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ECONOMIC MELTDOWN AND THE CHALLENGES IN
BUSINESS ENTERPRISES: THE NIGERIAN EXPERIENCE.
R.A. AKINSEYE (MRS.)
This paper addressed the global economic meltdown as it affects
Nigeria enterprises. It further examined the circumstances that brought
about economic predicament. The study adopted empirical approach
which involved eliciting information from two enterprises, one public
and one private. The primary and secondary sources of information
were sources from the staff of Oyo State Water Corporation and Airtel
hitherto called Zain, all are cited in Ibadan, the largest city in West
Africa. The piece of information were obtained from the managements
of the two enterprises. This was beefed up with secondary data within
the same enterprises. It also sourced information purposively from the
users of the product of the organizations, this was necessary as the
users are very likely to feel the impact of the economic meltdown. To
this end, few randomly selected managers and directors of the two
organization were interviewed. The findings of the empirical study
revealed that business enterprises in Nigeria including public
parastatals inclusive cannot cope with the global economic condition
and many of these shrink to unexpected level (74.5%). Furthermore,
the global economic crisis affects the private sector and the public
sector (60.5%). Also, both Airtel and Oyo state Water Corporation were
of the belief that the global recession has resulted in sharp drop in
international trade, rising unemployment and slumbing commodity
prices (55%). The study concluded that global economic meltdown has
a far reaching negative effect on public as well as on private
enterprises in Nigeria going by the statistical evidences in the findings
of this study.
INTRODUCTION
Economic meltdown
which is a situation in which economic activities
and its associated parameters shrink to unexpected level, has
Department of Public Administration and Local Government Studies,
The Polytechnic, Ibadan Oyo State, Nigeria.
[email protected]
+2348032202036, +2348076611665
Being a Paper Presented at the 14th International Business Research Conference, Held Between
28-30 April, 2011. At the Crowne Plaza Hotel, Sheikh Zayed Road, Dubai, UAE.
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recently become the most widely studied theme. Different approaches
have been adopted by various experts and researchers in proferring
solutions to the challenges of economic meltdown. During recessions,
many macroeconomic indicators vary in a similar way. Production as
measured by Gross Domestic Product (GDP), employment, investment
spending, capacity, utilization, household, incomes, business profit and
inflation, all fall during recessions, bankruptcies and unemployment rate
rise. The global recession has resulted in sharp drop in international
trade, rising unemployment and slumping commodity prices. Several
economists have predicted that recovery may not appear until 2011 and
that the recession will be worst since the depression in the 1930s. The
conditions leading up to the crisis, characterized by an exorbitant rise in
asset prices and associated boom in economic demand are considered as
a result of the extended period of easily available credit, inadequate
regulation and oversight or increasing inequality. The present economic
crisis is a reflection of general failure of business in different regions of
the world, poor economic calculation; non-performing loans and other
factors have been identified to fuel the situation.
Catherine (2010) reports that economic meltdown occur due to
multiple factors all coming to a head at the same time. These factors
include high unemployment, no liquidity or difficulty obtaining credit,
lack of consumer confidence and a plunge in the stock markets. Each of
these factors is intertwined with the other, which is precisely what makes
this economic meltdowns so severe. An overly-simplistic explanation
illustrates this point: a lack of lending during the bank liquidity crisis
beginning
operations,
in
November
and
2008
consumers
meant
couldn’t
2
companies
receive
couldn’t
loans.
finance
Consequently,
companies began laying people off. In turn, these people couldn’t pay
their mortgages, which exacerbated the bank lending crisis. All of these
factors created a giant snowball effect of economic catastrophe. She
stressed further that economic meltdowns are not new. The most
significant of these meltdowns was Great Depression beginning in 1929.
This meltdown was caused by a collapse in the stock market once too
many shares were “called in” by creditors who demanded payments for
their shares from people who had marginal investments in them. This led
to a “run” on the banks by depositors to collect their funds. Because
banks only hold a fraction of the money they lend, the banks then
collapse as they were unable to give people the full amount in their
accounts. Though the rampant inflation of the 1970s and the, then
bubble of the early 2000s caused some severe economic recessions, no
economic meltdown of equal comparison to the Great Depression
occurred until the mortgage crisis and bank collapses in 2008.
Andrew (2009) argued that an economic meltdown is no longer
restricted to just one country. As evident by the economic collapse of
2008, the ramifications are felt world-wide. This is, in part, due to the
linking of the financial systems abroad. For instance, nations like China
and Japan buy U.S bonds and own large portions of U.S experiences an
economic meltdown and the value of those shares is reduced, the
Chinese and Japanese economies are affected.
