.
2. The credit crisis experience by lending institutions affected business that depend on short- and long- term loans, and they also include banks that to corporate organizations as well as inter-bank short-term lending. In a country like Nigeria where mortgage and credit purchases are not well developed, this  became a margin-lending problem as banks that loaned money to finance corporations with the hope that these corporations will return quick investments with portfolio turn around became heavily affected by the crisis.
3. Other intensifying factors that seriously impacted on the stock market include implementation of new policy by the market due to the government's slow response to the crisis. It also includes interpretation of announcements, proclamations and rumours within the market. For instance, the proposed recapitalization of the stock market as well as rumours on the termination of margin lending by the government played a crucial role in the penetration of the economic crisis into the Nigerian economy.

1.3 IMPACT ON GDP AND PRODUCTION

Data from national bureau of statistics (2012) as illustrated below in figure (1) below indicated that Nigeria's GDP has witnessed a constant growth since 1998.

The aggregate growth was driven by increased production in the non-oil sector, which grew by 8.7% and contributed 80.7 GDP in 2008, while oil output declined further by 3.3% and contributed the outstanding 19.3%. The GDP continued to grow tremendously in 2009, before declining in 2010. The question would be why was the GDP growing while the world was in financial crisis?

This result is due to the increased budget for agriculture and manufacturing products, as the government sort new ways to subdue the oil crisis. The natural resource rich Nigeria found an alternative to the financial crisis when the federal government released 53,610 tonnes of grains in 2008 to the states Olu and Tayo, 2009). Thus, while the demand in oil decline, the country was able to cover up by increased exportation of agricultural products. The GDP and non-oil production is the only area that the financial crisis yielded positive result.

1.4 IMPACT ON HOUSEHOLD INCOME

Olu and Tayo (2009) found that the global financial crisis resulted in significant increase on poverty in Nigeria. They found that adverse oil shocks as a resulted of the financial crisis had severe distributional consequences on the Nigerian people. They conducted a research to prove this and their result found that in 2008, a 12.2% adverse oil shock brought a reduction of 0.93% on the Nigerian households (Olu and Tayo, 2009). The household income of the average Nigerians fall by 5.07% from July 2009 to December 2009. The fall in household income can also be attributed to the high layoffs that occurred within the period.

1.5 IMPACT ON FEDERAL GOVERNMENT'S MEDIUM- TO LONG-TERM BONDS

Between January and December of 2007, the federal government of Nigeria issues 14 bonds with a summed valued of N504.8 billion. The maturity profiles of these bonds were mainly three to five years tenor, with two of them in ten year tenor. In 2008, the total value of bonds issued is estimated at about N95 billion. Between the last quarter of 2008 and the first quarter of 2009, the yield curve of the bon was affected by the global financial crisis. The prices of the three and five year bonds were falling, while the curve was rising. However, the long-run impact of the crisis appears to be negligible and this suggests confidence in Nigerian bond market.

1.6 IMPACT ON THE BANKING SYSTEM

The Nigerian market although not well integrated into the global market, has faced destructive effects since the beginning of the global financial meltdown in July 2008 (Olu and Tayo, 2009). Such difficulties include the shrinking of its capital market, withdrawing of major international hedge funds and fading of laudable funds for domestic industries in the international credit line. Although the effects of the financial crisis are not fully evident in the banking sector, the follow indicators point to its direction.

1.6.1 Prudential indicators – they illustrate the declining levels of the quality of risk assets. Major component considered is non-performing loans (NPL) as the percentage of total commercial bank loans. This indicator has serious increased in 2009 as a result of the financial crisis

1.6.2 Activity indicators – this is determined by the ratio of security investment compared to the total commercial banks' assets. Figure (4) below, shows a decline in the ratio from 2007 and continued increase in preceding years.

1.6.3 Capitalized value of quoted banks – this have serious declined since the crisis, as a result of the decline in the quoted value of these financial institutions at the stock exchange. Thus, it has greatly endangered the tier one and tier two of the Nigerian capital market. 

