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THE EFFECT OF GLOBAL FINANCIAL CRISIS ON NIGERIAN ECONOMY

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ABSTRACT

The  study  examines the  effect  of  global financial  crisis  on  Nigerian  economy.  The objectives set for the study are; to determine the causes of the global financial crisis, to ascertain the effects of global financial crisis, to suggest measures that would be taken to manage the impact of global financial crisis in Nigeria. Primary and secondary data were used, the population of the study was 1200 from which the sample size of 400 were determined using Taro Yamani’s formula. The research instruments used were questionnaire and oral interview. The reliability of the research instruments were tested using Pearson Product moment correlation coefficient; the result gave a reliability index of 0.98 indicating a high degree of consistency. Chi-square and correlation analysis were the statistical tools used. The findings from the study reveals that, decline in oil prices and revenue, increase government expenditure and decline in market indices are the challenges  posed  by  financial  crisis  in  Nigeria;  consumption-based economy,  poor savings, high credit culture and huge financial outflow are the causes of the global financial  crisis  in  Nigeria;  reduction  in  direct  foreign  investment  and  oversea development assistance are the effects of global financial crisis to Nigeria and finally, diversification of the economy, robust regulatory policies and professional supervision of financial crisis in Nigeria. Based on the findings, the researcher made the following recommendation: Nigeria should adopt tough policy measures as effective strategies towards  a  comprehensive  strengthening  of  the  financial  service  sector,  government should ensure that policy recommendations are implemented in order to reposition the Nigerian economy against the impact of global financial crisis, government should create enabling environment to attract foreign investors in order to boost economic activities in the country. Finally, government needs to sincerely focus on developing/strengthening the economy and provide alternative sources of revenue on a sustained basis.

CHAPTER ONE INTRODUCTION

1.10    BACKGROUND OF THE STUDY

Nigeria is interlinked with global financial system. As such global financial crisis which was originated from the year 2007 mainly in U.S.A and spread in the latter part of the year 2008 among developed nations and subsequently shifted to developing nation has impact on the domestic economy of Nigeria. The country is in a difficult situation as it faces, imbalances, lack of transparency in the financial markets and non-applicability of domestic safety net.

The government has been facing the  impact of global financial crisis on the domestic economy. Nigeria is a part of the global economy, as such she has to face the danger of the global financial crisis, which has both micro and macro impact all over the

World.

The current global financial and economic crisis started as a series of malfunction in the financial markets, leading to credit and liquidity crises, which led to the collapse of several ‘big’ financial institutions, together with the loss of confidence in the banking sector. It further transmitted to the real sectors, leading to decline in aggregate demand and bringing about negative growth and job losses. The scale and speed of transmission of the crisis and its attendant consequences presented huge global challenge such that it has been variously described in such extreme vocabulary as “global financial meltdown”, “global economic meltdown”, “global credit crunch” and so on.

A financial crisis is often characterized by credit crunch an disorderly contraction

in money supply and wealth creation. A credit crunch occurs when participants in an economy lose confidence in having loans as well as recall existing loans. The great depression occurred after a dramatic expansion in debt and money supply in the 1920’s. Then, an equally dramatic contraction occurred between 1929 and 1933 as debt was default upon and resulted in a contraction in money supply and wealth.

The  latest  financial crisis, which has metamorphosed into  a global economic crisis, similarly has its origin in rapid risky debt accumulation. The spread of the crisis, also now referred to as global financial meltdown, across the globe due to the fact that the world  economy  has  become  highly  interconnected  as  a  result  of  the  forces  of globalization operating through the network of global economic and social linkages. The domestic economy is linked to the rest of the world economy through three markets, namely, goods market, factor market and assets market (money and financial market).

The rest of the world influences each of this market and hence the domestic economy. Thus, although the current crisis has derived from a credit crunch in the United States, It has spread to both develop and developing countries through trade and financial linkages. And implications have tended to be the same in the economies affected by the crisis.

1.11    STATEMENT OF THE PROBLEM

The  impact  of  the  global  financial  crisis  on  the  Nigerian  economy  was multifaceted as it  led to a dwindling of government revenues, affected the Nigerian currency, declining capital inflows, capital market down turn, divestment by foreign investors with tightness and possible second round effects on the balance sheet of banks by increasing provisioning for  bad  debt  and  decrease in  profitability, weakened the banking sector and fueled unmatched stock market crash, undermining confidence in the financial sector.

Also, it resulted in a retardation in Gross Domestic Product (GDP), Worldwide, as

consumer spending, consumer demand and industrial output declined, while unemployment rose; commodity prices fell sharply including oil sector which fell from a peak of USD 147 per barrel in July 2008 to USD 33 per barrel by December 2008. given the Nigerian economy is heavily dependent on the oil sector, the major problem on Nigeria was the decline in oil prices which led to a dramatic decline in government revenue as oil makes up 80% of budgeted revenues 90% of exports and 33% of GDP. Thus, the study focuses on the effect of global financial crisis on Nigerian economy.

