By Chibuike Oguh
One of the darkest days in world financial history is September 15th, 2008 – the day Lehman Brothers collapsed. The world plunged into the worst financial crisis since the Great Depression after that American investment bank declared bankruptcy. Numerous financial institutions – banks, investment banks, insurance companies, etc – also declared bankruptcies after their mortgage-backed securities became worthless when the US housing market crashed. The resulting credit crunch forced businesses to cut output and jobs, driving much of the world’s economies into a recession.
The global financial crisis did not spare Nigeria’s economy. Western portfolio investors, facing a credit crunch in their home countries, began withdrawing their funds from the Nigerian stock market. Net outflow from the stock market rose by about 400 percent between 2007 and 2008. This massive capital flight forced the stock market to nosedive, losing about 70 percent of its value between April 2008 and March 2009. And Nigerian banks were heavily exposed to the stock market. They had granted huge margin loans to stockbrokers and institutional investors to trade in equities. According to figures released by the former head of Nigeria’s central bank, Sanusi Lamido Sanusi, the Nigerian banking sector controlled about 60 percent of stocks on the Nigerian stock exchange as at 2008 after granting about $10 billion in margin loans. All these loans went bad after the Nigerian stock market crashed. “Nigerian banks faced liquidity and solvency challenges during the crisis which had impact on their credit ability, leading eventually to the termination of foreign credit lines,” Ambimbola Omotola, an analyst with Afrinvest West Africa, said.
The sharp fall in crude oil prices during the financial crisis also affected Nigeria’s economy. Crude oil prices dropped from a peak of $147 in July 2008 to about $41 in March 2009. Nigeria’s federal government, which earns about 90 percent of its revenue from oil sales, saw its revenue drop by 44 percent during the same period. The government dipped into its reserves to make up for this fall in revenue. Consequently, Nigeria’s oil savings dropped from about $62 billion in third quarter 2008 to about $42 billion in first quarter 2009. Even Nigerian banks were affected by the fall in oil prices. Nigerian oil marketers, who imported and sold refined fuel, began defaulting on loan payments after low oil prices erased their profits. This led to a “massive exposure on bank balance sheets to the downstream oil and gas sector,” Omotola said.
Despite these debilitating effects of the financial crisis, Nigeria’s economy did not plunge into recession unlike most western economies. Nigeria’s GDP growth rate remained steady, declining marginally to 5.99 percent in 2008 but rising to 6.9 percent in 2009 and 7.8 percent in 2010. This steady growth, in spite of global recession, could be attributed to Nigeria’s developing economy, which is not highly connected to the global economy. Furthermore, Nigeria’s non-oil sector, particularly the agriculture sector, had been experiencing rapid growth. The non-oil sector grew by about 8 percent between 2008 and 2009.
Nigeria’s government implemented some policies that also helped to mitigate the impact of the global financial crisis. Nigeria’s central bank bailed out some banks that had lost their capital owing to bad loans granted to equity traders and oil marketers. The central bank also created a “bad bank” that absorbed all bad loans throughout the banking system. These measures prevented bank failures, thus, saving the financial system from collapse. As stated earlier, Nigeria’s federal government dipped into its reserves to shore up dwindling revenues owing to low oil prices. This helped to cushion the economy against the immediate impact of the sharp fall in oil revenue. Overall, Nigeria’s economic fundamentals remained solid throughout the period of the global financial crisis in 2008.