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THE EFFECTS OF ECONOMIC RECESSION IN ECONOMIC GROWTH IN
NIGERIA.
AGUM CHARLES
Department of Economics
Faculty of Social Sciences,
Nasarawa State University Keffi.
PMB 1022
e-mail:agumcharles@gmail.com
GSM:07036136937
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Abstract
The focus of this research work is to investigate empirically the effects of Economic
recession in Economic growth in Nigeria. The study employed multiple linear regression
model (MLRM) and OLS estimation techniques on macroeconomic variables such as
Gross Domestic Product (GDP), unemployment rate in Nigeria, inflation rate and
poverty rate among others. The GDP was used as a proxy for economic growth rate
while the independent variables are Nigerian’s inflation rate, unemployment rate,
poverty rate and FDI. The result of this study shows that Economic recession impacts
negatively on the Economic growth of Nigeria. Based on the findings a number of
recommendations were made prominent among them is the need for the federal
Government to initiate policies and programmes to cushion the negative effect of
economic recession such as unemployment rate and poverty rate.
Keywords: Economic Growth, Economic, Recession, Nigeria.
1. Introduction
Nigeria economy is not immune from global happenings and the present global economic
recession. Every citizen now recognizes that Nigeria and the whole Countries is faced with
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the collapse of oil prices since two years ago from $145.00 per barrel for bonny light a year
ago to today’s price hovering just above $ 40.00 per barrel. The economy is now in a state of
crisis but not severely damaged. The cumulative results of past wrong policies are now
slowly being addressed by the government but critics argued that the Government have been
too slow to put in place the Infrastructural development needed for economic growth for the
Nigeria people. Critics argued that the pr esent oil price situation therefore, only makes more
acute the need for urgency in trying to fashion and implement correct policies for a viable
economy and for the resumption of economic growth (Adams, 2013). Nigeria government
depend on oil for over 60% of its total revenues, and the country for over 90% of her foreign
exchange earnings, while the state Governments are dependent to the extent of over 90% on
the Federal government for their revenues and 10% from their internal generated revenues.
The collapse of oil prices will surely have an immediate if not handle properly, disastrous
impact on the budgets of all the Governments of the federation be it local, state and Federal
as nation’s economy is not insulated from the global economic crises. As a result of the
economic Recession, Naira has been depreciated against the American Dollar since 2008.
The practice of publishing revenues and expenditures promptly should be encouraged by the
Federal Government re-echoing the issue of transparency. Reports shows that one-third
reduction in the budget releases of funds to Federal Governments and Federal ministries. The
president, Muhammad Buhari recently argued for pay cuts for all public servants including
the Governors and there should be a brave attempt by the National Assembly to carry out
their oversight functions in ensuring the implementation of the 2016 budget as it is not in the
nation interest to continuing to encourage waste at this period of economic recession. Faster
depreciation of Naira against the Dollar is affecting the economy and adding to the suffering
of the people. The Nigeria Government should do more to address the issues of Economic
recession, unemployment and poverty as these could lead to more crime in the State
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(Soludo,2006). The paper attempt to evaluate the impact of economic recession in economic
growth in the case of Nigeria today. The paper is divided into five subsections with the
introduction as one. Two dwell on the Conceptual Framework and literature review. Three
dwell on the methodology. Fourth focus on the results and discussion and fifth is the
conclusions and recommendations.
