- 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.
- 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.