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CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

The financial crisis ravaging the global economy has generated a very serious concern by all stakeholders. The world has been threatened by several cycles and periods of economic crisis in the past, but the current economic crisis has been described as “a tsunami” (Chossudovsky, 2009). Perhaps, the use of such a strong „catastrophic‟ phrase is to properly convey the circumstances and realities of the crisis which is peculiar in terms of its origin, evolution, nature, pace, magnitude, and distressing realities. There has been a great confusion on the nature of the crisis. According to Sanusi (2009a), “the world economy has been hit by the reperccussion of the financial meltdown that started with the sub-prime mortgage crisis in the United States of America and spread to Europe and other parts of the world”. The growing inability to differentiate the current crisis from either an economic problem, a political quandary or an ideological clash even makes the situation more worisome. The pace at which the crisis is affecting economic activity around the world is staggering. Most OECD countries are are already in recession, and growth in Asia is arguably slowing more rapidly than at any time since 1990 (Summers, 2006). Predicting and estimating the magnitude of the crisis has shaken the very foundations of international financial markets. The uncontrollable force of globalisation which has torn apart all economic boundaries has not only ravaged all regulatory and protectionist powers of the state, but has actually outspaced and created doubts about the ability of the IMF to contain the crisis (World Bank, 2008). As the world economists independently and jointly reveal their country‟s survival plans, policies and programmes has shown that the continued reign and existence of capitalist ideology is seriously threatened. Unfortunately, the crisis is further complicated by issues of global concern like climatic change, volatile food and energy prices (Commission for Social Development, 2009). The current financial and economic crisis has had limited direct impact on African economies largely because of its relatively low financial integration, but the crisis has affected the drivers of Africa‟s recent growth performance. Prior to July, 2008, African economies recorded excellent economic growth performance, despite the 2007 subprime mortgage crisis in the United States of America (ADB, 2009). The drivers of the strong economic growth include; macroeconomic reforms; world economic situation that is characterised by high demend for commodities; rising capital inflow; and China‟s strong economic growth (ADB, 2009). All these factors made analysts believe that the continent is on the verge of breaking away from poverty. However, yesterdays success has eroded with todays realities. The demand for and prices of African commodities are falling largely because of China‟s slowed growth, capital flight, and promised increased aid has not materialised and might even dissapear depending on how long the crisis lasts (ADB, 2009). The global financial crisis is already causing a considerable slowdown in most developed countries. The demino effect has led to job losses, speculative burbles in stock markets and commodities markets, reduction in manufacturing as consumption and demand continues to fall. Government around the world are striving earnestly to control the crisis. Market capitalisation is down from its enviable height globally, investment banks are collapsing, rescue packages have been drawn up involving more than twelve trillion US dollars, and interest rates have been cut around the world in what looks like a coordinated response, leading indicators of global economic activities, such as shipping rates, are declining at an alarming rates, while reduction in consumption and demand for manufactured goods have triggered a fall in production and investment in the productive sector (Te Velde, 2008).

Despite the assurance by the Nigerian government and the immediate past governor of Central Bank of Nigeria that the global financial crisis will not affect that Nigerian economy, the Nigerian financial system is currently rocked by the financial crisis. Thus, this study is provoked by the fact that when the crisis hit the Nigerian stock market, the Nigerian government did not make any effort to inject liquidity into the market. However, when Nigerian banks were affected due to excess exposure to the capital market and gas oil sector, the government via CBN was quick to inject six hundred billion naira to enhance bank stability. The CBN has always justified its decision on the important role of bank in economic development, and also to promote banking habit and avoid contagion in the Nigerian banking system. While this line of argument sounds plausible, it seems to suggest that the stock market is a side show, where inefficiencies would merely redistribute wealth between smart investors and noise traders, and would not affect real economic activities. The financial crisis ravaging the global economy is naturally a serious cause for concern to policy makers. Developed economies like USA, Germany, England among other were injecting liquidity into the stock market to safeguard the financial system from crashing. The former governor of Central Bank of Nigeria Prof. Charles Soludo was busy campaigning that Nigerian investor should not panick, and that the Nigerian financial system is insulated from the global financial crisis. The former governor of Central Bank‟s position deceived most Nigerian and also afforded foreign investors the opportunity to exit the market at its prime. He argues further that “one country could cause a crisis of this magnitude and many countries with sound fundamentals also plunged into a crisis because of the contagous effect, and then the rich ones bail themselves out because they have the resources to do so, while the least developed countries suffer the long-lasting effects of the crisis, is a market-cum system failure of global proportion”. In his opinion, the analytical tools for understanding and managing the current system are inadequate, and the national and global governance infrastructure for resolving or even preventing a resurgence is at best obsolete. This seems to suggest that the then governor of CBN was confuse and do not know what to do to arrest the situation in Nigeria. However, the research work tend to study the effect of financial meltdown on the performance of the Nigerian capital market.

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