1.7 IMPACT ON CRUDE OIL SECTOR

The change in international oil market poses a great threat to Nigeria's fiscal outlook. The global financial crisis resulted in lower demand for of commodities such as oil across the global economies. The impact was transferred to the Nigerian economy through numerous sources such as earnings and revenue, depreciation of Nigerian Naira against the US dollar, balance of payment through reduction of the surpluses in the current account balance, capital account through reduction in capital flows as a result of reappraisal of planned investments and/or complete withdrawal of previous commitments on investment and contraction of fiscal space for policy (Olu and Tayo, 2009).

The global economic crisis yielded about 71% in the price of crude oil. This meant that the Nigerian policy makers had to adjust the benchmark upon which the 2009 budget was based. Demand for Nigerian oil in the US and Europe dropped dramatically, as grew below projected values. As a country that relies heavily on oil export, the global crisis crippled many of aspects of the Nigerian economy.

1.8 IMPACT ON NATIONAL DEBT AND ECONOMY

Nigeria's debt profile almost instantly increased from US$17,349.69 billion in 2006 (following the repayment of the substantial debt owed by the country to the Paris Club) to $22,229.88 billion in 2007 and $23,383.98 billion in 2008 (Olu and Tayo, 2009). This debt was driven by the domestic debt share which increased between 79-84%, as corporation sort for ways to save their business from the doom of the global economic crisis that has eventually resulted in low demand of commodities and market inflation. This increase is further illustrated in figure (1-2) below.

Figure (1): Nigeria debt profile, 2003-2008

Source as adapted from: Olu and Tayo (2009)

Figure (2): Nigeria public debt profile and inflation, 2003-2008 (naira)

Source as adapted from: Olu and Tayo (2009)

As a result of the decrease in oil price, which gave rise to inflation, Nigeria's economy suffered a great loss as the cost of importation rose high, while the cost of commodities dropped to a fatal state, leading to loses in many business across the country and the eventual increase in national debt as the government sort for other source to maintain stability within its economy.

1.9 IMPACT ON EMPLOYMENT

The global financial meltdown didn't leave the employment in Nigeria alone, as it took a big toll on employment and caused 11.8 percent rise in unemployment rate by January 2009 as compared to the 5.3 percent of January 2007. This effect can be illustrated in the figure below.

Figure (3): unemployment rate in Nigeria (2007 – 2009)

Source as adapted from: national bureau of statistics (2012)

The figure (3) above, also illustrate that Nigeria is yet to recover from the shock as the unemployment rate has increased steadily since the rocket increase in 2009. 

2.0 MEASURE IMPLEMENTED TO ADDRESS THE FINANCIAL ISSUES IN NIGERIA

The areas of impact of the global crisis in Nigeria include: reduction in bank lending, reduction in FDI flow, reduction in export revenues as a result of decrease in demand from rich countries and reduction in population remittances for emigrating citizens. Notwithstanding these influences of the global crisis on the Nigerian economy, the response was slow and the government sectors had different stands on the way forward.

The shrinking demand from advanced nations for commodities resulted in cuts in production levels at numerous plants located within these nations. This meant a reduction in consumption of petroleum and other crude products (Olu and Tayo, 2009). Therefore, the earning of oil producing companies and countries declined. A key element in understanding the appropriate measure to deploy revolves around getting a background and detailed view of how the crisis affects the sources of international capital flow to Nigeria. On the other hand, since no two counties are the same, the method adopted in intervening during economic crisis will defer amongst countries. Some of the policies adopted in Nigeria as a counter measure for the economic crisis are:

1. Reduction in monetary policy rate (MPR) from 10.25% to 9.75% -  the Central Bank of Nigeria reduce monetary policy rate in response to the rising liquidity squeeze in the financial sector of the economy, as a result of the drastic increase in interest rate during the economic recession.
2. Reduction in the cash reserve ratio (CRR) for banks from 4% to 2% - this was a response to the rising inflation as the government sort for ways to increase economic efficiency and thus boost the overall market performance.
3. Cutting of liquidity ratio from 40% to 30%  - strict policies were enacted to tighten the borrowing system of banks and thus ensure that all banks meet the necessary operation capital requirement in order to maintain their license. While this led to the collapse of numerous banks, it ensured efficiency in the financial institution.

