The Governor of the Central Bank of Nigeria, Prof. Chukwuma Soludo, on Friday linked the decline in the Nigerian capital market to the credit crunch currently rocking the global financial market.
Soludo, who spoke at the Town Hall Meeting organised by ThisDay newspaper in Abuja, said following the credit crunch, many portfolio foreign investors pulled out from the Nigerian stock market to be able to service their obligations in other financial horizons. According to him, this resulted in the downward spiral, which equities on the Nigerian Stock Exchange have experienced since March.
Also speaking at the event, a former United States of America Secretary of Treasury and President of Harvard University, Lawrence Summers, said Nigeria had failed the world as a result of poor management of the economy.
He regretted that although Nigeria had ranked the highest among newly independent nations in the 1960s and was set to emerge a global economy, several decades of mismanagement had resulted in Nigeria having one of the poorest living standards in the world.
Soludo said, “Given the credit crunch in the advanced industrial world, several of the institutional investors in those markets began to pull out of our own markets. That was the origin of our own crisis here. Unless we understand it, then we will go on to what went on in this country for about five months.
“People were just busy not discussing the problem but looking for scapegoats – maybe somebody stopped the margin trading, maybe common year ending; they were just looking for scapegoat and not advancing the problem.
“The origin of the problem is the credit crunch that started globally and the institutional investors were pulling out in order to service their facilities elsewhere and then stock prices went down.”
He added, “As it went down, most of the investors in the Nigerian market were new and they are there for the short run. They are there mostly for speculative purposes and so they began to sell. That triggered off two quick reactions. The first reaction was the panic response on the part of all the stakeholders. The banks panicked by calling in the existing facilities; the participants in the market panicked by also selling quickly to repay their loans.
“And so you found a serial where the banks stopped new credit lines going into the market. They were calling in existing facilities and those who were already panicky wanted to get out of the market and there was only one way the market could go and that is the decline. And I think it is very important that we understand how we got to where we are in order for us to begin to think about how we make progress.”
Soludo expressed the hope that the credit crunch, especially in the United States, would not result in a worse currency crisis with the capacity to threaten the foreign reserve of Nigeria and other countries that hold their foreign reserves in dollar.
“I must also point out two other lingering threats from Nigeria’s point of view. One major threat that people call me to ask about is the safety of our foreign reserve. Whether the failure of these banks threatens our foreign reserve and I want to quickly use this occasion to say our foreign reserves are safe and we have been very prudent in terms of where we put them, the institutions where they are,” he said.
The Chairman of Dangote Group, Alhaji Aliko Dangote and Managing Director of Oceanic Bank, Mrs. Cecilia Ibru, agreed that the massive withdrawal of funds from the stock market caused the trouble for Nigeria. Dangote said, “I know of a bank in this country that lost so much money from its foreign partners recently. Its partners, on seeing what was happening to the financial sectors of US and Europe, quickly withdrew $3.4bn (N401bn) and left. We want government to put in measures that will stop foreign investors from suddenly pulling out like this to avoid a shock in the system.”
Summers, in his emotional argument, said, “I have spent sometime in Nigeria. So, I have very good knowledge about the country. Your country is well placed and is very successful in oil resources. If you look at the history of your country; there have been periods where oils prices have risen and the amount of money, which your country has earned since then from the sale of oil is more than any other country can accomplish and is worth many opportunities of uplifting the sufferings of the people. But it has not been so.
“Most of the oil windfall that has come into your country, when you look at living standard in Nigeria, of the average Nigerian, one does not see the kind of prosperity which one wants to see. When I came to Nigeria in 1991, I remarked at that time on the very different economic trajectories of Nigeria and Indonesia. When I went to school in the United States in the 1960s, we saw Nigeria as a country with far brighter prospects than Indonesia, but that is not the true state now.
“Your next generation of children should live far better than this generation of children. We should think about the future of Africa and the future depends on two countries - South Africa and Nigeria. South Africa has it challenges, you have yours, but you are blessed with tremendous moments of opportunities in terms of what is happening in the world today; and I pray to God that your society uses the tremendous opportunities of high oil prices today to make immense difference in the lives of millions of children alive today and the millions of children who will inherit your country in the nearest future.”
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