THE CHALLENGES OF GLOBAL ECONOMIC CRISIS AND NIGERIA’S FINANCIAL MARKET STABILITY

THE CHALLENGES OF GLOBAL ECONOMIC CRISIS AND NIGERIA’S FINANCIAL MARKET STABILITY

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CHAPTER ONE

INTRODUCTION

1.1      Background of the study

The Emergence of the Global Financial Meltdown The global economy has been hit by the worst economic crisis since the Great Depression. What began as a meltdown of the United States sub-prime mortgage market in 2007, had grown steadily into a full blown economic crisis by 2008, wiping out trillions of dollars of financial wealth, undermining global trade and investment and putting the real economy on a course of protracted recession around the world (ILO, 2009.3; World Bank, 2009.1; Igbatayo, 2009.5). The foreclosure epidemic in the United States mortgage market in 2006 became a key factor that triggered the global financial crisis. Economies in all the continents and espousing different ideologies and institutional organization were quickly caught in the inevitable web of multifarious networks which are the hallmark of globalization. The growing liberalization of international trade attained in the last twenty years of the 21th century, propelled by the reform policies championed by the World Bank and the International Monetary Fund (IMF) prepared the ground for full blown globalization. This new system of doing international business may be defined as the growing integration of markets in goods, services and capital across national borders. With the emergence of globalization, economic crisis can no longer be confined to one country, or even an economic community. The Nigerian economy has demonstrated particular vulnerability to the emergent global economic crisis. Driven by crude oil and gas, the nation’s economy is anchored on the petroleum sector, which accounts for 80 percent of government’s annual revenue and foreign exchange earnings. The petroleum sector also contributes about 50 percent of Nigeria’s annual gross domestic product. The global oil and gas industry enjoyed tremendous price increases associated with sustained economic growth around the world until mid-2008, when the price of crude oil packed at US$147.00 per barrel. While the boom lasted, Nigeria became a major beneficiary of crude oil price upswings, increasing its foreign exchange reserves to an unprecedented level of about US$60 billion. The windfall also afforded Nigeria the rare opportunity to exit the Paris Club of creditors, in a development which catalyzed the discharge of its foreign debt obligations through the payment of US$18 billion, while the sum of US$12billion was waived by creditors, leaving a paltry sum of US$2billion. However, with the advent of the global economic turmoil, global oil prices plummeted to less than US$40.00 per barrel by the 1st quarter of 2009. This development has unleashed an external shock on the Nigerian economy. The sharp drop in oil revenue has reversed few years of fiscal surpluses to severe deficits. The dominance of the oil sector has therefore impacted negatively on Nigeria’s macroeconomic performance, particularly since the emergence of the global crisis. Igbatayo (2011) opined that in the case of Nigeria, the emergent global crisis has impacted negatively on the nation’s financial sector, triggering instability in banks and the capital market. The banking sector is shaken particularly hard, causing the Central Bank to inject more than N400 billion naira or US$2.72 billion into vulnerable banks to forestall systemic collapse in the sector. In the capital market, equity prices, in the past couple of years, have fallen sharply, with the All-Share Index at the Nigerian Stock Exchange down by 33 percent at the end of December 2009, from levels recorded in December, 2008. 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. The instability in Nigeria’s financial markets poses severe challenges to policy makers, requiring urgent measures to stem the tide. The 2008/2009 global economic meltdown was a challenge to the Nigerian economy. As a major petroleumproducing country, Nigeria was not insulated from its effects. An important effect of the global meltdown was the decline in the demand for crude petroleum. Crude prices fell precipitately from about $150.00 per barrel in 2008 to less than $40.00 early in 2009, a development that subjected budgets at all tiers of government todrastic downsizing. In a way, the recent global meltdown may be considered as a trial run and a simulation of conditions in Nigeria’s post petroleum era.

1.2 STATEMENT OF THE PROBLEM

The Nigerian economy has demonstrated particular vulnerability to the emergent global economic crisis. Driven by crude oil and gas, the nation’s economy is anchored on the petroleum sector, which accounts for 80 percent of government’s annual revenue and foreign exchange earnings. The petroleum sector also contributes about 50 percent of Nigeria’s annual gross domestic product. The global oil and gas industry enjoyed tremendous price increases associated with sustained economic growth around the world until mid-2008, when the price of crude oil packed at US$147.00 per barrel. While the boom lasted, Nigeria became a major beneficiary of crude oil price upswings, increasing its foreign exchange reserves to an unprecedented level of about US$60 billion. The windfall also afforded Nigeria the rare opportunity to exit the Paris Club of creditors, in a development which catalyzed the discharge of its foreign debt obligations through the payment of US$18 billion, while the sum of US$12billion was waived by creditors, leaving a paltry sum of US$2billion. However, with the advent of the global economic turmoil, global oil prices plummeted to less than US$40.00 per barrel by the 1st quarter of 2009. This development has unleashed an external shock on the Nigerian economy. The sharp drop in oil revenue has reversed few years of fiscal surpluses to severe deficits. The dominance of the oil sector has therefore impacted negatively on Nigeria’s macroeconomic performance, particularly since the emergence of the global crisis. From this background the researcher wants to investigate the challenges of global economic crisis and Nigeria’s financial markets stability

1.3 OBJECTIVE OF THE STUDY

The objectives of the study are;

1.   To ascertain the causes of global economic crisis

2.   To ascertain the effect of global economic crisis on Nigeria’s economy

3.   To ascertain the relationship between global economic crisis and financial market stability in Nigeria

4.   To ascertain the causes of Nigeria’s financial market stability

1.4 RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher; 

H0: there is no effect of global economic crisis on Nigeria’s economy

H1:there is effect of global economic crisis on Nigeria’s economy.

H02:there is no relationship between global economic crisis and financial market stability in Nigeria.

H2: there is relationship between global economic crisis and financial market stability in Nigeria

1.5 SIGNIFICANCE OF THE STUDY

This study, which is primarily aimed at explaining the challenges of global economic crisis and Nigeria’s financial market stability, will provide an insight into the problems associated with global economic crisis and Nigeria’s financial market stability.This report would be of great benefit for Nigeria’s financial sector, to expose them to the solution to global economic crisis and Nigeria’s financial market stability.The findings will be useful for researchers to further generate knowledge in the field

1.6 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the challenges of global economic crisis and Nigeria’s financial market stability. The researcher encounters some constrain which limited the scope of the study;

a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study       

b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

1.7 DEFINITION OF TERMS

CHALLENGES: A call to someone to participate in a competitive situation or fight to decide who is superior in terms of ability or strength

GLOBAL ECONOMIC CRISIS: Global economic crisis may refer to: Economic events of the late 2000s: Financial crisis of 2007–2008 · Great Recession. A global recession; Earlier global economic events, such as: The Great Depression, a global economic downturn from the late 1920s until World War II; The Long Depression, an international depression.

FINANCIAL MARKET: financial market is a market in which people trade financial securities, commodities, and value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural products.

FINANCIAL STABILITY: Financial stability is a state in which the financial system, i.e. the key financialmarkets and the financial institutional system is resistant to economic shocks and is fit to smoothly fulfill its basic functions: the intermediation of financial funds, management of risks and the arrangement of payments.

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study


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