Nigeria  economy  is  faced  with  so  many  global  financial  catastrophes.  All

economic indices, including oil prices are down. The purchasing power of the people is increasingly being eroded and the standard of living on steady decline. Major businesses are  collapsing, unemployment  and  inflation rates  are  spiraling out  of control,  stock market indices recently have defied bookmakers’ prediction and analysis and there is global food scarcity

The  global  economy  has  been  in  recession  as  the  gap  between  the  global economic potential growth and the actual growth performance widened over the period of the crisis, particularly since January 2009. Families’ life dreams had been destroyed as they lost their homes, their jobs and their life savings in various markets in different jurisdictions. The systemic breakdowns brought about by the phenomenon have caused real crisis for all categories of economic agents across societies.

1.12    OBJECTIVES OF THE STUDY

The specific objectives of the study include the following:

1]        To ascertain the challenges of the global financial crisis in Nigeria

2]        To determine the causes of the global financial crisis in Nigeria

3]        To ascertain the effects of the global financial crisis to Nigeria

4]         To suggest measures that would be taken to manage the impact of global financial crisis in Nigeria.

1.13    RESEARCH QUESTIONS

To achieve the above objectives, the following research questions were raised:

1.        What are the challenges of the global financial crisis in Nigeria?

2.        What are the causes of the global financial crisis in Nigeria?

3.        What are the effects of global financial crisis to Nigeria?

4.         What are the measures to be taken to manage the impact of global financial crisis in Nigeria?

1.14    RESEARCH HYPOTHESES

For the purpose of the study the following research hypotheses were formulated:

1)         Ho:      Decline in oil prices and in revenue, increase in government expenditure and decline in market indices are not  challenges posed by financial crisis in Nigeria

Hi:      Decline in oil prices and in revenue, increase in government expenditure and decline in market indices are the challenges posed by financial crisis in Nigeria

2)         Ho:      Consumption-based economy, poor savings, high credit culture and huge financial outflow are not causes of the global financial crisis.

Hi:      Consumption-based economy, poor savings, high credit culture and huge financial outflow are the causes of the global financial crisis.

3)         Ho:      Reduction   in   direct   foreign   investment   and   oversea   development assistance are not effects of global financial to Nigeria.

Hi:      Reduction   in   direct   foreign   investment   and   oversea   development assistance are the effects of global financial crisis.

4)         Ho:      Diversification   of   the   economy,   robust   regulatory   policies   and professional supervision of financial institutions are not measures to be taken to manage the impact of global financial crisis in Nigeria.

Hi:      Diversification   of   the   economy,   robust   regulatory   policies   and professional supervision of financial institutions are measures to be taken to manage the impact of global financial crisis in Nigeria.

1.15    SCOPE OF THE STUDY

The study covers the effect of global financial crisis in Nigeria. It is really an evaluative study, which looks at the types, causes, challenges and consequences of the global financial crisis in Nigeria.

1.7      LIMITATIONS OF THE STUDY

The constraints encountered while carrying out this study are:

Time Constraint: The researcher was faced with insufficient time to carry out the study. Due to time constraint, the researcher could not visit places where information relevant to the study could be obtained.

Financial Constraint: The researcher faced a lot of financial challenges during the course of sourcing materials for the study, also included was the cost of printing and reprinting of the work for a better result.

Attitude of the Respondents: Some of the respondents were unwilling to corporate with the researcher, they felt that they would not benefit financially from the study and equally have the mind set that the secret of the organization will be explored.

1.8      SIGNIFICANCE OF THE STUDY

The study determines the implications of the global economic crisis on Nigerian economy. Since Nigeria is part of the global village and what happens in other communities, especially the western world (the US) affects Nigeria, the study will enable Nigerians to think globally but act locally in maximizing the benefits of globalization and mitigating the costs and challenges of globalization.

Since this is a pioneer study, the findings will serve as a benchmark for further research.

1.9      DEFINITION OF TERMS Financial Crisis

Financial crisis is a sudden wide-scale drop in the value of financial assets or in the financial institution managing those assets. (Obadan, 2008).

Economic Crisis

This generally refers to a sudden negative turn of events in the economy. It is usually characterized by general slow down in economic activity over a sustained period of time. This slow down can be regarded as a period of stagnation, recession or depression.

Stagnation, Recession and Depression

This is regarded as a long period of economic slow down that is not characterized by negative growth. If the stagnation is characterized by a negative GDP lasting between six months and two years it is called recession. If the stagnation prolongs beyond two years then we have what is called Depression (Onyukwu, 2009).

Economic Meltdown

This is specifically the term used to capture the current slow down in economic activities that began in US and spread over the whole World in 2008 and 2009. The characteristics of this slow down are such that it can be grouped under recession (Onodugo, 2009).


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