Allen (2009) asserts that businesses around the globe were hit so
hard by the economic crisis that several businesses had to seek
monetary assistance from the government in order to survive. The trends
in the market place began to fluctuate along with the demand of various
products. Almost every business was affected by this global economic
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crisis but the companies that were hard hit were the companies having
large scale operation along with those who provide their services at high
prices. The consumers are now turning to the businesses which render
similar services at comparatively cheap prices. Businesses that can
survive this economic recession in a better way are basically small as
well as medium scales industries. Nonetheless, it does not suggest that
they are not hit by economic crisis. The difference primarily lies in the
fact that small medium scale enterprises have comparatively undersized
operations and have the ability to maintain the operation with fewer
revenues. Such business usually has streamline way of operation which
minimizes the total effect of the global crisis for survival.
Akinsanmi (2011) comments that the global meltdown crept in
gradually and went like wildlife to virtually all the developed and
developing countries in which Nigeria is a victim. The financial sector
have been greatly affected and other economic sectors such as the real
sector have also been affected by this recession which is indeed imposing
one of the greatest threat to our human survival.
Animashaun (2010) further claims that the global financial
meltdown is a topical issue because it seems to have affected many
countries all over the world. It has various implications for both the
developed and developing economies. United state of
America
and
other developed countries are experiencing severe closure of companies,
loss of jobs, crash prices, squeeze in consumer credit facilities,
crumbling mortgage facilities among others. In the case of the developing
countries of which Nigeria is one, the implication are noticeable in the
areas of crash in prices, dwindling revenue, few direct investments from
developed countries.
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In view of this paper therefore has identified several measures
to
be adopted to solve the problem of genuine economic damage,
threatening stagflation and a reversal of globalization.
LITERATURE REVIEW
WHAT GLOBAL FINANCIAL MELTDOWN IS
The term “global financial meltdown” is a recognition of the
globalize economy as we have today.
Gladson et al, 2009 “We are not sure that we have read the actual
definition of this global financial meltdown in any paper so far. In a
common man’s is description, global financial meltdown refers to a
financial distortion that started at one point (Wall Street, USA) which has
gradually but steadily affected all financial institutions and economies in
the world negatively” (N. Gladson Nworah et al, 2009). They further
illustrated this concept by making reference to the human body. “If an
individual has a malaria parasite, the first symptoms might be headache
and fever. If he does nothing to treat the malaria, it might get to a point
where his entire body system would demobilized”.
According to Aham et al. (2009) “Financial meltdown has much to
do with the crash of stock/share prices in the various stock exchange
markets of countries. There is a linkage between the collapse of both the
mortgage investments and auto industry in the US and the wall street
crisis. These companies and their positive performance till the crunch
came down on them was due to investor’s confidence in the ability to
manager their activities and return dividends to their investment”.
Since the emergence of this global financial crisis most nations
have continued to propose and announce financial bailouts for various
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companies. These emergency and financial bailouts are suggesting that
government should not leave their economies without continuous
progressive regulations and capital inputs.
HISTORICAL DEVELOPMENT OF THE FINANCIAL CRISIS
Opinions vary on how the present global financial crisis started. One
frequently canvassed origin was the financial instability in the U.S.A
caused in part by the failure and/or sub-prime mortgage lending
difficulties of the investment banking industry in the US. Specific
mention had been made of Lehman Brothers, Merill Lynch, Morgan
Stanley and PJ Morgan chase as well as government-backed mortgage
giants Fannie Mae and Freddie Mack (Aluko, 2008:48).
In trying to answer to the question of how this financial crises
began? Donal (http Us. Mz. Yahoo.com) observed that banks and
mortgage brokers and borrower all are responsible for making loans and
borrowing money on terms that were not fully, understood by buyers, or
ignored by them, and offered by unscrupulous lenders who violated that
basic law of economies: NEVER LEND MONEY TO PEOPLE WHO
CANNOT PAY IT BACK: a good home loan will have 20% down payment
from borrower’s earned saving and a fixed interest rate for 30 years with
total monthly payment
that includes principal, interest. Homeowner’s
insurance having a total that the borrower can pay for easily out of
current income which has been verified by the loan committee that
approves the loan. Violation of these simple basic laws in common sense,
results in inability to make the payment which precipitates foreclosure
which puts the borrower on the street and the house sits empty-bringing
in an income for anyone. The failure to regulate the activities of lenders
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and the borrowers with hard laws, encourages poor business practices
which usually results in financial failure.
