Global Financial Crisis and Its Impact on Investments In Africa

Published on 17th March 2009

This presentation is divided into four parts. Section 1 traces and explains the causes of the global financial crisis as well as steps taken so far by the lead or developed economies. Section 2 discusses the implications of the crisis for the agricultural and rural development of Africa in the light of the predictions of The World Bank and the United Nation’s Food & Agriculture Organization (FAO). Section 3 highlights the implications of the global financial crisis for development in Nigeria from the perspectives of the Federal Government and the Central Bank of Nigeria (CBN). Section 4 concludes and suggests adjustment options to the global financial crisis "virus" for African governments to consider.

1.0 Introduction

The global financial crisis which first showed signs in the United States of America (USA) is becoming contagious and is apparently affecting directly or indirectly, every economy on the globe. The financial crunch has its roots in a banking practice called sub-prime lending or sub-prime mortgage lending in the USA. It is traceable to a set of complex banking problems that developed over time, caused specifically by housing and credit markets mis-match, poor judgement by borrowers and/or the lenders, inability of home owners to make mortgage payments, speculation and overbuilding during the boom period, risky mortgage products (financial innovations with concealed default risks), high personal and corporate debt profiles and inactive/weak central bank policies. The crisis is presently putting to test the ingenuity of the management of various central banks world over.

In response to the challenges posed, many countries, governments and their central banks have intervened by slashing interest rates in the bid to reduce the negative impact and avoid compounding the crisis from becoming a global financial meltdown. To contain the impact of the crises, there has so far, been mixed reactions; in Europe for instance, central banks injected more cash to the market in an on-going attempt to provide liquidity to the financial system. The Euro zone countries bought into banks to boost their finances as well as announced the guarantee of inter-bank lending up to the end of 2009. Already, among European banks, inter-bank lending had frozen. Banks no longer lend to each other except in the shortest periods. Supported by the Bank of Japan, others like the central banks of China, Canada, Sweden and Switzerland had had to cut rates. The British government on its part took up majority stakes in UK’s four biggest banks while in Ireland, bank shares surged after government unveiled an unlimited guarantee on deposits at six domestic banks a day after the Irish Stock Exchange registered its greatest historic fall.

2.0 Implications for Africa

Although in Africa, there is presently a relative stability on the continent. Predictions are that the stability of African countries may not last as poor countries will bear the brunt of the crunch more since they are not well insulated. This view was expressed at the 119th meeting of the International Conference Centre in Geneva (CICG), Switzerland organized by the Inter-Parliament Union (IPU). The meeting rose with the expressed fear that, the world’s poorest nations are the most vulnerable, and that in this regard Africa is not exempted from the spiral effects of the crunch. Compared with other regions of the developing world, Africa already faces the largest challenge in terms of meeting the target 1 of the Millennium Development Goals (MDGs). The UN’s Food & Agricultural Organization (FAO) in its reports noted that 30 per cent of Africans are chronically hungry (evident among children under five). For instance, in 2001, about 47 per cent of the population were living below the international poverty line. Depending on the challenges and opportunities prevailing within each of the African countries, agriculture remains the primary means of addressing the challenges because 65 per cent of Africans derive their livelihood from the sector.

According to the World Bank, the effects of financial crisis on the continent could manifest through drying up of liquidity and capital inflows, aids programmes and trade. This is because:

(i) Many African banks that may be planning to seek funds from the developed economies would not be able to source capital;

(ii) Most African countries through their central banks have their foreign reserves stashed out in Dollars and Pounds in the United States of America (USA) and Western Europe, portending low income in subsequent years because of the low interest rates following governments and central banks interventions;

(iii) Strong likelihood of decline in revenue from exports in African countries;

(iv) Low commitment by African governments to rural development agreements under the Millennium Development Goals (MDGs) and the New Partnership for Africa’s Development (NEPAD); and

(v) That the Crisis of the four Fs (fuel, fertilizer, finance and food) still faces the continent, especially given that in Togo and Liberia, food inflation is still 25 per cent while in Ethiopia it is 92 per cent and (vi) poor response of African governments to the global financial crisis. The World Bank has in respect of the developments forecasted for 2009, that commodity prices will nosedive to between 20-25 per cent compared. An overlay of the above facets of the global financial crises therefore portends that, should Africa remain complacent, the effects of the financial crunch will be very considerable for the continent.