2.Conceptual Framework and Literature Review
Economic Recession simply means that a Country has experienced two consecutive quarters
of declining growth in a given year. It also implies that key macroeconomic economic
indicator/variables are on the negative side. Similarly a Country is said to be in recession
when two consecutive quarters contract or shows negative growth over a period of time. A
recession is thus defined as consecutive declines in quarterly real gross domestic product
(inflation adjusted) and a decline in activity across the economy, lasting longer than a three to
four months. It is visible in industrial production, employment, real income and wholesale-
retail trade (Soludo, 2013). There are various reasons why countries enter into a recession and
it all depends on the economic framework of that country. For Nigeria, a recession could be
triggered by a dip in government revenues and /or a drop in consumer spending. A drop in oil
prices for example, can trigger a drop government spending due to government not being able
to earn what it used to earn before the dip. In Nigeria where government are the highest
spenders in the economy, a drop in Government spending can dovetail into a drop in
consumer spending which in turns means business can’t invest in products and services. The
Gross Domestic Product (GDP) of an economy is the value of goods and services produced in
an economy like Nigeria. GDP is basically the sum of Consumer Spending, Government
Spending, Investments and then Net Exports. It is a good measure of economic activity in any
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economy and is a benchmark for Government Budgeting, income and expenditure,
investment inflows in and out of an economy etc. The private sector also relies on the GDP of
a country to determine which areas have robust economic activity helping them decide where
to invest. Analyzing the shocks experienced in the Nigerian Economy as a result of Economic
Recession, Ajakaiye and Fakiyesi (2009) asserted that, there are concerns regarding how
rapidly the global economic crisis penetrated the Nigerian capital market, especially given
that there is hardly any thriving domestic mortgage market. The decline of indicators of
activities on the NSE before the escalation of the crisis on the global scene in July 2008
became a source of concern for many. Emerging facts reveal that the economic recession
may have been made evident in the capital market through various channels. Foreign
portfolio investment withdrawals and withholdings in order to service financial problems at
the foreign investors’ home, as well as prospects of reduced Foreign Direct Investments, are
bound to affect investor confidence in the economic health of Nigeria. Evidence on the
foreign portfolio withdrawals show that the total financial inflows to Nigeria between 2007
and 2008 increased by 21%, while that between 2008 and 2009 is predicted to reduce by
38.6%. According to Adams,2013, Economic recession/ the credit crunch experienced by
lending (particularly bank) institutions affects businesses that require short and long-term
money, including banks lending to corporate organizations as well as inter-bank short-term
lending. In a country like Nigeria, where mortgages and credit card purchases are not well
developed, this credit crunch became manifest in weakened risk assets of banks that had
given out loans to some investors to invest in other financial instruments (particularly
secondary market purchase and initial public offerings – IPOs). In the hope of making quick
returns through a quick turnaround of their portfolio. This was what was termed otherwise
‘margin lending’. This may also be termed Nigeria’s own version of the ‘subprime problem’.
Resulting in an exploding domestic stock market and stock prices and astounding returns to
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both the speculators and providers of the margin funds (the banks). Other factors that have
had a serious impact on the stock market are what can be called the ‘intensifiers.’ These
include policy interpretations by the market, which may have been induced by the slow
government initial stand on the economy. This also includes interpretation of
announcements, proclamations and rumors by the market. Examples include the proposed
recapitalization plan of the stock market players (stock broking firms), as well as rumours on
the termination of margin lending by banks. According to Nwokah G. A. et al (2009), in a
globalized world, transactions are carried out in different countries in integrated markets.
The world has over the past two decades headed towards liberalization and deregulation, with
the goal of integrating world markets. Nigerian markets, although not well integrated into the
world market, have been facing serious destabilizing effects since the emergence of the
Economic recession. Ajakaiye and Fakiyesi (2008) averred that as a result of economic
recession, the capital market has been shrinking; major international hedge funds have been
withdrawn; and the international credit line has faded out of loadable funds for domestic
industry.
Theoretical Underpinning
THE CLASSICAL THEORY OF ECONOMIC GROWTH
The classical economists, Adam Smith, Thomas Robert Malthus, David Ricardo, John Stuart
Mill, and others, were very much concerned with economic growth. They thought that
economic growth would eventually cease. The economy would enter a stationary state. In that
state, population growth would be zero, and investment would be for replacement only. Real
wages would be constant and at a low level. Classical theory was based in part on the theory
of population associated with Thomas Robert Malthus. In a simplest terms, Malthus assumed
that population increases geometrically: 1, 2, 4, 8, 16, ...... Food production, on the other
hand, is capable of increasing only arithmetically: 1, 2, 3, 4, 5, .... Consequently, difficulties
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will arise in the long run as population outstrips the food supply. At that point, mortality rates
increase owing to starvation and malnutrition.
HARROD’S THEORY OF ECONOMIC GROWTH
With the Great Depression of the 1930s and the publication of Keynes’s General Theory in
1936, economists turned their attention to short-run theories of income determination. Keynes
himself was predominantly interested in the short run. As we have seen, his analysis assumed
that the economy’s capital stock and technology were constant. These assumptions are
justifiable for short-run theories of income determination, but not for long-run theories of
income determination, called growth theories or models, to others.
