Nigeria and the global financial meltdown – Obadiah Mailafia

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Nigeria and the global financial meltdown



Written by Obadiah Mailafia   


Thursday, 25 December 2008


From first principles, we must not forget that financial booms and busts are not a new phenomenon. What is disquieting about the current meltdown is that it is in the nature of a seismic tremor of earth-shaking proportions. Within a few moths, some of the biggest financial giants have gone belly-up, while several more are in serious trouble. How indeed are the mighty fallen! Bear Stearns, AIG, Fannie Mae and Freddie Mac, Lehman Brothers and Merill Lynch. The automobile giants are virtually on their deathbeds while a good number of industrials are surviving only by the skin of their teeth. A rather prosperous central European nation, Iceland, has virtually sued for bankruptcy, resorting to an IMF standby arrangement – the first since the British ‘humiliation’ of 1967.  

The contagion has spread to Europe, Japan, Asia, Africa and Latin America. An estimated US$1.7 trillion in bailout funds has already been committed by OECD countries, but we are yet to see the end of the tunnel, not to talk of any light in it. According to a recent report, the world stands in need of a staggering US$4 trillion to fully resolve this crisis.

Any explanation of the current financial turbulence must begin with the housing bubble fuelled by low interest rates, increased global liquidity and predatory lending by the financial giants. According to some estimates, the annual issuance of US sub-prime mortgage backed securities increased from a mere $56 billion in 2000 to a massive $508 billion in 2005, comprising something of the order of 20 percent of total US mortgages. By 2006, the housing bubble was beginning to unravel, as higher interest rates and rising oil and food prices – and a generalised decline in consumer confidence — were starting to take their toll.

For Robert Reich, former Labour Secretary under President Clinton, greed has to be the main explanatory variable. For billionaire investor George Soros, on the other hand, the main villain is former Fed Chairman Alan Greenspan whose monetary policies allegedly encouraged speculative exuberance even as interest rates were at an all-time low and asset prices were spiraling out of control. Predictably, President-elect Barack Obama puts most of the blame on the misguided policies of the Bush administration, describing the situation as “the most serious financial crisis since the Great Depression”. To all intents and purposes, the big ratings agencies must also bear some of the blame for failing to be more rigorous in their risk assessments. There are yet others who blame the situation on the repeal of the Glass-Steagall Act 1933 which had made a clear demarcation between general commercial banking on the one hand, and investment banking activities, on the other. The absence of such a demarcation was underlined as one of the factors accounting for the speculative exuberance that led to the 1929 Wall Street crash.

Linked to this is the dwindling capacity of regulatory authorities. The reality is that the world of high finance has become so complex in our digital age, with capital travelling at the speed of light and several instruments engineered using the arcane language of quantum physics. The hedge funds which control over a US$1 trillion in assets are not subject to many of the traditional regulatory regimes. Inevitably, such power without responsibility is bound, sooner or later, to lead to anarchy or even worse.

Another factor that may not be so apparent is what I would term “the crisis of American hegemony”. It is an open secret that America is today the world’s number one debtor-nation. One of the greatest achievements of the Clinton Presidency was to have eliminated the budget deficit. When the Republicans took over, the notion of balanced budgets was thrown out of the window. It was further aggravated by military adventures in Afghanistan and Iraq that cost an astonishing US$1 billion daily in tax-payers’ money. And we all know that those adventures have more to do with advancing the interests of oil sharks and the military-industrial complex than about fighting terrorism or spreading the ideals of democratic government.

A hypothesis made famous by the late Harvard economist Charles Kindleberger and others posits that a stable international monetary is possible only where there is a world power able and willing to bear the burdens of responsibility for the preservation of the prevailing system. Such a leader must also be prepared to act as a lender of last resort. Britain played this role in the nineteenth century. America was to play this role for much of the twentieth century. For such theorists, the decline of a ‘hegemon’ is often reflected in international financial disequilibrium, a situation which perhaps offers part of the explanation for the current difficulties.

Your Excellency, for us in Nigeria, the current crisis could not have come at a worse time, especially when we have been facing a capital market meltdown of our own for some months now.  There are several implications of the current meltdown on the Nigerian economy.

First, as an immediate consequence, it is likely to aggravate the ongoing stock market crisis. As of last week, it was reported that foreign portfolio investors have withdrawn some US$15 billion from our capital markets. Such massive withdrawals compound the crisis of confidence which will further complicate the capital market recovery process.

Secondly, dwindling petroleum prices mean a severe reduction in foreign exchange earnings, which, in our case, derive overwhelmingly from the petroleum sector. Some experts are predicting that petroleum prices may come down to as low as US$30 per barrel over the coming years. Others believe we are approaching a stabilization point where the price may hold for sometime. Hardly anyone imagines that prices would recover to the levels exceeding the US$100 that we witnessed about a year ago.

Thirdly, and deriving from the above, it is likely to affect our budget plans in a major way. Already, the 2009 federal budget proposals have an inbuilt deficit of 1.09 trillion naira, a figure that many consider to be unsustainable. While government is optimistic it would be able to finance it through taxation and accruals from signature bonuses from the sale of certain privatized companies, the skeptics seem to be carrying the day.

