Being a paper presented at the 40h CPA African Region Conference, Port Harcourt.
The theme of this year’s Conference, ‘Commonwealth at 60- The Challenges and Opportunities” is very apt and a demonstration of our collective resolve to exploit available opportunities by taking stock of our challenges. Therefore, I strongly believe the CPA, Africa Region was most correct in listing the current global economic crisis and its implication for Africa as a critical challenge and subjects for discussion at this Conference. It is a matter of common sense that since the economic crisis cuts across nations, it is only natural that efforts to address it take systemic cooperation and strategizing across nations. And where else could have been best suited in charting a course for the rebound and development of African economies than Nigeria, the most populous nation and key player on the continent’s and global economy?
As we probably know, the current global economic crisis is the second round of the financial crisis, which began in United States of America (USA) in August, 2007. The crisis has its roots in a banking practice called sub-prime mortgage lending in the USA. It is traceable to a set of complex banking problems that developed over time. The crisis was caused specifically by housing and credit markets mismatch, poor judgement by borrowers and/or the lenders, inability of homeowners to make mortgage payments, speculation and overbuilding during the boom period, risky mortgage products (financial innovations with concealed ed default risk), high personal and corporate debt profiles and inactive/weak central bank policies.
The benign environment then led investors, firms and consumers to expect a bright future and underestimate risk. Housing and other asset prices went up in U.S. as several risky mortgages were approved and sold as being nearly riskless. Therefore, when housing prices fell and sub prime mortgages and securities based on them reduced in value, the stage was set for a crisis. The crisis became contagious and quickly moved across assets, markets and economies in view of global integration and connections among financial institutions.
It is therefore relevant to ask, what does the global economic crisis mean for Africa? What are the channels through which the crisis is spreading and affecting Africa? What strategies can Africa use to counter the effects of this global economic crisis? The aim of this Paper therefore, is to examine the implications of the global economic crisis for African economy.. For a better understanding of the subject matter, relevant concepts are clarified and an overview of past and present global economic crises is presented followed by the implications of the global economic crisis on Africa with emphasis on the Nigerian economy.
Global: This is a synonym of worldwide and relates to the entire world. It means covering or affecting the whole world. It also mean comprehensive. It has been argued that global has replaced international as a way of referring to issues, processes and structure.
Economic Crises: Economic means ‘connected with the economy of a country or an area’ in aspects like production, trade, services, and development of the wealth of the society. Crisis on the other hand refers to a time of difficulty or confusion when problems must be solved or important decisions made. Therefore, economic crisis relates to difficulties that affect the growth and performance of the economy in question; unlike financial crisis which mainly involve financial institutions or assets suddenly losing a large part of their value. Crises will mean different periods of economic crisis.
Relationship between Concepts: An economic phenomenon is global in outlook when it is worldwide in character and wide spread influence. Hence, global economic crisis refer to economic problems, which affect the economies of several countries.
The global economy is a network of economic linkages. The domestic economy is linked to the economy of the rest of the world through three markets. These are: goods market, factor market and assets market (money and credit market. Economic activities in other parts of the world influence the domestic economy through each of these markets. The extent to which this occurs depend on the level of integration of the domestic economy to the rest of the world.
The most obvious link of the domestic economy with other economies is through exports and imports of goods and services. The rest of the world influences the prices at which trade takes place and the quantities (for some goods) traded in the world markets. Thus, the effects other economies on the domestic economy are essentially through:
– prices and quantities of exports and imports.
– terms of trade (price of exports divided by price of imports)
– purchasing power of exports (terms of trade X export volume)
The terms of trade, measure is one of the most important indicators of external shocks to the economy. An improvement in terms of trade is a good thing but deterioration is adverse.
The factor market of a domestic economy is linked to other economies through two channels: international mobility of labour and international capital movement. The effects of labour movement, whether short-term or longterm/permanent, are through (1) Influence on labour supply in the home country; and (2) Influence on home country’s income through remittances.
The third link between the domestic economy and other economies in the world is through the market for assets, (the money and credit market). In this respect, people decide on where they want to invest their capital or keep their wealth. Some people may choose to hold their wealth abroad despite obstacles legal and physical while others may prefer the local economy. In any event, capital tends to flee from countries with unstable finances, and where the rewards associated with holding assets, (e.g. interest rates and dividends) are relatively low. This linkage between asset markets is perhaps the immediate and strongest of the three linkages. For instance, domestic prices may take sometime to have effect on the economy. Nevertheless, when interest rates, adjusted for exchange rate depreciation, get out of line, there is an immediate, highly visible pressure from capital flight. External reserves will fall or the country’s exchange rate will depreciate.