A further support to the historical origin of this crisis was noted in
daily champion (2008:29) where it was reported that critics have blamed
an oversight and failures by US and other regulators to detect the
problems as prime reasons for the financial crisis. Continuing, the paper
noted that the crisis broke out in the United States around August 2007.
Mortgage Investments sourced with the housing market’s collapse and
the fallout quickly spread and foreclosure skyrocketed. The troubles
crimped auto and student loans and locked up lending for many
consumers and business worldwide.
WORLD SITUATION
This section reviews statements credited to informed sources on the
financial meltdown.
1.
The US government has bailed out citigroup Inc. agreeing to
shoulder most of the potential losses on $306 billion of high risk
assets and inject $20billion of new capital in its biggest rescuer of a
bank yet. Citi group’s rescuer marks the latest’s government effort
to contain a widening financial meltdown that has caused the
disappearance of bankruptcies of companies including Bear
Stearns Cues, Lehman Brother Holding Inc. and Washington
Mutual Inc. (Reuters, 2001).
2.
As noted by Ayankola (2008:18) unfortunately for OPEC, the world
economic crisis is showing no sign of easing off. The United state,
the biggest economy in the world and the biggest consumers of oil,
is witnessing a huge drop in demand because of financial meltdown
and president elect, Barrack Obama, is already talking about
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seeking for alternative energy. In Europe, the situation is also not
any better. Many of the European economies are also on the brink
of recession with demand for crude oil dropping sharply. China and
India which are the two economic power blocks among the Asia
tigers are not left out as crude oil demand had also dropped.
3.
In the property and environment section of daily Champion
(2008:32), it was noted that the financial crunch had eventually hit
Dubai. Quoting the “Architects” Journal, the report noted that
“architects and developers in Dubai are freezing recruitment and
making redundancies as the emirate’s real estate market begins to
crumble. “Similarly, in the Dubai financial market, the general
stock index had fallen from a high of 6,315 earlier this year to just
2, 1012 yesterday (November 26, 2008).
4.
Gordon Brown (prime minister of Britain) had warn that the world
is facing “the first truly global financial crisis (Msthaba, July 4,
2008). Gordon further positioned that both the World Bank and UN
were out of date and should be formed to tackle the emerging
problems.
5.
Gordon further stress that the Economic problems afflicting many
countries suffering recession have been blamed on the subprime
mortgage crisis in the US that has led to plunging property prices
and billions in losses by banks.
6.
Khan (2008:25) blamed the current global meltdown on the
exuberance of the developed economies which was largely credit
based without the requisite regulation to control the current spinoff.
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The world situation as far as this global financial crisis is
concerned is very fluid, change take place at enormous speed thus
making definite statements and projections very difficult. The instances
cited above points to the fact that most developed countries have been
affected and are still being affected by the crisis.
NIGERIA SITUATION AND CHALLENGES
The Nigerian economy is not an isolated one and this is why it
could be freed when the world economy is in distress. Expectedly, Nigeria
has experienced and is experiencing this situations as can be seen from
the evidence below.
1.
According to Salako (2008), an average investor in Nigeria stock
market has lost 43 percent return on his investments in the past
11 months according to the closing position of the stock market at
the week-end. Key value-based overall market indicators at the
Nigerian Stock Exchange (NSE) closed November deeper in red with
market capitalization of quoted companies indicating that not less
than N3trillion has been lost to the sustained recession in the past
nine months.
2.
The Nigerian capital market has experienced a downward trend in
the share prices. As noted by Iwuala (2008) the capital market
during this period (March 5 to November 28) has shed some 33
percent of its value when it attained a peak of N12.9 trillion in
market capitalization. Much of the downturn was attributed to the
mass flight by international hedge funds which most of the last
year played a role influencing sentiments in the market. Foreign
investors had fled the market over concern of irrationality of the
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NSE introduction of circuit breakers, which was a deliberate policy
to stop price from sliding.
3.
Prof. Charles Soludo, former Governor of CBN was quoted as
reassuring Nigerians that Nigerian banks will not be affected by the
global financial meltdown. This assurance was based on the
volume of Nigeria’s external reserves estimated at over $60billion
which according to him is safe despite the crumbling financial
institutions abroad (2008:46).
4.
Fiaka (2008) reported that operators in the nation’s industrial
sector are beginning to nurse the fear of possible credit squeeze as
the global financial meltdown remains unabated even as they face
fresh difficulties over non-oil exports to the United State of
America. The fear is that a troubled USA economy will surely affect
Nigerian manufacturers as they trade in dollars and export most of
their good to the country. In addition, obtaining credit facilities will
become more difficult.
5.
