The National Bureau ofEconomic Research (NBER) defined a recession as “a significant decline ineconomic 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.” Economicsrecession can also be define as a contraction in the real GDP growth rate fortwo consecutive quarters.Nigeria experienced theworst 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 manyfactors that could be responsible for the cause of a recession in a nation’seconomy. Some of them include; High interest rates because it leads to adecline in borrowing and limit liquidity or the amount of money available toinvest thereby discouraging investors. Increased inflation: Inflation refers toa general rise in the general price level of goods and services over a periodof time. As inflation increases, the purchasing power of money reduces as theamount of goods and services that can be purchased with the same amount ofmoney decreases.
Reduced real wages: which refers to wages that have been adjustedfor inflation i.e employees might be making the same amount of money, but hispurchasing power has been reduced. Other causes includes: accumulation of debtservicing especially foreign debts, Fall in aggregate demand, fall in income, massunemployment, and general loss of confidence in the government due to economicindices and policies.However in Nigeria, theeconomic recession was triggered by the following;v Poor economic Planning:Poor economic planning and lack of concrete implementation of her economicplanning is the major cause of Nigeria current recession. This includes delayand 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 ofpayment (import exceeding export) and imported inflation from other countries.
v Insurgency and activities ofmilitants in pipeline vandalization: The vandalization ofoil pipelines by the militants led to a shortage in the production of crude oilfor export which is the main source of revenue generation for the country. Theactivities of the insurgents (boko haram) as well discouraged foreigninvestment and led to a flight in foreign capitalv Fall in the international price ofcrude oil: Nigeria was heavily impacted by the drop in crudeprices. The price dropped from $100 to $80 and this led to about 50% drop inrevenue, and a resultant drop in importation of some crucial consumer goods.The situation is further compounded where Nigeria could not produce enough ofthese consumer goods locally to offset the shortfall in importation as a resultof her over reliance on crude oil without focusing on the mainstay of the economywhich is Agriculture. The drop in oil price also triggered a drop in governmentspending due to government not being able to earn what it used to earn beforethe 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 whichin turn means businesses can’t invest in products and services.
v Increase in demand for foreigncurrencies: The fall in the international price of crude oilas well as a the vandalization of pipeline led to a shortage of foreigncurrencies as the demand for foreign currency outweighed the supply whichweakened the purchasing power of Naira compared to other foreign currencies.v Inflation:As inflation increases, the percentage of goods and services that can bepurchased with the same amount of money decreases. There are certain factorsthat caused inflation which eventually led to recession in Nigeria. Thisincludes; the banning of certain essential agricultural products like Rice,speculations in stock market due to budget delay, increase in domestic oilprice as a result of subsidy removal, decline in the global oil pricesweakening the Nigerian Naira and a hike In the household prices of goods andservices. The inflation rate in Nigeria skyrocketed from 8.
20% in 2015 to 18.55in 2016 (CBN Data & Statistics) which is an all-time high record since thatrecorded 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 fromborrowing which led to a sharp fall in investments.
This further led tounemployment and reduction in aggregate demand.v Conflicting Government Policies:During the recession, the government alleged to adopting expansionary policiesmeanwhile, there were evidence of high tax rate and high interest rate whichare tight monetary policy measures. Therefore, the tight monetary policiesmeasure present didn’t resonate with the expansionary policy the governmentintends adopting.Treasury Single Account(TSA): The introduction of the TSA constrained the abilityof banks to grant loans as a chunk of the liquidity in the banking industrywhere 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 ata higher interest rate to the deficit unit.
This reduced the funds availablefor lending which led to a fall in investment eventually contributing to therecession.