CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF THE STUDY
The global financial crisis began in the United States of America and the United Kingdom when the global credit market came to a standstill in July 2017(Avgouleas, 2014). The crisis, brewing for a while, really started to show its effects in the middle of 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. The original root of the current financial mess is in the US- the world’s largest Industrial-Military complex. With an estimated GDP of $14 trillion, the US contributes about 25% of world output. If, as is being forecast, the US economy contracts by just 1%, this will imply a direct output loss of approximately $140 billion- equivalent to the GDP of Pakistan, the 47th largest economy in the world! And the crises are not restricted to the US. Financial markets have tumbled and slumped the world over: from London to Tokyo, Seoul to Sydney, Sao Paulo to Moscow, Bombay to Frankfurt etc. No economy-whether developed, emerging or developing is, so far, insulated from what Greenspan refers to as ‘once-in-a-century credit tsunami’.
The initial response of the policy makers in Nigeria was meek. Either they did not understand the crises or underestimated its magnitude. In general, they thought of the crisis as only a ‘storm in a tea cup’, an aberration, a ‘hiccup’. They insisted that the ‘fundamentals of the financial system look impressively strong’ even when the capital market has been bleeding uncontrollably. The Minister of Planning stated, rather insensitively, ‘there is no problem in the Nation’s capital market. What we have presently is just corrections and adjustments….shareholders are getting dividends and bonuses and they are happy…’ this was at a time when market capitalization had dropped from N12 trillion to less than N9 trillion. When they finally accepted there was a crisis, they promised to take some unspecified ‘drastic and unusual action’ to stem the global financial crises from causing havoc in the Nigerian financial system (Abubakar, M., 2014). That initial response was, to put it mildly, naïve. The country’s dependence on the export sector is very significant: 99% of FX and 85% of local revenues are directly derived from activities related to export of a single commodity, which is at the center of the current financial crises, oil. It is estimated that 58.4% of Nigeria’s exports are US bound and up to 25% to the Euro zone. 67% of our non-oil exports go to Western Europe, 20% to Asia while ECOWAS accounted for only 11% in 2007. The stock of our FX reserves is kept in European capitals where financial markets have tumbled and banks distressed. How can anyone think we are insulated? International financial crises which affect trade and investment flows are bound to impact on the domestic economy.
The recent global financial crisis had a deleterious impact on the world economy, especially on the financial system in most countries, whether developed, emerging market or developing countries. In the wake of the devastating effects of the crisis, governments as well as central banks all around the world adopted several measures including some unconventional ones to deal with the crisis. The effects of the financial crisis still lingers too date as countries continue to struggle to bring back their financial institutions and markets to a stage where public confidence is fully restored and financial institutions, especially banks resume their intermediation role through resumption of lending activities (Sanusi Lamido Sanusi, 2010). Like most developing countries, Nigeria felt the effects of the financial crisis largely through trade and capital flows because of the openness of the economy and the near total reliance on crude oil exports for government revenue and foreign exchange earnings. The impact of the crisis through the financial system was not as direct or devastating as those of developed and emerging market economies where there was a near obliteration of the entire financial system because of the limited integration with the global financial markets. However, when the impact of the crisis permeated Nigeria’s financial system, the soundness and stability of the system was seriously threatened prompting a decisive intervention of the Central Bank of Nigeria (CBN) to mitigate the emerging crisis and restore public confidence (Sanusi Lamido Sanusi, 2010).
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