The National Bureau of
Economic Research (NBER) defined a recession as “a significant decline in
economic activity spread across the economy, lasting more than a few months,
normally visible in a real gross domestic product (GDP), real income,
employment, industrial production and wholesale-retail sales.” Economics
recession can also be define as a contraction in the real GDP growth rate for
two consecutive quarters.
Nigeria experienced the
worst economic recession in year 2016 with a contraction in real GDP growth of
-0.36% and -1.5% during the first and second quarters of the year.
There are so many
factors that could be responsible for the cause of a recession in a nation’s
economy. Some of them include; High interest rates because it leads to a
decline in borrowing and limit liquidity or the amount of money available to
invest thereby discouraging investors. Increased inflation: Inflation refers to
a general rise in the general price level of goods and services over a period
of time. As inflation increases, the purchasing power of money reduces as the
amount of goods and services that can be purchased with the same amount of
money decreases. Reduced real wages: which refers to wages that have been adjusted
for inflation i.e employees might be making the same amount of money, but his
purchasing power has been reduced. Other causes includes: accumulation of debt
servicing especially foreign debts, Fall in aggregate demand, fall in income, mass
unemployment, and general loss of confidence in the government due to economic
indices and policies.
However in Nigeria, the
economic recession was triggered by the following;
v Poor economic Planning:
Poor economic planning and lack of concrete implementation of her economic
planning is the major cause of Nigeria current recession. This includes delay
and controversies in the 2016 budget and exchange rate policy.
v Over-dependence on foreign products:
Nigeria depended heavily on foreign products which led to a deficit balance of
payment (import exceeding export) and imported inflation from other countries.
v Insurgency and activities of
militants in pipeline vandalization: The vandalization of
oil pipelines by the militants led to a shortage in the production of crude oil
for export which is the main source of revenue generation for the country. The
activities of the insurgents (boko haram) as well discouraged foreign
investment and led to a flight in foreign capital
v Fall in the international price of
crude oil: Nigeria was heavily impacted by the drop in crude
prices. The price dropped from $100 to $80 and this led to about 50% drop in
revenue, and a resultant drop in importation of some crucial consumer goods.
The situation is further compounded where Nigeria could not produce enough of
these consumer goods locally to offset the shortfall in importation as a result
of her over reliance on crude oil without focusing on the mainstay of the economy
which is Agriculture. The drop in oil price also triggered a drop in government
spending due to government not being able to earn what it used to earn before
the drop. In Nigeria where government are the highest spenders in the economy,
a drop in Government spending can lead to a plunge in consumer spending which
in turn means businesses can’t invest in products and services.
v Increase in demand for foreign
currencies: The fall in the international price of crude oil
as well as a the vandalization of pipeline led to a shortage of foreign
currencies as the demand for foreign currency outweighed the supply which
weakened the purchasing power of Naira compared to other foreign currencies.
As inflation increases, the percentage of goods and services that can be
purchased with the same amount of money decreases. There are certain factors
that caused inflation which eventually led to recession in Nigeria. This
includes; the banning of certain essential agricultural products like Rice,
speculations in stock market due to budget delay, increase in domestic oil
price as a result of subsidy removal, decline in the global oil prices
weakening the Nigerian Naira and a hike In the household prices of goods and
services. The inflation rate in Nigeria skyrocketed from 8.20% in 2015 to 18.55
in 2016 (CBN Data & Statistics) which is an all-time high record since that
recorded in the past few decades.
v High interest rate:
As at January 2016, the interest rate was 26.77% (CBN money market indicator).
The high interest rate discouraged both domestic and foreign investors from
borrowing which led to a sharp fall in investments. This further led to
unemployment and reduction in aggregate demand.
v Conflicting Government Policies:
During the recession, the government alleged to adopting expansionary policies
meanwhile, there were evidence of high tax rate and high interest rate which
are tight monetary policy measures. Therefore, the tight monetary policies
measure present didn’t resonate with the expansionary policy the government
Treasury Single Account
(TSA): The introduction of the TSA constrained the ability
of banks to grant loans as a chunk of the liquidity in the banking industry
where removed. This affected the ability of the banks to intermediate properly i.e.
accepting deposits from the surplus unit at a low interest rate and lending at
a higher interest rate to the deficit unit. This reduced the funds available
for lending which led to a fall in investment eventually contributing to the