The global financial crisis began in the United States of America and the United Kingdom when the global credit market came to a standstill in July 2007 (Avgouleas, 2008). The crisis, brewing for a while, really started to show its effects in the middle of 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. It is a well known fact that the world is now a global village.
As a result of this, the global economic meltdown is having a side effect on Nigerians to an extent that people’s standard of living has been seriously affected. The side effects on Nigerians include high cost of commodities, upsurge in social vices and unemployment. As a way of managing the situation, the government should cut down on the salaries of public office holders and reduce excessive spending in order to utilize the little resources available to provide the needed infrastructural facilities that will make life meaningful to the people, and focus attention on important projects.
The concept of financial crisis The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults (Kindleberger and Aliber, 2005, Laeven and Valencia, 2008).
Causes of the Crisis The reasons for this crisis are varied and complex, but largely it can be attributed to a number of factors in both the housing and credit markets, which developed over an extended period of time. Some of these include: the inability of homeowner to make their mortgage payments, poor judgement by the borrower and/or lender, speculation and overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, financial innovation that distributed and concealed default risks, central bank policies, and regulation (Stiglitz,2008).
Africa and the Global Financial Crisis The direct impact of the financial crisis on the African economies has thus far been limited as most commercial banks in the region refrained from investing in the troubled assets from the US and other part of the world. This is why most commentators argue that Africa is so far insulated from the direct effects of the financial crisis. The current financial crisis affects Africa and other developing countries in two possible ways; First, there could be financial contagion and spillovers for stock markets in Africa.
Stock markets in the region showed some volatility, driven by a sell-off by foreign investors. The Nigerian stock market for instance has been experiencing a continuous downward trend in prices of stocks for over two months now. The India stock market dropped by 8% in one day at the same time as stock markets in the USA and Brazil plunged. Stock markets across the world – developed and developing – have all dropped substantially since May 2008.
Share prices have tumble between 12 and 19% in the USA, UK and Japan in just one week, while the MSCI emerging market index fell 23%. This includes stock markets in Brazil, South Africa, India and China (ODI, 2008). We need to better understand the nature of the financial linkages, how they occur (as they do appear to occur) and whether anything can be done to minimise contagion. Possible Policy responses The current macro-economic and social challenges posed by the global financial crisis require a much better understanding of appropriate policy responses.
Some recommended policy responses which can be applied to the situation in Nigeria are enumerated as follows: • There needs to be a better understanding of what can provide financial stability, how crossborder cooperation can help to provide the public good of international financial rules and systems, and what the most appropriate rules are with respect to development.
There needs to be an understanding of whether and how Nigeria and other developing countries can minimise financial contagion; • Nigeria and other developing countries will also need to manage the implications of the current economic slowdown – after a period of strong and continued growth in developing countries, which has promoted interest in structural factors of growth, international macro economic management will now move up the policy agenda. • Nigeria and other developing countries need to understand the social outcomes and provide appropriate social protection schemes. • Central Banks should regulate issue of foreign exchange to companies during this time of crisis to avoid creating a deep in foreign reserves. • Non-bank financial sector such as Pension Funds should also be regulated.
This is to protect pension funds from being invested in some of this complex instruments to enable them meet their liquidity obligation as at when due. • African countries should strengthen domestic and regional markets and boost intra-African trade and it is also important to promote domestic tourism. • There is a need for new stability of the global financial system in which the voice of every nation, every continent is heard and their concerns taken into account. Conclusion The global financial crisis is already causing a considerable slowdown in most developed countries. Governments around the word are trying to contain the crisis, but many suggest the worst is not yet over. Stock markets are down more than 40% from their recent highs.
Investment banks have collapsed, rescue packages are drawn up involving more than a trillion US dollars, and interest rates have been cut around the world with US and Japan cutting theirs to all time low of 0. 25% and 0. 1% respectively (bbc. co. uk), in what looks like a coordinated response. With a recession already in place in most developed countries, Nigeria and other developing countries should try and come up with policies that will minimise the spread of this crisis to their economy.