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GLOBAL FINANCIAL CRISIS AND ITS IMPACT ON INVESTMENTS IN AFRICA – AGRICULTURE AND RURAL FINANCE: PERSPECTIVE OF THE PowerPoint Presentation
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GLOBAL FINANCIAL CRISIS AND ITS IMPACT ON INVESTMENTS IN AFRICA – AGRICULTURE AND RURAL FINANCE: PERSPECTIVE OF THE CENTRAL BANK OF NIGERIA (CBN).

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GLOBAL FINANCIAL CRISIS AND ITS IMPACT ON INVESTMENTS IN AFRICA – AGRICULTURE AND RURAL FINANCE: PERSPECTIVE OF THE CENTRAL BANK OF NIGERIA (CBN)

Being a Presentation made at the 16th Technical Advisory & General Assembly Meeting of the African Rural & Agricultural Credit Association (AFRACA) at Dar es Salaam, Tanzania, November 24 – 28, 2008.

contents
Contents
  • Introduction
  • Causes of the Crisis
  • Implications for Investments in Africa
  • Depth of the Crisis in Nigeria
  • Government/CBN Initiatives to Mitigate Financial Meltdown
  • Conclusion
introduction
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 banking practice problem referred to as sub-prime lending or sub-prime mortgage lending in the USA.
  • To avoid becoming a financial meltdown, governments of many countries have intervened, several central banks have slashed interest rates and injected liquidity to their financial systems, e. g. China, Canada, Sweden & Switzerland Central Banks cut rates, governments of the Euro zone bought into banks and announced guarantees on deposits till 2009 end while the inter-bank lending activities froze. The British government took up majority stakes in its four biggest banks.
  • Africa though presently enjoys a relative stability, predictions are that the stability may not last. Poor nations world over are speculated to likely bear the brunt.
  • The concerns are broadening and deepening, e. g. the second largest world economy – Japan’s GDP fell by unprecedented 0.5%. The country has just cut its interest rate from 0.5% to 0.3%.
causes of the crisis
Causes of the Crisis

They are varied, complex and are attributed to certain pervasive factors (both in the housing and credit markets), and they developed over an extended period 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 boom period; and
  • Concealed default risks
implications for investments in africa
Implications for Investments in Africa
  • Increased investment dis-incentive resulting from increased poverty, hunger, un-employment and health challenges - compared with other regions of the world, Africa faces the greatest challenge of meeting target 1 of the Millennium Development Goals (MDGs) and AIDS/HIV.
  • Inability to reverse some negative predictions on Africa:

(i) “Africa’s stability will not last” - 119th Meeting of the International Conference Centre in Geneva (CIGC), Switzerland organized by Inter-Parliament Union (IPU)

(ii) “47% of the population of Africa is living below the international poverty line while 65% derive their livelihood from agriculture” – United Nation’s Food & Agricultural Organization (FAO) reports (iii) “Effects of the crisis on Africa could manifest through 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 in revenue from exports (iii) Weakness of more African governments to fulfill 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 is still 25% while in Ethiopia it is 92%.
further implications for investments in africa
Further Implications for 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 in the 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: The International Monetary Fund (IMF) in its recent report has stated that, “financial institutions around the world are likely to incur combined loss of about $1.4trillion from the global financial market crisis”. It therefore has recommended that policy makers must urgently evolve comprehensive measures to address the crisis at national level to bring about a return to stability in the international financial system.
depth of the crisis in nigeria
Depth of the Crisis in Nigeria

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

  • Meltdown of the country’s capital market (as from March, 2008, the market has lost 23 per cent or N2.9 trillion in market capitalization);
  • Inability of the Federal Government to fund its Joint Venture Commitments under the upstream Oil & Gas sector agreements;
  • Inability to drive Nigeria’s Oil & Gas Projects by foreign direct investments. It may now take longer time to complete the projects; and
  • Panic withdrawal of deposited funds from banks by entrepreneurs and industrialists due to fear of uncertainties.
effects of the crisis on nigeria cont d
Effects of the Crisis on Nigeria Cont’d.

Other effects of the crisis on Nigeria include:

  • Poor implementation of development initiatives that are of national priority, e. g. the Seven Point Agenda of the current administration, Financial Sector Strategy (FSS) 2020, National Economic Empowerment & Development Strategy (NEEDS) and the National Microfinance Policy, Regulatory and Supervisory Framework; and
  • Threats: (i) Food insecurity - the Federal Government plans that within the next four years, it would deploy N950billion to intervene in the agricultural sector (ii) Non-achievement of the mandates/realization of set targets of some national development programmes, e. g. National Poverty Eradication Programme (NAPEP) and the Small & Medium Development Agency of Nigeria (SMEDAN)

(iii) increased decaying of infrastructures due to likely funding inadequacy..

federal government cbn initiatives to mitigate financial meltdown
Federal Government/CBN Initiatives to Mitigate Financial Meltdown
  • The Federal Government set up a Presidential Committee comprised of the CBN, the Stock Exchange, etc. to study trends of the global crisis and suggest appropriate 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 30 per cent respectively thus reflating the economy by N1.2 trillion
  • Credit window was extended to 365 days as opposed to overnight and DMBs were permitted to buy back their securities
  • Monetary policy rate was cut by 50 basis points from 10.25 to 9.75 per cent
conclusion
Conclusion
  • Given that the world is a global village and that Central Banks world over, use different strategies to pursue financial and macro-economic stability as well as ensure efficient payment/settlement systems; African governments should not be complacent in the face of the global financial crisis.
  • The crisis is has become contagious while its effects are deepening and the valuations of more banks are plummeting. Budgets of many African nations may therefore, in due course, be strained with their rate of inflation 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 to guarantee bank deposits; African nations should consider 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.