GLOBAL ECONOMIC RECESSION AND CHALLENGES FOR

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• GLOBAL ECONOMIC RECESSION AND CHALLENGES FOR
• NIGERIA AVOIDING THE WRONG LESSONS AND
• TAKING THE RIGHT LESSONS
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• Mike I. Obadan, Ph.D, FNES

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Presentation Outline

• I. Introduction
• Dimensions of the crisis
• Impact of the crisis on the Nigerian economy
• What do we learn from the crisis?
• Conclusion

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I. Introduction

• The world capitalist system has been greatly
  stressed by financial and economic crises, which
  have threatened the foundation of the system for
  about two years now.
• The resultant global economic recession was
  triggered by financial crisis originating in the
  US mortgage sector.
• However, financial crises with global dimension
  are not new in history.
• A major one occurred 1928-1933 culminating in the
  Great Depression.
• The Great Depression occurred after a dramatic
  expansion in debt and money supply, first in the
  1920s, and later in 1929-1933 due to debt
  default.

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I. Introduction

• Latest financial crisis similarly originated in
  rapid risky debt accumulation and loss of
  investor confidence in the US sub-prime mortgage
  market. Result liquidity crisis.
• In September 2008, the crisis deepened, as
  several stock markets crashed and many banks,
  mortgage lenders and insurance companies failed.
• Spread of the crisis worldwide is due to the
  linkages of the world economy arising from
  economic globalization.
• Implications tends to be alike in crisis-affected
  economies
• - economic recession, output losses, higher
  unemployment and poverty
• - reduced capital inflows including aid, and
  increased capital flight
• - exchange rate and balance of payments crisis.
• Adoption of expensive rescue packages to bail out
  troubled financial systems.

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2. Dimensions of the Global Economic Crisis

• Causes of the Crisis
• US mortgage crisis triggered the crisis which
  affected the entire financial sector and led to
  serious economic recession.
• Use of financial instruments such as
  securitization.
• Role of policy Clinton govt. pressurized Freddie
  Mac and Fannie Mae to increase mortgages to
  low/moderate income people.
• Other factors
• - Limited regulation/supervision amidst careless
  financial liberalization.
• - Fragile and vulnerable U.S financial system.
• - Widespread miscalculation by banks and
  investors on the risk inherent in the unregulated
  collateral debt obligations and Credit Default
  Swap markets.
• Boom and collapse of the shadow or parallel
  banking system.
• However, the financial crisis could have been a
  symptom of a deeper crisis.

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2. Dimensions of the Global Economic Crisis

• Spread and Effects of the Crisis
• The crisis spread to Europe through the channels
  of financial globalization.
• The crisis rapidly spread into a global economic
  shock and crisis, resulting in
• - A number of European bank failures,
• - Declines in stock market indices, and
• - Large reductions in the market values of
  equities and commodities like oil.
• - As the currency crisis developed, investors
  transferred vast capital resources into stronger
  currencies

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2. Dimensions of the Global Economic Crisis

• The problems have been so severe that the
  following happened
• Some of the worlds largest institutions have
  collapsed.
• Some have been bought by their competitors at low
  prices
• Governments have resorted to extensive bail-out
  and rescue packages.
• - U.S targets 1.5 trillion to recover. Congress
  already approved 800 billion.
• - U.K about 692 billion of fresh funds
• - France Euro 360 billion
• - Germany - 670 billion.
• Growth has slowed considerably in most developed
  countries.
• U.S economy, many Euro-zone, Japan, etc,
  officially in recession.
• Stock markets are down with about 40 reduction
  in the value of the worlds companies.

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2. Dimensions of the Global Economic Crisis

• Even banks with large capital reserves needed
  funds and sought government bailout though
  businesses and individuals that rely on credit
  find it harder to get.
• Specifically, the following have occurred
• U.S economy lost 2.5 million jobs in 2008 lose
  500,000 jobs a month has another 3.4 million who
  have gone form full-time to part-time, has high
  under employment rate and growth has slowed
  considerably.
• In U.K, the Bank of England cut its interest rate
  to an historic low of 1.5 from 2.0 (Mid-January
  2009) to 1.0 by February, 2009.

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2. Dimensions of the Global Economic Crisis

• The World Bank has warned that
• Some emerging market economies (EMEs) may face
  serious challenges like bank failures and
  currency crises even if global bail-out plans
  start restoring confidence in financial markets.
• There would be a significant decline in global
  economic growth in 2009 for developed countries
  and EMEs.
• Deep global recession could not be ruled out and
  world growth per capita could be negative in
  2009
• Following the insolvency of some large banks and
  financial institutions, capital flows to
  developing countries are drying up and huge
  amounts of market capitalization have evaporated.
  
• Dwindling capital flows to developing countries
  reduce their investment level while slowdown in
  world trade tends to cut into their export
  markets.

