The article accesses the impact of the 2007 global
financial crisis on Nigeria by closely analyzingthe basic macroeconomic
indicators such as inflation, government revenue, imports, exports etc.The
article aims at investigatingthe direct (financial transmission) and the indirect
(transmission through real economy) impact of the crisis on Nigeria as the
financial market was integrating with the rest of the world. Did Nigeria’s
strongsupport on primary commodities export, especially oil, served as conduit for
contagion? Read on.
Although the Sub-Sahara Africa(SSA) indirectly felt the effect
of the 2007 global financial crisis,with fallouts such as decline in exports
and export price,negative terms of trade, FDI, remittances and aid, the cases
of Nigeria and other emerging economies were slightly different.
Emerging
economies in SSA were hit first, leading to the collapse of equity markets,
capital flow reversal and pressure on exchange rates. Ghana and Kenya had to
postpone planned borrowing and in South Africa and Nigeria, external financing
for corporations and banks became scarce[1].
In January 2009, foreign portfolio investors withdrew about $15 billion from
the Nigerian capital markets, causing stock market capitalization to fall
almost by half, and the ‘all share index lost a total share of 67 per cent from
March 2008 to March 2009’. Stock markets in other countries like Ghana, Kenya,
Uganda and Benin lost more than 20 per cent in the last year of the crisis[2]
. This strongly suggests that emerging economies in SSA, where financial markets
were somewhat integrated, suffered direct transmission of the crisis and spread
the negative spillover to the neighboring countries.
In
this paper, I closely analyze the key economic variables such as real GDP,
imports and exports, government revenue and inflation from 2006 to 2012 (before
and after the crisis). The analyses indicate that unlike other SSA countries,
Nigeria faced direct and indirect brunt in capital markets owing to heavy
dependency on primary commodities exports.
Brief
overview of Nigeria’s pre-crisis economy
The
Nigerian economy was well on track before the crisis, especially its non-oil
sectors; in 2006, growth in the agriculture sector led by crop production,
livestock and fishing stood at 7.4 per cent[3].
The wholesale and retail trade, building and construction and services also
recorded growth rates of 15.3, 13.0 and 9.8 per cent respectively during 2006.
Growth in Nigeria’s non-oil sector was influenced positivelyby several Government
intervention measures, such as the National Agriculture Project, the National
Special Programme for Food Security, zero tariffs on imported agrochemical,
export expansion grants and through tightening of controls on illegal imports
of agricultural products[4].
The capital market also enjoyed a decade of unprecedented growth, largely
driven by banking sector reform. Market capitalization increased from 2.90
trillion Naira (N) in December 2005 to 12.13 trillion Naira as of March 2008,
while the all share index rose from N24,085.8 to N63,016.56 over the same
period[5].
Impact
of the crisis on Nigeria
Nigeria’s
capital market was the first financial institution to show signs of distress.
As is the case with capital markets around the world, investors began to
speculate and started selling out their assets in response to the crisis. As
the crisis intensified, the all-share Index and market capitalization declined
by 67.2 per cent and 61.7 per cent respectively between April 2008 and March
2009.[6]
On the other hand, state and federal government faced intense fiscal constrains
as revenue and foreign exchange earnings fell significantly due to fall in oil
price from $147 per barrel in July 2008 to $50 per barrel in November the same
year; this was below the $58 per barrel
benchmark oil price for the 2008 budget[7].
Inflation
and GDP growth
As
was in the case of other African countries, Nigeria’s high inflation rate too
was driven by the rising fuel and food prices. The country’s inflation rate
reached two-digits (11 per cent) from the third quarter of 2008 and continued
in two-digit till the end of the crisis. It rose to more than 13 per cent in 2010
(Figure 1). A strong and extended downward movement of the exchange rates also
influenced the high inflation rate.
Figure 1
GDP growth and inflation rate
Source:
author’s calculation based on IMF data
Real
GDP growth rates started to decline in late 2007 and extended in 2008. As
capital flow into the Nigerian economy declined, followed by the foreign
portfolio and foreign direct investment capital, withholding became the order
of the day. Real GDP growth decline came to become obvious.
Investment and remittance flow
Official
Development Assistance (ODA) declined by $666.1 million in 2008 (Table 1)largely
due to the huge effect of the crisis on Nigeria’s development partners such as
the EU and OECD countries.Personal remittances though remained strong in 2008, however,
fell by $837.58 million in 2009 as the crisis intensified. The fall in personal
remittances can be attributed to job cuts in Europe and the United States where
a good number of Nigerians were residing. The decline of aid had direct
negative impact on the country’s health and education sectors since huge chunk
of ODA was directed in these sectors.
Although
there is no data available for inward foreign direct investment and inward
equity investment for the crisis years 2007-08, comparison between 2009 and
2010 data shows that the crisis had significant downward effect on both the
indicators. Inward direct investment increased by $43,910.118 million in 2010 while
inward equity investment increased by $1,882.048 million over the same period (Table
1). The figure strongly suggests that both equity and direct investment had a
southward slope during the financial crisis.