Nwachukwu (2008) quoting Remi Babalola (Minister of state for
finance and supervising minister of FCT) noted that as a result of
dwindling revenue from the joint venture contracts occasioned by
this drastic drop in oil production levels, actual production is down
to two million barrels per day against actual projection of 3m bpd
and a quota of 2.25 bpd. He further noted that there is compelling
need for Nigeria to focus on economic growth but homogenous
private investment will.
GLOBAL FINANCIAL CRISIS AND IMPLICATIONS FOR NIGERIA
The global financial crisis has continued to have impact on the
Nigerian economy. Some of the implications are as follows.
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1.
The Nigerian economy is depended on oil revenue and the fall in oil
prices has affected the revenue from oil since the recent fall in the
international market creating worries for the government coupled
with decline in oil production from 2.25 million bpd to 2.0 million
bpd. The decline in both price and volume reflected in the
federation account allocation committee’s (FAAC) October report
which shows mineral revenue at N46.22billion as against N495.56
billion generated in September 2008 (Nwachukwu, 2008).
2.
The implications of the global financial meltdown in Nigeria have
been adequately captured in the communiqué issued by the ASUU
National
president
Prof.
Ukachukwu
Awuzie
(2008).
The
implications includes.
a.
The economic effects of global capitalist crisis may eventually lead
to a social crisis in Nigeria.
b.
The remittance by Nigerians who work and stay abroad will be
reduced as they are affected by the crisis. This led to a reduction of
welfare of their dependents in Nigeria.
c.
Loss of huge sums of money by Nigerian investors (marginal
borrowers) who borrowed from banks for investment in the stock
exchange market. This may as w ell be the Nigeria’s “supreme”
problem.
3.
The safety of Nigeria’s foreign reserve as noted by Aluko (2008:49),
out of the Nigeria’s foreign reserve (October 1,2008), 87.3% ($42.30)
of the naira of N5.617 trillion (442 billion) shares was denominated
in US 8.7% dollar and in Euro currency 1.78%.
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CAUSES OF ECONOMIC MELTDOWN
Financial meltdowns are situations in which the normal economic
activity of a country--such as the lending and borrowing of money and
the buying and selling of stocks and bonds--slow tremendously in a very
short time or even stops completely. Financial meltdowns can be
triggered by a number of factors, both economic and political. Wolf (2010)
identified the followings as the major causes of economic meltdown.
SPECULATION
One of the foremost causes of a financial meltdown is speculation,
in which a particular type of asset is exceedingly overvalued. When
investors discover that the asset is overvalued, the bubble of inflated
value
pops,
spurring
off
a
wave
of
selling.
Because
of
the
interconnectedness of modern financial systems, the decline in value is
not simply contained to the overpriced asset, but affects many other
items as well. Unsure of a fair price for loans and investments, trading
often freezes up, as happened during the Asian market crisis of the late
1990s.
CURRENCY DEVALUATION
Financial meltdowns can also be triggered by a government’s
decision to devalue its currency. Occasionally, in a effort to curb
inflation, a government changes the rate at which its currency can be
exchanged for foreign currency. For example, in Zimbabwe in 2008 and
North Korea in 2010, the value of the currency was moved much lower
virtually overnight, with a single unit worth several hundred times less
than it had been the day before the decree. This rapid change in the
value of assets can create chaos for investors, leading to a financial
meltdown.
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DISASTER
Some disasters, both natural and man-made, can lead to financial
meltdowns, as investors fear that a country’s assets may be damaged or
rendered worthless. Many countries have suffered financial meltdowns in
the wake of massive natural disasters, such as earthquakes or
hurricanes. Wars can also precipitate financial meltdown, as the normal
economic activity of the nation ceases. Investors may flee the country, in
the fear that investments will be damaged or taken over, either by the
current government in support of the war effort or by an invading force.
CHANGES IN LEADERSHIP
Changes in political leadership, particularly the movement from a
capitalist, free-market economy to a socialist government can impact
financial markets. Investors may fear that they will no longer be able to
trade freely under a new, government-controlled economy and choose to
disinvest assets before they are prohibited from doing so. This results in
the suspension of normal economic movement. For example, in 1917, in
the wake of its revolution, Russia suffered a temporary financial
meltdown as many assets were seized by the country’s new, communist
leaders.
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DISCUSSION AND FINDINGS
ANALYSIS OF QUESTIONNAIRES DISTRIBUTED
One hundred questionnaires were distributed to members of staff
of Oyo State Water Corporation, Airtel, and some selected members of
the company. Eighty percent of these distributed questionnaires were
retrieved. The questionnaires distributed were analyzed using inferential
statistics and beefed up with descriptive analysis. See the below tables.
