CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Nigeria is interlinked with the global financial system. The global financial crisis emanated from the economy of the United States in 2007 and later spread to other developed economies of the world in 2008 and subsequently transmitted in that same year to less developing countries, inclusive of the Nigerian economy .The global financial crisis further destabilized the economy of Nigeria, which was initially bedeviled with the challenges of economic instability, inconsistency in government policies, lack of transparency in the financial markets, corruption, political instability, high rates of poverty and unemployment among-st others. Government till date has been facing the effect of global financial crisis on the domestic economy. Nigeria a part of the global economy is bounded to face the micro and macro adverse effects of global financial crisis.
The global financial crisis started as a series of ineptitude in the financial markets, leading to credit and liquidity crises, which resulted into the fall of several giant financial institutions in conjunction with the loss of confidence in the banking sector. The crisis further spread to the real sectors, resulting to decline in the level of aggregate demand, economic retardation and job losses. The pace at which the crisis transmitted to other countries regardless the level of their development has made people to term the menace as “global financial meltdown”, global economic meltdown” global credit crunch” etc. A financial crisis often featured by credit crunch, which means a disorderly contraction in money supply and wealth creation ((Obadan, 2008).
A credit crunch occurs when participants in an economy lose confidence to have loans as well as recall existing loans. The great depression occurred after a dramatic expansion in debt and money supply in 1920’s. Then, a contraction also took place between 1929 and 1933 as debt was defaulted upon further resulted into a huge decline in the supply of money. The origin of the global financial crisis is traceable to rapid risky debt accumulation. The transmission of the crisis across the globe is due to the fact that the world economy has become increasingly interlinked as a result of the forces of globalization, operating through the network of global economic and social linkages (Onudugo, 2009; Onyukwu, 2009). The domestic economy is connected to the rest of the world economy through three markets: product market, factor market and assets market (money and capital markets). The rest of the world and the domestic economy access the world economy through these three markets.
Although, the global financial crisis is caused by the credit crunch in the United States, it has spread to almost all countries’ economies through trade and financial linkages and the implications such as job insecurity and retrenchment, reduction in foreign development and oversea development assistance, increased impoverishment, declined revenue among-st others, have been found to be uniform in the economies affected by this crisis.