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3. IMPACT OF THE CRISIS ON THE NIGERIAN ECONOMY

• i. Government finances and fiscal operations
• This is a most visible area of impact given
  Nigerias heavy dependence on crude oil exports
  for government revenue and foreign exchange
  earning.
• Reduced crude oil demand due to the recession
  and the crash of oil prices have negatively
  impacted on government finances.
• Crude oil prices was about US40.0 per barrel as
  at the first week of February, 2009 (over 50.00
  in May) compared to U.S 147.00 per barrel in
  July, 2008.
• Realized government revenue January-March, 2009,
  was N353 billion compared to N477 billion
  expected, implying a short fall of N124 billion.
• Though foreign exchange earnings dropped, recent
  improvements in oil prices, however, have
  positive impact.
• Realized fiscal deficit in 2009 may be higher
  than what has been projected in the 2009
  Appropriation Act.

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3. IMPACT OF THE CRISIS ON THE NIGERIAN ECONOMY

• Macroeconomic Performance
• The crisis is already having serious effects on
  the macroeconomy.
• Growth
• The economy may not go into recession this year.
• Contrary to the optimism of senior government
  officials, the economy may experience significant
  contraction and high growth rates recorded in
  recent years may reduce significantly.
• Balance of payments and exchange rate
• Balance of payments and currency/exchange rate
  crisis are likely.
• There has been higher capital outflow,
  particularly portfolio investment.
• Foreign reserves have largely fallen. From over
  US 60.0 billion by the mid-2008 to the current
  level of about U.S 46.0 billion.
• Thus, the naira depreciated by 25 early
  December, 2008.

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3. IMPACT OF THE CRISIS ON THE NIGERIAN ECONOMY

• Inflation and Interest rates
• These are very likely to maintain their upward
  trend that was observed in 2008.
• Inflation may worsen as a result of the
  pass-through effects of exchange rate
  depreciation and the financing of fiscal
  deficits.
• Interest rates will trend upwards considering the
  depreciating naira and fiscal deficit.

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3. IMPACT OF THE CRISIS ON THE NIGERIAN ECONOMY

• The Financial Sector
• With the global financial/economic crisis, there
  has been
• Withdrawal of funds/placements by many
  international banks/institutions that extended
  credit to Nigerian banks and businesses.
• Intensification of capital flight which is
  compounding the downturn in the capital market.
• Reduction of confirming lines by foreign banks to
  their Nigerian counterparts.
• Belt-tightening measures on the part of some
  Nigerian banks as part of strategic measures to
  minimize impact.
• The heavy burden of huge lending to the troubled
  stock market, estimated at N1.2 trillion by the
  CBN.
• Nigerian banks have reduced their lending
  activities considerably.
• Given the high capitalization of the banks, their
  huge profits and recent strategic moves , they
  should be able to withstand shocks.

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3. IMPACT OF THE CRISIS ON THE NIGERIAN ECONOMY

• iv. Effects on the Stock Market
• The global financial crisis has worsened the
  crisis in the Nigerian stock market.
• - Share prices trended downwards mirroring global
  trends. The stock market lost 45 of its value in
  2008 and has lost over 37 since the beginning of
  2009.
• - This had a big impact on banking systems
  exposure to the capital market.
• v. Effect on the Real Sector
• With the global crisis, the industrial sectors
  problems are being compounded by depreciating
  naira, rising interest rate, rising cost of
  infrastructure services, etc.
• Operators in the sector are jittery anticipating
  more hard times in terms of lower investment,
  lower profits and possible retrenchment.

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4. WHAT DO WE LEARN FROM THE CRISIS?

• 4.1 Some General Lessons
• i. Free market mechanism is vulnerable to
  serious crisis.
• The invisible hand of the market is not
  invincible after all. The promoters of the
  Washington Consensus are now promoting big
  government to rescue capitalism.
• ii. Markets cannot be left on their own.
• The crisis has shown that markets are not always
  able to function on their own.
• Pragmatic and sensible adoption of market systems
  is required.
• iii. Greater appreciation of the significance of
  governments necessary role
• There is need for pragmatic adoption of the
  market system in the context of the guiding hand
  of government.

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4. WHAT DO WE LEARN FROM THE CRISIS?

• iv. Avoid pre-mature and careless financial
  liberalization.
• - Careless financial liberalization and the idea
  of self-correcting markets led to recession,
  unemployment and poverty.
• v. More professional supervision of financial
  institutions
• - Better regulation required to reign in
  financial markets and restore trust in the
  system.
• vi. Implications for macroeconomic policies being
  used to stimulate recovery
• - increased borrowing, reduction of interest
  rates, reduction of taxes, spending on public
  works, etc. appear reasonable under present
  circumstances.
• - However, when good economic times return, some
  of the policies need to be reversed.