A financial crisis can metamorphose into a global economic crisis, manifesting in deepening recession, contraction of growth, employment and, hence, aggregate demand in a number of developed countries and some emerging market economies.
Overview of Global Economic Crisis
The world has witnessed several financial and economic crises. Notable among them is the Great depression of 1929-33, regarded as the worst in modern times. It reflected previous excesses and subsequent incompetence. A short list of some major financial crises since 1980 includes:
Latin American debt crisis of 1980s which began in Mexico U.S. Savings and Loans crisis in 1989-91
Nordic Banking and Economic Crises, 1990-94 ? The 1994-95 Mexican Economic Crisis. The Asian Financial Crisis in 1997-98
1998 Russian Financial Crisis 1999-2002Argentine Economic Crisis 2008 U.S. Financial Crisis
The U.S. Savings and Loans (S&L) Crisis of the 1980-91 was a massive collapse of the thrift industry. S&Ls financed long-term fixed-rate residential mortgages with savings and time deposits at a restricted interest rate. This mismatch exposed Savings and Loans to considerable interest rate risk when inflation rose in the 1970s and monetary policy was tightened. Savings and Loans experienced enormous losses of net worth in 1979-82, and the early 1980s recession exacerbated the problem. From 1986 to mid-1995 about one-half of all Savings and Loans holding in assets were closed. The resulting slowdown in the finance industry and the real estate market may have contributed to the 1990-91 economic recession in America. However, the recession was short-lived and relatively mild.
The three Nordic countries (Norway, Sweden and Finland) experienced banking and economic crisis in the early 1990s though the timing and severity of the crisis were different but there were important common elements. The crisis in Norway preceded the other two as it was closely linked to international oil price fluctuations while the crisis in Finland took the form of a severe depression (cumulative Gross Domestic Product GDP) fell by 14 percent over 1990 – 94 and the unemployment rate exploded from 3 to 20 per cent over that period).
In the case of the Asian financial crisis, the slowdown in the East Asia region during the crisis had global repercussions. The global economy witnessed slow growth and fall in commodity prices. The drop in oil prices adversely affected the export earnings and economic growth rates of oil- export countries like Nigeria. The financial crisis also affected the other non-oil producing Sub Saharan African (SSA) countries through the declining prices of key non-oil export commodities such as cotton, timber, etc. However, the financial effect of the East Asian financial crisis was effectively limited to South Africa because it was the only country in Sub Sahara Africa with sophisticated financial markets and substantial capital inflows. So, it was the only one fully exposed to contagion from the world financial crisis at the time. In recent years, however, some Sub Sahara Africa countries like Nigeria have liberalised their financial sectors and internationalised the capital markets thus making the economies highly vulnerable to the financial contagion.
FG Approves N169.72bn Private Sector Investments In Roads
The Federal Executive Council (FEC) has approved N169.7 billion private sector investments for at least four road infrastructures through the government’s Tax Credit Scheme.
The roads include a 234-kilometre stretch from Bali to Sheti through Gashaka to Gembu in Taraba State, at the sum of N95,232,474,010.72; and a second road, which consists of three roads worth N74,486,577,050.
Minister of Works and Housing, Babatunde Fashola, disclosed this to State House correspondents at the end of the FEC’s meeting presided over by President Muhammadu Buhari at the Presidential Villa, Abuja, on Wednesday.
Fashola, who noted that the scheme was initiated in 2019 through Executive Order 7 signed by the President, said the arrangement allowed private sector players to finance public infrastructure instead of paying taxes and then offset it over time using tax credits.
For the 234-kilometre road in Taraba, which would cost N95.23 billion, Fashola said a N20 billion under the NNPC Tax Credit Scheme would be disbursed to begin the project soonest.
According to him, “the two main memoranda (presented to the council) relate to the uptake by the private sector in response to the tax credit programme, which we initiated in 2019, by Mr. President signing of Executive Order 7 to allow private sector finance public infrastructure in lieu of tax and then to offset it over time using tax credits.
“So, the first road that was awarded today on that policy initiative is the Rule Road from Bali to Sheti, through Gashaka to Gembu in Taraba State. A total of 234 kilometres reconstruction of that road in the sum of 95,232,474,010.62.
“The existing road, for those who are familiar with it, has no concrete stone base. It is just laterite on the asphalt so it doesn’t last and it’s breaking up and leading to potholes.
“So we’ve re-awarded this now for reconstruction under the tax credit scheme, there’s a N20 billion provision under the NNPC tax credit scheme that will be used to kickstart this immediately.
“The second road which is also the tax credit scheme, which was approved by the council is actually three roads. The applicant, in this case, is Mainstream Energy Solutions, a major energy player in the country is now seeking to also participate in this policy by investing a total of N74,486,577, 050,” he explained.