Table 1: Analysis of Questionnaires Distributed
Variable
Frequency
Percentage
Retrieved
80
80
Unretrieved
20
20
Total
100
100
Source: fieldwork, 2011 Table 1:
The
above
table
shows
that
hundred
questionnaires
were
distributed but eighty representing 80% were retrieved while 20% were
unretrieved.
Table 2: Economic meltdown is an added burden on poor nations as
their economies are affected directly or indirectly.
Variable
Frequency
Percentage
Great Burden
51
63.75
Partial Burden
24
30.00
Never a Burden
5
6.25
Total
80
100
Source: fieldwork, 2011 Table 2:
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The study discovered that economic meltdown is an added burden
on poor nations as their economies are affected directly or indirectly. 51
respondents equivalent of 63.75% admitted this assertion while (24)
(30%) agreed partially and 6.25% of the respondent disagreed.
Table 3: Businesses around the globe were hit so hard by the
economic crisis and that several businesses had to seek monetary
assistance from the government in order to survive.
Variable
Frequency
Percentage
Yes
68
85
No
12
15
Total
80
100
Source: fieldwork, 2011 Table 1:
Table 3: established that businesses around the globe were hit so
hard by the economic crisis and that several businesses had to seek
monetary assistance from the government in order to survive. 68
respondents equating 85% admitted this assertion while 12 respondents
comprising 15% disagreed.
Table 4: The current global economic meltdown has negatively
affects the private sector than the public sectors.
Variable
Frequency
Percentage
Agreed
54
67.5
Disagreed
16
20.0
Undecided
10
12.5
Total
80
100
Source: fieldwork, 2011 Table 1:
15
The study has confirmed that the current global economic
meltdown has negatively affected the private sector than the public
sector.
54
respondents
equivalent
of
67.5%
strongly
agreed
16
respondents (20%) disagreed while 12.5% failed to decide.
Table 5: The global economic meltdown is indeed imposing one of the
greatest threat to human survival.
Variable
Frequency
Percentage
Agreed
64
80
Disagreed
16
20
Total
80
100
Source: Fieldwork, 2011
The study also found out that the global economic meltdown is
indeed imposing one of the greatest threat to human survival. 64
respondents i.e 80% strongly agreed with this statement while 16
respondents (20%) disagreed.
Table 6: Level of inflation during economic recession.
Variable
Frequency
Percentage
Very high
56
70.0
Very low
10
12.5
Partially high
14
17.5
Total
80
100.0
Source: Fieldwork, 2011.
16
Majority of the respondents (87.5%) commented that during
recessions, many macroeconomic indicators vary in a similar way.
Production as measured by Gross Domestic Product (GDP), employment,
investment spending, capacity utilization, household income, and
business profit were all fell during recession. Not only these, inflation
and the unemployment rate rises. This implies that the global recession
has resulted in a sharp drop in international trade, rising unemployment
and slumbing commodity prices.
Table 7:
The Nigeria governments need to reduce waste and improve in
social environment with rapid industry and service sector job creation to
underemployment in the society.
Variable
Frequency
Percentage
YES
60
75
NO
20
25
Total
80
100
Source: Fieldwork, 2011.
Some of the respondents whose there opinions were the sampled in
Oyo state water corporation agreed that to prevent the global economic
meltdown, there is the dire need for government at all levels to reduce
waste and improve social environment with rapid industry and service
sector job creation to reduce the rising youth unemployment and
underemployment in the society. 75% of the respondents agreed and
25% only disagreed.
17
Table 8: Level of public Discontent
Variable
Frequency
Percentages
Very high
67
83.75
Very low
13
16.25
Total
80
100.00
Source: fieldwork, 2011.
67 respondents (83.70%) claimed that the global economic meltdown
tends to increase the level of public discontent while 16.25% disagreed.
CONCLUSION
Arising from the analysis and discussion of data gathered from the
field, the followings are therefore the major findings of this study.
i.
Economics meltdown is an added burden on poor nations as their
economies are affected directly or indirectly. This claim is justified
by 93.75%.
ii.
That the role of the government in managing the crisis can not be
undermined as several businesses in the country had to seek
monetary assistance from the government in order to survive.(85% )
iii.
The current global economic crisis has negatively affected the
private sectors than the public sectors. This is due to the fact that,
there are closures of private companies, loss of jobs in most private
establishments, crash prices, squeeze in consumers credit facilities,
crumbling mortgage facilities, among others. (67.5%)
iv.
Government at various levels need to reduce waste and improve
social environment with rapid industry and service sector job
creation to reduce the rising youth unemployment and under
unemployment in the society.
18
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