Additionally, the Central Bank of Nigeria gave mandate to banks that they have the option to reform the crystalized margin loans up to 2009; and inter-bank lending will be expanded and extended up to 360 days. These policy reform were meant to inject an estimated N150 billion into the Nigerian economy and improve the liquidity of the economy. It is the part of government initiative to reduce unpredictable market atmosphere in view of foreign direct investment and international financial market performance. Other policies enacted include

1. Presidential Steering Committee on Global Economic Crisis (inaugurated on 16 January 2009);
2. Presidential Advisory Team on the Capital Market set up to consider measures to reverse the declining fortunes of the Nigerian capital market;
3. Security Exchange Commission SEC), NSE and all capital market operators reduced fees by 50%;
4. NSE to review trading rules and regulations;
5. 1.0% maximum downward limit on daily price movement and 5.0% on upward movement. This has been harmonized to 5% either way from end-October 2008;
6. SEC released guidelines/rules on market makers;
7. Strict enforcement of NSE's listing requirement with zero tolerance for infractions;
8. NSE de-listed 19 stagnant companies;
9. Rules on share buyback introduced, with a limit of 15.0%. (Olu and Tayo, 2009)

A summary of these policies indicates attempts to expand liquidity and contrast as well as tighten the market operations of corporations in view with tackling the financial economic crisis and preventing a similar occurrence in the future.

Besides the government sectors, private corporations also adopted policies to counter the impact of the crisis. Policies adopted by the private sector include:

1. Reduce credit purchase – companies opted not to sale than to sale at credit as they were not sure about getting loan from the bank, and the possibility of repayment form their clients due to the impact of the crisis on household income as well.
2. Increased Lay off - the budget cut approach saw companies laying off workers to reduce their cost of production as a counter measure for improving profit.
3. Strategic alliance and partnership – corporations sort new ways to increase their revenue and this lead to numerous companies joining forces to produce and market their products.
4. Decreased holiday intention – in Nigeria, the tourism industry was one of the most hit sector of the economy, as residents were less interested in holiday and recreational activities due to a back plan of saving more than they spend in expectation of the works case scenario.

3.0 CONCLUSION

The global economic crisis between 2007 to 2009 while it can be considered as a product of the bust in America's real estate sector, illustrated the extent to which globalization has integrated economies of the world into a single functioning unit, and is evidence that a fracture from one country can eventually affect the economic performance of other countries and possibly the world.

Nigeria was no exception, as the financial crisis left the Nigerian economy in shambolic tatters and resulted in the government having to implemented quick successive policies as counter measure to the declining economic performance. The influence was felt in the Nigerian real sector, banking sector, national debt, stock market and virtually all crones and cranes of the economy.

While the government was not quick in response, the Nigerian bond market showed great since of confidence, as the impact of the economic crisis appeared to be negligible. However, lateness of the government in response meant that the economy was stripped down to many shortcomings and the nation's high dependence on crude oil exportation also resulted in the Nigerian economy being heavily affected by the economic crisis.

It was not for long until the government responded with counter measure by reducing the monetary policy, reducing the cash reserve and cutting liquidity ratio. This eventually resulted to increase in economic efficiency as the Nigerian economy slowly started to propelled back to its original position.

Thus, it can be concluded that the rapid growth of globalization has numerous worries and areas of concern as if it is not carefully controlled or manipulated, it has the full potentially of ensuring that economic crisis in a particular country has the potential of endangering the economies of another nation as illustrated in the Nigerian case which began from the United States and eventually endangered and collapsed several areas of the Nigerian economy.

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