CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Living in isolation is not the best option for
countries in the 21st country, hence globalization has provided a
platform from which happenings in one country can have profound effects on the
others especially those that are more involved in the financial market of the
world.
Globalization refers to
increasing global connectively, integration and interdependence in the
economic, social, technological, cultural, and ecological spheres, that is
increasingly landing peoples, companies, countries and the biosphere more
tightly into pone global system. One of the major adverse effects of
globalization in the economic and financial crisis which started in the United
State in September, 2007 and has rattled the financial market both the
developed and developing economies around the globe. The contagious effect is
associated with the fact that world economics are interlinked (global village)
such that any economy could be affected through international trade; the
dependence of countries on industrial countries for remittance, Official
Development Assistance (ODA) and Foreign Direct Investment (FDI). The make up
the transmission mechanisms through which the global financial crisis trickled
down to developing like Nigeria. The US is largest economy in the world, and
many foreign countries including advanced economies invest there. The major
industrialized economies provided significant investment to emerging market,
accounting for more than 85% of the global out world FDI stock, as a
consequence, there are trade and investment linkage between the economics of
the USA, advance countries and emerging markets. The financial crisis of
2007-2008 also known as the global financial crisis became heightened in the US
in the early 2004 until mid-2007 when it escalated. The crisis is rooted to the
mortgage loan crisis which was believed to have been worst since the great
depression of 1930’s given the collapse of the large financial institutions,
the bailout of banks by national governments, and downturn in stock markets
around the world.
At the onset of the crisis,
the initial view was that Africa was “decoupled” from the crisis. Schiere
(2010) provide two reasons for this view point. Firstly, Africa has limited
exposure to the crisis as the continent is not fully integrated into global
financial system. Secondly, the growing relationship with Asian countries, in
particular china and india, made Africa countries less reliant on traditional
development partners, which are suffering from a severe economic contradiction.
However this perception proved wrong as the financial crisis did affect Africa,
leading to drop in the GDP growth to 20% for 2008, 41% from 2009 and 52% from
2010 (Africa Economic Outlook, 2010). Thus, in late 2008, African countries
were not only facing the problem of poverty, inequality, rising commodity price
but also growth and labour market problems were added to their structural
crisis. Prior to the crisis, the Nigeria economy has witnessed some
developmental programs such as the Structural Adjustment Programs (SAP) 1986,
Millennium Development Goals (MDG’S) 2001, National Economic Empowerment and
Development Strategy (NEEDS) 2001, amongst other sectarian programs. This
programs has targets that were distorted by the 2007 crisis. During periods of
downturn there are calls for government and other financial institutions to
step in to cushion the worst effects of the slowdown in economic activities.
The 2007 global recession saw governments around the world making announcements
of fiscal stimulus packages to help boost aggregate demand. The freezing of
credit market effectively marked the star of intervention by the central banks
around the world. In addition to consideration casing of monetary policy across
the world, government, in consultation with the central banks, stepped into
provide financial support for a wide range of businesses and financial
institution together with other fiscal stimulus. In 2005, Nigeria implemented
the bank capitalization policy of compelling bank have minimum capital of 25 billion naira that went a long way to put the financial
sector on a good path during the financial crisis. This policy may have savage
the financial sectors from collapsing totally but its effect could be felt in
some sectors (Agu and Yuni, 2011). Thus, the benefits of each packages and
weather they amount to a stimulus have been called into question and aroused
much debate among economists.
The pursuit of growth,
development and creation of employment opportunities by countries shows how
important these macroeconomics indicators are to the economy of countries,
hence the goals of macroeconomics policy are:
a)
A high and
growing level of national output; high levels and rapid growth of output and
consumption (output is usually measured by the gross domestics product (GDP),
which is the total value of all final goods and services produced in a given year; also GDP should be high to
potential GDP, the maximum sustainable or high employment level of output).
b)
High employment
with low unemployment; low unemployment rate and high employment, with ample
supply of good jobs.
c)
A stable or
gently rising price level or inflation.
Economists evaluate the
success of an economy’s overall performance by how well it attains these
objectives. Thus based on the above discussion, this study is an attempt to
find out the impact of the global financial crisis on Gross Domestic Product in
Nigeria.
1.2 Statement of the Problem
Development
of the financial system is crucial to the growth of an economy. It leads to the
emergence of industries since it finance part of their activities. Financial
sector contribute in accelerating the growth of other sectors that lead to
economic growth in the long (Levine, 1997). In Nigeria financial system has no
doubt made remarkable impact on the country’s GDP. Yet, in 2008, the financial
system has not fared better, as unprecedented recession has taken it by force
causing untold losses and decline in stock prices to investors and further
creating crisis of confidence about the competence of the regulatory
authorities to handle the situation. The aftermath of the economic meltdown is
still felt by the financial system since the bailout packages by various
governments do not seems to be much effective. Nigeria was not immune to the
financial crisis especially considering the loss of substantial revenue rising
from the fall in oil prices (Iweala, 2009).
Therefore,
this study is aim to examine whether the periods of Global Financial Crisis and
its aftermath has any significant impact on Nigerian economy.
1.3 Research Questions
a)
What are the
impacts of domestic credit by banks on the Gross Domestic Product in Nigeria?
b)
What are the
effects of foreign direct investment on Gross Domestic Product in Nigeria?
c)
What are the
causes of financial crises in Gross Domestic Product in Nigerian Economy?
1.4 Objectives
of the Study
The broad objective of this research is to analyse
the impact of the global financial crisis on the Nigeria economy.
The
specific objectives are:
a)
To examine the
impact of domestic credit by banks on Gross Domestic Product in Nigeria.
b)
To evaluate the
effect of foreign direct investment on Gross Domestic Product in Nigeria.
d)
To investigate
the causes of financial crises in Gross Domestic Product in Nigerian Economy.
1.5
Significance of the Study
The study is carried out to provide an insight and
improve public knowledge on the impact of global financial crises to the
Nigeria economy. The study is also aimed to improved and add to the existing
literature on the subject matter and a good source of reference for students,
researchers, policy makers and economists who may want to know the extent to
which he financial crises affects the economy it will help to prevent
reoccurrence of such financial crisis in the future.
1.6 Scope and Study Area
It is noteworthy that every research work has its own
scope and area of interest. However, the study essentially would cover the
effects of the global financial crisis on Gross Domestic Product in Nigeria
economy from year 1991 to 2014, which is a period of 23 years. The data set
provided is yearly and the key variables to be considered are GDP growth,
domestic credit by banks and foreign direct investment.
1.7 Chapter Organization
The study will be organized in five chapters.
Following the introduction in Chapter One, Chapter Two contains the literature
review of some work done by others which are relevant to this research. It also
discusses the causes of the crises and relevant theories related to the study.
Chapter Three presents the methodology that will be adopted in carrying out the
research as well as the sources of data. The study however will made the used
of trend and Ordinary Least Square (OLS) method that will cover a period of
twenty three years. Chapter Four deals with data presentation, analysis and
interpretation of results based on the statistical techniques used in the study
within the periods under consideration. Chapter Five concludes the research by
presenting the summary, conclusion and recommendation of the researched work
respectively.