Speaking on behalf of his counterparts in the Ministries of Aviation, Power and Agriculture, the Minister of Information and Culture, Lai Mohammed, revealed that the council approved N3.49 billion for the purchase of an office building in Abuja for the Ministry of Aviation.
This, he said, would cluster the various agencies under the ministry into a single location.
He also revealed that council awarded a N553.58 million contract for the establishment and deployment of Advanced Report Generation Utility Engine Web-based Reporting Tools in favour of Messrs Sinecou Limited with a delivery date of 12 months.
JET-A1: Domestic Airlines Predict Increased Flight Ticket To N100,000
Domestic airlines under the aegis of the Airline Operators of Nigeria have said that rising operational costs occasioned by aviation fuel price hikes, foreign exchange shortage, etc. may push the base economy flight ticket to N100,000.
Spokesperson for local airlines/Chairman, United Airlines, Professor Obiora Okonkwo, made the disclosure during an exclusive interview with The Tide’s source on Wednesday in Abuja.
Beyond the lingering aviation price hike crisis, the airline chief said local operators were being compelled to source foreign exchange from the parallel market at high rates due to a lack of adequate supply from the Central Bank of Nigeria through the commercial banks.
Consequently, he said an increase in the base economy flight ticket to at least N100,000 might be inevitable for all domestic airline operators, if the current situation persists.
“Obviously, it is inevitable. I can tell you that all the airline operators, in the last three months, have been losing money, a huge amount of money. There is too much stress on the operational fronts for them to break even.
“Even if the aviation fuel is made available, there must be a review to reflect the minimal operational cost. We are offering patriotic services to the nation and understand the essential part of it. We are part of this economic development process in Nigeria but it is coming at a very huge sacrifice.
“Nothing less than N100,000, between N100,000 and N120,000 base price, even with Jet A1 fuel at N400 – N500. That is what it is”, Okonkwo said.
Noting that meetings with the CBN in this regard are yet to yield any positive result in the provision of adequate forex, he stressed the need for the aviation industry to be seen as an essential service that should have special consideration in financial matters.
He clarified that the operators have no joy in increasing fares, but that it has become necessary for them to avoid shutting down and running out of business.
“In the industry, it is expected that you will gain some here and lose some there, but the biggest challenge indigenous operators are having is that the cost of everything is high.
“You source money from the commercial bank rates. You source money from the black market. No moratorium for your loans and the banks and AMCON are quick to jump on you”, he explained.
Corroborating this view, the Chief Operating Officer, Ibom Air, Mr. George Uriesi, said local airlines had reached a point in their operational cost that ‘something has to give in’.
“Something has to give in. It’s either the prices of fuel should come down, or the prices of airfares go up from where they are.
“So far, the airlines have tried very much to work within the airfares as they are. All sides of the divide are aware that the airlines have done the best that they can do.
“I don’t know what tomorrow holds but at some point, if the airline doesn’t survive, it goes down, to the detriment of everybody – the people who work for the airline, the people who fly on the airline, the country’s economy, everything goes down. So, airlines are just trying to be stable and patriotic. That’s where we are”, Uriesi said.
Uriesi, a former Managing Director of the Federal Airports Authority of Nigeria, said it was difficult to tell how long the local carriers would be able to continue with the high operational cost.
‘Youths Key To Economic Advancement’
An economist, Prof. Pat Utomi, has stressed the need to invest in youths to enable them transform Nigeria’s economy.
Noting that youths have the capacity to reverse the dwindling fortunes of the economy, Utomi, who was the keynote speaker at the first International Conference on Innovation, Entrepreneurship and Business Management organised by the University of Lagos Business School (ULBS), said Nigeria is till being challenged.
“Our country is still challenged. We are the poverty capital of the world. According to a report, in the next 10 years, between us and Congo Democratic Republic,would produce 40 per cent of the world’s poorest people.
“Thus, we should invest massively in our young people to enable them transform the country and the economy. They have the capacity to change this country for good,” he said.
The Professor of Political Economy also underscored the importance of deploying technology in deepen entrepreneurship and growth.
He said through the tech space Africa would make over $14billion with youths, adding that 60 per cent of the cash would be for Nigeria.
Earlier, Vice Chancellor, University of Lagos, Prof. Oluwatoyin Ogundipe lauded the leadership of the ULBS for its performance.
He noted that plans were underway to build a mini-refinery for the institution’s Department of Petroleum Engineering.
Pioneer Executive Director, ULBS, Prof. Abraham Osinubi, said the conference was aimed at halting the disconnect between the academia and industry by creating an interactive avenue for new ideas to solve real life problems.
The event also witnessed the launch of the ULBS journal, Lagos Management and Business Review.
Thw Conference had as its theme: “Adapting to business landscape in disruptive times”.
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