3.0 Implications of the Global Financial Crisis for Nigeria

According to the World Development Report (2007/2008), Nigeria is the largest territorial unit in West Africa with an estimated 140million people (based on 2006 headcount). It is an agrarian, oil producing country with a gender population ratio of 51.2 and 48.8 per cent for male and female respectively, an annual growth rate of 3.2 per cent and a low human development rating, HIV/AIDS prevalence rate of 3.9 per cent, infant mortality at 100 per 1,000 births and mortality of 1,100 per 100,000 live births. The country placed 158 among 177 countries in terms of Human Development Index (HDI) as at 2005 and is considered poor with a life expectancy of about 54 years and per capita income of $1,128 (US) or $3.00 per day, depicting that 70.8 per cent of her population live below the poverty line of $1.00 per day or 92.4 per cent living below the $2.0 per day. Nigeria has a high degree of inequality in income distribution with only a small fraction of the population earning the bulk of its national income.

The unprecedented fall by 40.0 per cent in the international prices of oil, attendant of the global financial crunch compounded by the persistent Niger Delta Crisis of Nigeria signals that if the global financial meltdown persists, Nigeria could suffer a major setback. For instance, its 2009 budget has been benchmarked against the $62.0 per barrel oil earnings. The contributions of agriculture and crude petroleum to the country’s GDP averaged, 41.40 and 23.50 per cent between 2003 and 2007 respectively. The contributions by mining and quarrying, manufacturing, building and construction, wholesale and trade services averaged 0.29, 3.80, 1.50, 14.1 and 15.4 per cent respectively between 2003 and 2007. The effects of the crises on agriculture, rural development and the economy of Nigeria at large are as follows:

-Dis-incentive to foreign investors arising from the cash crunch;

-Decaying infrastructures likely to weaken the supply side of the nation’s food market, food un-availability, low rate of domestic food supplies and imports;

-Bearish features of the capital market (23 per cent or N2.9 trillion in market capitalization has already been lost since March, 2008 resulting in the CBN granting reprieve to banks that has large portfolio of margin facilities to re-structure for longer periods);

-Panic withdrawal of deposited funds from banks by entrepreneurs and industrialists in the country in apprehension of future uncertainties;

-Threat of food insecurity – with reduced foreign exchange earnings from oil, the prospects of the government to invest N950.00billion in agricultural programmes within the next four years is bleak;

-Nigeria’s Oil and Gas Projects is at risk – the projects may now take longer time to be completed. This is because all the recent successes of the sector have been driven by increased foreign direct investment;

-Poor implementation of some major national priority development initiatives, e. g. The 7-point Agenda of the current administration, The Financial Sector Strategy (FSS) 2020 and the National Economic Empowerment Development Strategy (NEEDS) arising from reduced capital for funding;

-Possible non-realization of the stipulations/mandates under some key national programmes focused at poverty reduction like the National Microfinance Policy & Regulatory Framework, Small & Medium Enterprises Development Agency (SMEDAN) and the National Poverty Eradication Programme (NAPEP) meant to fast track the economy;

-Inability of the government of Nigeria to fund its Joint Venture Commitments under the upstream oil and gas sector arrangements;

-More challenges for the CBN to stem the effects of the crisis. Currently, the Bank had had to increase liquidity by over N1.0 trillion, permitted deposit money banks (DMBs) to buy back their securities (and extended the window to 365days as opposed to overnight lending), it reduced interest rate by 50 basis point from 10.25 to 9.75 per cent, cash reserve ratio from 4 to 2 per cent; minimum liquidity ratio (MLR) from 40 to 30 per cent and has reflated the economy by N1.2 trillion; and

-Collapse of infrastructures (energy, water, communication and transportation) due to funding inadequacy.

4.0 Conclusion

Central Banks world over are concerned by macroeconomic stability, maintenance of financial stability of the economy and ensuring the proper functioning of the monetary economy (payment and settlement systems). Nigeria is presently using fiscal policies to ease the pressure of the financial crunch. To match the efforts, the CBN has put in place several measures to enable the country cope.

Although African countries are free to manage their economies using differing strategies some of which may include the draw down of reserves to finance sudden shortfalls in capital inflows and interest cuts. With depleted or no reserve, crisis will continue to deepen. African countries may therefore have their budgets strained in the near future, register unprecedented rise in the rates of their inflation, contend with high cost of living and experience severe balance of payment problems.

To contain the global crisis and promote agricultural and rural development in Africa, like the euro zone countries (Denmark, Greece, Ireland & Germany) opted to guarantee bank deposits; African nations should consider guaranteeing deposits, cutting interests, reduce imports and (where necessary) draw down on their reserves to finance sudden shortfalls in capital inflows to their economies.

By Joe Alegieuno

Ag. Director, Development Finance Department, Central Bank Of Nigeria.

Presented at the 16th Technical advisory & general Assembly Meeting of the African Rural & Agricultural Credit Association (AFRACA) at Dar es Salaam, Tanzania.

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