3. Methodology
This study examines empirically “The effects of Economic recession in Economic growth in
Nigeria”. The study establishes a relationship between Gross Domestic Product and some
macro-economy indicators. The secondary data used in this Study was obtained from the
Central Bank of Nigeria (CBN) Statistical Bulletin and National Bureau of Statistics (NBS)
Publication.
The data were analyzed using a multiple linear regression model of the form:
GDP = β0 + β1URN + β2INF + β3FDI + β4NOE + β5NOI + β6PRN + β7EXC + µ…..(i)
Where:
GDP = Gross Domestic Product as proxy to Nigeria’s economic growth
URN = Unemployment rate in Nigeria
INF = Inflation Rate
FDI = Foreign Direct Investment
NO E = Non-Oil Export
NOI = Non-Oil Import
PRN = Poverty rate in Nigeria
EXC = Exchange Rate
β0 = Intercept
β1 , B2 ,…..B7= Partial Slopes of the Linear regression model
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µ = Stochastic error term. β1 < 0, β2 > 0, β3 > 0, β4 < 0, β5 < 0, β6 < 0, β7 <0
4.Results and Discussions
The estimated regression model is given as follows;
GDP = 14806900 – 606413.3URN - 265.61INF + 46297.99FDI + 3.0589NOE + 1.8264NOI - 5.10839PRN-
182210.7EXC
t = (1.8381) (-1.81238) (0.0044) (1.8449) (2.184193) (1.8465) (-3.2839)
(6.7311)
R2 = 0.911 Adjusted R2 = 0.86
F = 19.67377 D.W (d) = 1.76
n = 26 k = 8
Where: n = number of observation k = number of parameters in the model
From the estimated regression model above, we observed that the coefficient of the
explanatory variable: (NOE, FDI, NOI) are positive indicating that such variables impact
positively and contributes to the growth of the Economy. On the other hand, the coefficient of
the other independent variables; (PRN, URN, INF, EXC) are negative, this implies that such
variables impact negatively on the economic growth of the State. Further study shows that
about 91% of variations in the dependent variable (GDP) were explained by the changes in
explanatory variables of the estimated model. This implies that the estimated model has a
good fit. Therefore, R2 is significant. Similarly, the adjusted (R2) also shows that the estimated
model has a good fit (i.e, Adjusted R2 = 0.86).
The high value of the F-statistic (i.e., F=19.67) indicates that the parameters of the
estimated model are jointly or simultaneously statistically significant. This implies the
estimated model is good for forecasting, predicting, policy formulation and analysis purposes.
The Durbin Watson which tests for the presence of first order serial correlation between error
term i.e. it tests whether adjacent residuals are correlated. Based on the decision rule which
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state that if Durbin-Watson value of the estimated model is close to 2. We have no evidence
of first order serial correlation, thus, the forecasting power of the estimated model is more
reliable in the absence of autocorrelation supported by the good explanatory power of the
explanatory variables as evidenced by the high value of R2.
5. Conclusions and Recommendations
Economic Recession cannot be only attributed to the reason why the oil and gas industry is
not functional as expected, but rather, poor governance, corruptions and the long awaited
passage of the PIB.“The reason why it is blamed on recession is because the government
cannot meet up their obligation to increase the activities in the industry, due to lack of funds.
And the reason for lack of funds is because there is nothing going on in the petroleum
industry.“This is caused as a result of bad governance and lack of good institutional
framework in Nigeria. From the above analysis, the following points were observed;
Exchange Rate (EXC) has a positive and significant impact on the economic growth of
Nigeria. Inflation rate in Nigeria has a negative and insignificant effect on the economic
growth of the country. Non oil Export and Non-oil Import has a significant and positive
impact on the economic growth of Nigeria during the period under review. Unemployment
rate and poverty rate in Nigeria has a negative and insignificant impact on the economic
growth of Nigeria there by reducing the country internally generated revenue.
From the Findings drawn, the following recommendations are made:
Firstly, In order to reduce the negative of economic recession, the federal Government
should initiate policies and programmes that will reduce unemployment and poverty to
the barest such as construction of dam for irrigation farming, building capacity on
business ideas and improving small and medium scale industry.
Secondly, The federal Government in conjunction with the federal ministry of finance
should embark on fiscal policy that will reduce unemployment level in the Nigeria.