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4. WHAT DO WE LEARN FROM THE CRISIS?

• 4.2. What can be considered as Specific Right
  Lessons for Nigeria?
• Contingency Plan for possible bail-out of Banks
  needs to be in place to contain the macroeconomic
  implications of possible distress in the banking
  system.
• Regulatory institutions, e.g, the CBN, SEC and
  Nigerian Insurance Regulatory Commission appear
  weak and ineffective, especially the SEC.
• Promote vigorous tax collection to provide
  sustainable revenue.
• Return non-oil tax as the pivot of national
  development as it is consistently reliable and
  predictable.
• Use oil revenue to strengthen the non-oil sector
  base of taxation.
• Bring all taxable adults evading /avoiding tax
  into the tax net.
• Improve efficiency of collection and
  administration of existing taxes.
• Prudent fiscal policy is required more than ever.
  
• Bloated budgets, like the 2009 budget, portray a
  penchant for profligacy and corruption which
  makes public spending inefficient and
  ineffective.

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4. WHAT DO WE LEARN FROM THE CRISIS?

• Stimulate aggregate demand through private and
  productive public spending with supportive
  anti-cyclical fiscal and monetary policies aimed
  at stemming recession.
• Greater urgency to diversify the economy.
• Government needs to sincerely focus on
  developing/strengthening agriculture,
  manufacturing and other sectors that can drive
  the economy and provide alternative sources of
  revenue on a sustained basis.
• Resuscitate national development planning
• Planning permits a systematic, disciplined and
  coherent management of the economy.
• Use NV2020 document as framework for national
  development plan.
• Vision 2020 document should provide the framework
  for preparing a medium term development plan
  containing programmes and projects for realizing
  Vision 2020.

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4. WHAT DO WE LEARN FROM THE CRISIS?

• Macroeconomic management interest rates and
  exchange rate.
• This is not the time to raise interest rates.
  They are already too high.
• Interest rates should not be relied upon for
  foreign exchange management. Other strategies
  should be explored.
• Confidence building measures.
• There is need for confidence building measures in
  the Nigerian stock market.
• Transparent management of excess oil revenue.
• A formal oil revenue stabilization fund, endorsed
  by all tiers of government is imperative.
• Fund should be properly managed as a cushion to
  the type of internal and external shocks
  currently been experienced by the country.
• Cooperative fiscal federalism.
• This is important particularly in view of the
  last point on management of excess oil revenue
  and the need for macroeconomic coordination and
  stability.

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4.3. What can be considered as Wrong Lessons to
Avoid?

• i. Ostrich Behaviour. Government cannot afford to
  behave like an ostrich. A more purposive
  management of the economy is indispensable.
• ii. Pro-cyclical IMF policies and lending.
• The Bretton Woods Institutions usual
  pro-cyclical policies of raising interest rates
  and taxes and lowering expenditure are not
  helpful in the prevailing circumstances of
  recession.
• Such policies had failed in the past. Rather,
  Keynesian anti-cyclical policies would be in the
  right direction.
• iii. Fixing or freely floating the exchange rate.
  
• There is need to continuously manage the exchange
  rate.
• Formal or informal bands may be adopted in this
  regard.

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4.3. What can be considered as Wrong Lessons to
Avoid?

• iv. Printing of money to increase liquidity and
  ease possible cash crunch.
• As Nigerian governments are not known to use
  deficit finance judiciously, printing of money
  and borrowing from banks are not advisable.
• Safer to borrow from the non-bank public through
  the floating of long-term bonds and development
  stocks rather than short-term instruments.
• v. Succumbing to pressure to bail-out the stock
  market.
• Stock market should be allowed to sort out itself
  through the market mechanism.

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5. CONCLUSION

• The global economic melt-down has had
  far-reaching impact on and implications for both
  developed and developing economies, Nigeria
  included, depending on their level of openness
  and interconnectedness with the global economy.
• In dealing with the crisis, the inevitable role
  of government in complementing the market has
  come to the fore very strongly.
• Important lessons in economic management have
  also been thrown up. For Nigeria, some of such
  lessons relate to the avoidance of IMF type
  policies and conduct which portrays the
  government as an ostrich.

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5. CONCLUSION

• Others to avoid are printing of money, fixing or
  freely floating the exchange rate, and succumbing
  to pressure to bail-out the stock market.
• Well thought-through strategies and policies are
  required. Some of them relate to the following
  vigorous promotion of non-oil tax collection and
  prudent fiscal policy and management of available
  resources.
• Others are diversification of the economy and
  various confidence building measures to restore
  trust and stability to the financial sector.
• Robust regulation and more professional
  supervision of financial institutions and strict
  enforcement of regulatory policies and measures
  is indispensable.

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• THANK YOU