200 Central Bank of Nigeria Presentation

8/8/2019 200 Central Bank of Nigeria Presentation

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Contents

Introduction

Causes of the Crisis

Implications for Investments in Africa

Depth of the Crisis in Nigeria

Government/CBN Initiatives toMitigate Financial Meltdown

Conclusion


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Introduction First showed signs in the USA and soon started affecting

global economies directly and indirectly.

Developed over time and has its roots in a bankingpractice problem referred to as sub-prime lending or sub-prime mortgage lending in the USA.

To avoid becoming a financial meltdown, governments ofmany countries have intervened, several central banks

have slashed interest rates and injected liquidity to theirfinancial systems, e. g. China, Canada, Sweden & SwitzerlandCentral Banks cut rates, governments of the Euro zone bought intobanks and announced guarantees on deposits till 2009 end whilethe inter-bank lending activities froze. The British government tookup majority stakes in its four biggest banks.

Africa though presently enjoys a relative stability,predictions are that the stability may not last. Poor nationsworld over are speculated to likely bear the brunt.

The concerns are broadening and deepening, e. g. thesecond largest world economy Japans GDP fell byunprecedented 0.5%. The country has just cut its

interest rate from 0.5% to 0.3%.


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Causes of the Crisis

They are varied, complex and are attributed to certainpervasive factors (both in the housing and creditmarkets), and they developed over an extendedperiod of time. Some of them include:

Inability of home owners to make their payments; High personal and corporate debts; Risky mortgage products; Poor judgements by borrower and/or the lenders;

Speculation and overbuilding during the boomperiod; and

Concealed default risks


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Africa Increased investment dis-incentive resulting from

increased poverty, hunger, un-employment and health

challenges - compared with other regions of the world, Africafaces the greatest challenge of meeting target 1 of theMillennium Development Goals (MDGs) and AIDS/HIV.

Inability to reverse some negative predictions on Africa:(i) Africas stability will not last - 119th Meeting of theInternational Conference Centre in Geneva (CIGC), Switzerland

organized by Inter-Parliament Union (IPU)(ii) 47% of the population of Africa is living below theinternational poverty line while 65% derive their livelihood fromagriculture United Nations Food & Agricultural Organization(FAO) reports (iii) Effects of the crisis on Africa could manifestthrough drying up of liquidity and capital inflows, aids

programmes and trade The World Bank. Delicate balance for African economies, due to: (i) Inability of African

Banks to access funds from developed economies (ii) decline inrevenue from exports (iii) Weakness of more African governments tofulfill their commitments under the MDGs and NEPAD initiatives(iv) Up scaled crisis of the four (4) Fs fuel, fertilizer,finance and food, e. g. In Togo and Liberia food inflation isstill 25% while in Ethiopia it is 92%.


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Investments in Africa Low interest income or yields on the investments of

African governments: Most African countries have their

foreign reserves stashed out in Dollars and Pound Sterling inthe United States and Western Europe.

Commodity price crash: According to The World Bank,commodity prices world over will nosedive to between 20 25

per cent compared to the previous years. Increased insecurity of food, poverty and mortality

resulting from complacency by African governments: TheInternational Monetary Fund (IMF) in its recent report hasstated that, financial institutions around the world are likely to

incur combined loss of about $1.4trillion from the globalfinancial market crisis. It therefore has recommended thatpolicy makers must urgently evolve comprehensivemeasures to address the crisis at national level to bring abouta return to stability in the international financial system.


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NigeriaThe effects of the crisis on Nigeria has been as follows:

Meltdown of the countrys capital market (asfrom March, 2008, the market has lost 23 per centor N2.9 trillion in market capitalization);

Inability of the Federal Government to fund its

Joint Venture Commitments under the upstreamOil & Gas sector agreements;

Inability to drive Nigerias Oil & Gas Projects byforeign direct investments. It may now take longertime to complete the projects; and

Panic withdrawal of deposited funds from banksby entrepreneurs and industrialists due tofear of uncertainties.


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ec s o e r s s onNigeria Contd.

Other effects of the crisis on Nigeria include:

Poor implementation of development initiatives that are ofnational priority, e. g. the Seven Point Agenda of the currentadministration, Financial Sector Strategy (FSS) 2020, NationalEconomic Empowerment & Development Strategy (NEEDS)and the National Microfinance Policy, Regulatory andSupervisory Framework; and

Threats: (i) Food insecurity - the Federal Government plansthat within the next four years, it would deploy N950billion tointervene in the agricultural sector (ii) Non-achievement of themandates/realization of set targets of some nationaldevelopment programmes, e. g. National Poverty Eradication

Programme (NAPEP) and the Small & Medium DevelopmentAgency of Nigeria (SMEDAN)

(iii) increased decaying of infrastructures due to likelyfunding inadequacy..


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e era overnmenInitiatives to Mitigate FinancialMeltdown The Federal Government set up a Presidential

Committee comprised of the CBN, the Stock Exchange,etc. to study trends of the global crisis and suggestappropriate mitigation strategies that should be adopted

Capital market revamp: Deposit Money Banks (DMBs)that has large portfolio of margin facilities were granted

reprieve to re-structure for longer periods Cash reserve and the minimum liquidity ratios (MLR)

were reduced from 4 to 2 per cent, and from 40 to 30per cent respectively thus reflating the economy by N1.2trillion

Credit window was extended to 365 days as opposedto overnight and DMBs were permitted to buy back theirsecurities

Monetary policy rate was cut by 50 basis points from10.25 to 9.75 per cent


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Conclusion Given that the world is a global village and that

Central Banks world over, use different strategies topursue financial and macro-economic stability as wellas ensure efficient payment/settlement systems;African governments should not be complacent in theface of the global financial crisis.

The crisis is has become contagious while its effects are

deepening and the valuations of more banks areplummeting. Budgets of many African nations maytherefore, in due course, be strained with their rate ofinflation and cost of living escalating astronomically.

To contain the global crisis and promote agricultural and

rural development in Africa, like the euro zone countries(Denmark, Greece, Ireland & Germany) opted toguarantee bank deposits; African nations shouldconsider guaranteeing deposits, cutting interests,reducing their export demand and (where necessary)draw down on their reserves to finance sudden

shortfalls in capital inflows to their economies.


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200 Central Bank of Nigeria Presentation