Table 1
Investment and remittance flow (US$ in million)
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
ODA (Net)
|
11428.020
|
1956.260
|
1290.160
|
1657.070
|
2061.960
|
1768.550
|
1915.820
|
Personal remittance
|
16932.363
|
18011.296
|
19205.913
|
18368.329
|
19817.843
|
20618.849
|
20633.319
|
Inward FDI
|
---
|
---
|
---
|
9610.869
|
53520.987
|
84682.019
|
106116.697
|
Inward equity (net)
|
---
|
---
|
---
|
18233.288
|
20115.336
|
26804.193
|
34379.248
|
Source:IMFdata
|
Balance
of payment
Nigeria
enjoyed a favorable current account balance before the crisis in 2007. Current
account as percentage of GDP declined from 9.52 per cent in 2006 to 2.0 percent
in 2007 (Figure 2). It managed to increase by 4.2 per cent early 2008 due to
increase in oil prices, but again suffered a sharp decline in 2009 as the crisis
intensified and crude oil prices fell.
Imports, as percentage of GDP, fell by 6 per
cent in 2008. Consumer goods were mainly affected due to high inflation. Export
as per cent of GDP fell significantly from 40 per cent in 2008 to 31 per cent
in 2009 and even dropped further to 25 per cent in 2010 (Figure 2). The decrease
in exports was mainly due to fall in the demand for crude oil which alone
generated more than 80 per cent of Nigeria’s foreign earnings. The sale of
crude fell from 1.69 million barrels per day to 1.49 barrels per day between
2007 and 2008. Due to fall in price, official flow, private flow, current account
and remittances were strongly affected[8].
Figure 2
Balance of payment flow (per cent of GDP)
Source:
author’s calculation base on IMF data
Fiscal
outlook
Table 2
Fiscal outlook (per cent of GDP)
2006
|
2007
|
2008
|
2009
|
2010
|
1011
|
2012
| |
Gross national saving
|
34.203
|
30.560
|
25.267
|
26.844
|
21.158
|
19.209
|
19.265
|
Revenue (Gen. Govt.)
|
22.012
|
17.906
|
20.809
|
11.310
|
12.421
|
17.729
|
14.347
|
Total expenditure (Gen. Govt.)
|
15.916
|
16.837
|
16.707
|
17.268
|
16.598
|
17.275
|
13.983
|
Net debt, Gen. Gov.)
|
2.907
|
4.745
|
1.250
|
10.954
|
14.370
|
14.962
|
13.283
|
Source:
IMF database
Gross
national saving as percentage of GDP declined by 5.29 per cent in 2008; though
it slightly increased by 1.57 per cent in 2009, it again decreased by 5.68 per
cent in 2010 (Table 2). The fluctuation in gross national saving can be better
explained by taking a keen look at the commodity price before and during the crisis. Government revenue fell significantly by 9.49
per cent(from 20.80 per cent in 2008 to 11.310 per cent in 2009), however, the
Government expenditure remained relatively constant during the crisis and even
increased slightly by 0.56 per cent in 2009 (at the end of crisis). On the
other hand, net Government debt as percentage of GDP, although fell by 3.49 per
cent in 2008, surged by 9.70 per cent in 2009 (Table 2), suggesting that the
fear level of Government expenditure during the crisis was backed by Government
borrowing.
The
2007 global economic and financial crisisaffected Nigeria in two ways. Nigeria,
where crude oil constitutes more than 80 per cent of the total Government
foreign earnings and more than 70 per cent of exports, the effect of the crisis
led to decline in exports and subsequent fall in the Government revenues. The
crisis also affected Nigeria’s stock market, remittances and aid. Nigeria all
share index declined by 67 per cent in 2009, while market capitalization lost a
total of 62 per cent over the same period. Aid, especially personal remittances
was severely hit, declining by $837.58 in 2009.High inflation was fallout of the
crisis on Nigerian economy as inflation reached two digits during the crisis
and remained so even after the crisis.
(P. Samuel Goweh is Master’s student of
International Affairs at O.P. Jindal Global University), Delhi-NCR, India).
References
1.
Dr. Fritz
Augustine Gockel THE WORLD FINANCIAL CRISIS AND ITS IMPLICATIONS FOR GHANA
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2.
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GodfredAckah, Ellen Bortei-DorkuAryeetey and Ernest Aryeetey; Global Financial
Crisis Discussion Series
Paper 5: Ghana, (2009)
3.
OluAjakaiye
and ’TayoFakiyesi; Global Financial Crisis
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Paper 8: Nigeria, (2009)
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Aham Kelvin
Uko; The Effect of Global Financial Crisis on Nigerian Economy, (2012)
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KwabenaNyarkoOtoo
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6.
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8.
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10.Omika Mohammed1 & Amana Mohammed;
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(2009)
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15.Sophie Chauvin and André Geis; WHO
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16.THE SPILLOVER OF THE GLOBAL FINANCIAL
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18 MachikoNissanke; The Global
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[1]
International Monetary Fund, Impact of the Global Financial on Sub-Saharan
Africa, (2009)
[2]
Franklin Allen and Giorgia Giovannetti; the effect of the financial crisis on
Sub-Saharan Africa
[3]OluAjakaiye and
TayoFakiyes; The Global Financial Crisis Discussion Series Paper 8: Nigeria;
2009
[4]Ibid
[5]Abimbola
Hakeem Omotola, Impact of the Global Financial Crisis on the Nigerian Economy,
(2013)
[6]
Ibid
[7]
Ibid
[8]OluAjakaiye
and TayoFakiyes; The Global Financial Crisis Discussion Series Paper 8:
Nigeria; 2009
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