Fourthly, lower revenue expectations through all tiers of government mean reduction of funds for much-needed investment in infrastructures development.  This would not only deepen the infrastructure finance gap, it would also bedim the prospects for our much-vaunted Vision 2020 project.

Fifthly, we would have to reckon with reduction in net capital flows, both in terms of investment and concessional resources. Whilst we may not be major recipients of official development assistance (ODA), we do benefit significantly from bilateral and multilateral aid resources, which are often the soft target when developed countries face a major financial crisis. Inevitably, investment flows, both in terms of FDI and portfolio, are likely to be affected, in addition to remittances from the Nigerian Diaspora, which, according to some calculations, exceed US$2 billion annually.

Sixthly, the lowering of growth in the OECD countries will translate into lower growth in Africa as indeed in our country. Earlier estimates about growth exceeding 10 percent would clearly have to be revised downwards. We may have to be content with something of the region of 7 – 8 percent growth for 2008.

Seventh, lower growth would also mean a slowdown in the fight against poverty. Worsening poverty removes farther the prospects of our attaining the internationally agreed targets for halving the number of the poor within the framework of the Millennium Development Goals (MDGs) by the year 2015.

Given the fact of dwindling foreign earnings, we have to apply certain financial stringencies. Even in the best of times, the cost of government in this country is far above the norm even for the richest countries. We therefore need to eliminate waste and put in place effective cost-cutting measures. I suspect there are still a good number of ghost workers as well as dead wood in much of the public service. One effective approach is to deepen the institutionalization of E-governance. The computerization of the public service through implementation of enterprise systems will eliminate many of the leakages which afflict the system. I am sure that billions would be saved in that process.

For America, it will not be the end of the world, but it certainly signals the end of en era. In over-extending herself beyond her means and her material capabilities, America has ended up alienating her allies, pursuing a unilateralist course that its wisest statesmen would never have dared to contemplate. In so doing, George W. Bush and his neoconservative brethren have exhausted the moral capital that the American Republic has accumulated for the better part of a century. More than at any time in her illustrious history, America stands isolated and bereft of moral authority – and on the verge of

We in Nigeria have an opportunity to relaunch our development on new and more robust foundations. Priority must be given to addressing the severe infrastructure constraints that are so glaring. There is a need to address supply-side issues as well as the institutional environment in general. Another missing link, in my view, is the absence of an effective anti-monopolies regime. Our economy has a fearful symmetry of cartels that are feeding fat on our country and defrauding customers by charging exorbitantly for poor services and products. I have always believed that a free market economy without effective regulation is like playing Hamlet without the Prince.

We also need to re-visit the imperatives of economic and industrial competitiveness. Nigeria currently ranks 94th according to the 2008 Global Competitiveness Index. We fare even worse, at 114th out of 181 countries, according to the World Bank report on the ease of doing business. To achieve this, we have to deepen the reforms which were begun in 2003 within a coordinated strategy anchored on structural transformation and the creation of nothing less than a New Nigeria.

I have to confess that I am not one of those who are easily taken in by the report attributed to Merrill Lynch, which declares our economy to be the safest in the world. As far as I know, our alleged safety derives from the paradox of marginality – to the simple fact that we are not deeply hooked into the global digital economy. It is foolhardy to behave like the proverbial ostrich when Rome is on fire and when the embers of financial contagion have been unleashed everywhere.

Madam President, talking about the much-vaunted Vision 2020, I am constrained to note that we are yet to see a clear economic strategy around which to anchor rational expectations and mobilize the vast resources and energies of our people. Our leaders have all but forgotten the onerous task of nation building. The simple truth is that we are not yet a nation and we are far from having that spiritual bond which the British political philosopher Sir Ernest Baker regarded as the most critical factor in the building of a united and prosperous democracy.

Clearly, we have enormous work to do and several steep mountains to climb. At the global level, we would need to work with others to hammer out a brave new world in which the demands of equity harmonise with the imperatives of international solidarity.

Distinguished Ladies and Gentlemen, for us in this benighted continent, the current upheaval provides an opportunity to re-launch the African Century and to consolidate the foundations of democracy that would enhance peaceful and just development for our long-suffering people. After a millennium of servitude, our continent may, at last, be coming to its own. No nation is better placed, in my view, than ours to champion this continental rejuvenation, whose foundations must be built on sound economic and public management. But I daresay that we will not rise to the occasion until we have transformed our national mindset, reformed the way we do business and changed the structure of our politics and the very spirit of our constitution, leadership and nationhood.

(Being the summarised version of the Annual Dinner Lecture Organised by the Banking and Finance Committee of the Kaduna Chamber of Commerce, Industry, Mines and Agriculture (KADCCIMA) at Hamdala Hotel, Tuesday 16th December 2008). Dr. Mailafia is Chairman of the Centre for Policy and Economic Research (CEPER), Abuja.

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One Response to “Nigeria and the global financial meltdown – Obadiah Mailafia”

  1. Lawal Abdulfatai says:

    Your research work has contributed to my knowledge grately . As much is been plug out for my seminar presentation to the department of BANKING AND FINANCE KWARA POLY .AS AN OUT GOING STUDENT OF THE DEPARTMENT ……. THANKS

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