Solomon Onafowokan
16 October 2008
The financial crisis ravaging the global economy is naturally a serious cause for concern to investors all over the world.
The situation calls for a calm, calculated and proactive response by the economic managers of countries. The Lagos Chamber notes with satisfaction steps already taken by the regulatory authorities to forestall the spill over of the crisis into the Nigerian economy.
Some of these measures include the following: *Review of the cash reserve ratio from 4 per cent to 2 per cent*Reduction of liquidity ratio from 40 per cent to 30 per cent*Reduction in the MPR from 10.25% to 9.75 per cent *Suspension of the recapitalisation of Capital Market operators.
*Restoration of bank facilities for the purchase of shares (margin trading facility) *Rescheduling of existing bank facilities granted for the purpose of buying shares into longer term tenure.
*Suspension of the common accounting year-end policy for banks.From the liquidity perspective, we welcome this intervention. Beyond all of these, the Lagos Chamber is quite confident that the Nigeria economy is not particularly vulnerable to the extent as to cause any anxiety. The Chamber therefore urges all private sector operators not to panic.
The fundamentals of the Nigerian economy are strong as evidenced by the healthy foreign reserve of $63b, low inflation, stable exchange rate, robust excess crude account, drastic reduction in external debt etc. There are no serious threats to these fundamentals at this time.
The Nigerian economy draws its strength from the strong internal economic dynamics rooted in its large population, resilient SMEs, large and vibrant informal sector and an excellent crop of entrepreneurs.
Paradoxically, the weak integration of both the Nigerian Financial system and the larger economy into the global economy stands to our advantage at this time. It significantly reduces the economy's exposure to external shocks.
One single most important factor in the current global financial crisis is the quality of the assets of the financial institutions in the United States and Europe. Happily, the quality of the bank loans in the Nigerian banking system has improved significantly overtime.
The percentage of non-performing assets in the Nigeria banking system declined from 22% in 2003 to 8.4% in 2007. This is a reflection of dramatic improvement in risk management practices of the Nigerian banking system. This also reduces the vulnerability of the Nigerian banks to a credit induced crisis.
We also note that the Nigerian economy is not a credit economy.The credit component of the national consumption of goods and services is not significant. Indeed, one of the greatest challenges faced by the Nigerian private sector (especially the SMEs and the informal sector) is the access to credit. We therefore believe that the Nigerian economy can carry on reasonably well in spite of the developments in the global financial markets.
However, we need to be on guard, without necessarily being nervous or take panicky measures. We urge stakeholders in the economy and the polity to refrain from utterances that could create undue anxiety, generate tensions and precipitate avoidable dislocations in the economy. The financial system of any economy is a very sensitive component and statements concerning the sector should be guarded and well informed.
With regard to the stock market, we believe that the market should be allowed to fully correct itself as part of the confidence building process. The fundamentals that drive the market could be enhanced, but direct regulatory interference in the interplay of the market forces should be avoided. There may be a further slide in prices, but we believe the recovery would follow soon after.
We however share the concern about the safety of our foreign reserves, which are kept in offshore banks. But we have noted the assurances of the Central Bank Governor on the safety of the reserves. We also note the concerns about the declining oil prices. The current global depression has reduced energy consumption and consequently crude oil demand. We therefore need to reposition the economy for possible shocks and fiscal adjustments.
Above all, there is the imperative to deepen the economy by reinvigorating the real sector of the economy as well as revitalising the service sector. A virile economy is needed to sustain and ensure a sound financial system. These two are mutually dependent and mutually reinforcing.
A critical issue here is the need to foster an enabling environment that would propel and accelerate private sector development and ensure quick economic diversification. Current investment options in the economy are too narrow and restrictive, and this is not healthy for the country.
We need to address the infrastructure and policy conditions that are currently strangulating the real and services sectors of the economy. This is the way to ensure sustainable growth and development of the Nigeria economy. This would broaden and deepen the investment space as well as strengthen the synergy between Nigerian financial system and the rest of the economy. God bless Nigeria.* Asiwaju Solomon K. Onafowokan, is the President, Lagos Chamber of Commerce and Industry
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