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Thirdly, the government should initiate policies that will boost her foreign ties with
other countries so as to attract foreign investors into the country.
Fourthly, people in leadership front should be able to provide good governance and
Government should provide policy framework for industrialization.
Finally, also, government should plan and diversify the economy instead of relying in
the oil revenue alone. They should developed Agricultural sector, Manufacturing
sector and Mining sector in order to get out of economic recession.
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APPENDIX
4.1 Presentation of Data
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Table 4.2: GDP and Macroeconomic Indicators (1990-2015)
Source: CBN Statistical Bulletin, 2015.
The regression output using E-Views’ software is given below as:
Dependent Variable: GDP
Method: Least Squares
Date: 12/19/16 Time: 13:11
Sample: 1990 2015
Included observations: 26
Variable
Coefficient
Std. Error
t-Statistic
Prob.
URN
-606413.3
334595.5
-1.812378
0.0931
INF
-265.6129
60184.91
0.004413
0.9965
FDI
46297.99
25094.77
1.844926
0.0879
NOE
3.058941
1.400491
2.184193
0.0479
NOI
1.826404
0.989109
1.846514
0.0877
Year
GDP
(Million
N)
URN (%)
INF (%)
FDI
NOE
NOI
(Million
N)
PRN (%)
EXC
(Million $)
1990
267550.0
25.50000
7.500000
4686
3259.600
39644.80
14.0
9.400000
1991
312139.7
20.00000
13.00000
6916.1
4677.300
81716.00
21.9
12.20000
1992
532613.8
29.80000
44.50000
14463.1
4227.800
123589.7
14.3
14.70000
1993
683869.8
18.30000
57.20000
29675.2
4991.300
124493.3
30.5
19.00000
1994
899863.2
21.00000
57.00000
22229.2
5349.000
120439.2
38.0
22.30000
1995
1933212.
20.10000
72.80000
75940.6
23096.10
599301.8
19.
25.60000
1996
2702719.
19.70000
29.30000
111295
23327.50
400477.9
17.0
30.40000
1997
2801973.
13.50000
8.500000
110453
29163.30
678814.1
27.9
39.60000
1998
2708431.
18.30000
10.00000
80750.4
34070.20
661564.5
16.9
41.70000
1999
3194015.
21.30000
6.600000
92792.5
19492.90
650853.9
23.2
50.20000
2000
4582127.
18.00000
6.900000
115952
24353.60
543433.2
20.4
71.20000
2001
4725086.
18.30000
18.90000
132434
87923.20
434244.2
12.8
90.10000
2002
6912381.
24.40000
12.90000
225972
48082.30
539392.3
13.9
126.9000
2003
8487032.
20.70000
14.00000
259250
23987.40
530322.9
42.9
137.0000
2004
11411067
19.20000
15.00000
249158
34697.90
47882.30
48.8
132.8600
2005
14572239
17.95000
8.800000
101133
105955.88
53983.80
36.9
129.0000
2006
18564595
16.90000
12.80000
150509
133594.99
603084.3
54.7
128.2700
2007
20657325
16.50000
9.200000
191668
169709.78
632992.0
45.9
117.9700
2008
23842126
17.50000
5.100000
155948.2
94316.78
5342149.
43.6
132.5600
2009
36587654
17.50000
9.100000
174302.1
286325.54
634393.0
50.0
149.5800
2010
42335120
18.50000
9.200000
178321.3
328421.67
525525.8
54.4
150.2000
2011
65873938
19.0
10.8
498272.8
860798.9
7587628.5
56.8
150.9
2012
96873092
19.7
11.7
387598.7
875968.6
87562094
57.9
157.6
2013
98674983
20.0
12.9
384675.3
659876.8
85968703
59.8
157.3
2014
97098473
21.8
15.9
749867.6
48758.8
87566408
59.9
160.0
2015
87095094
22.9
16.6
786759.8
8576498.7
7698473
60.0
167.9
15
PRN
-5.108399
1.555557
-3.283968
0.0059
EXC
-182210.7
27069.94
6.731106
0.0000
C
14806900
8055468.
1.838118
0.0890
R-squared
0.911273
Mean dependent var
9938721.
Adjusted R-squared
0.863497
S.D. dependent var
12124870
S.E. of regression
4479700.
Akaike info criterion
33.75034
Sum squared resid
2.61E+14
Schwarz criterion
34.14826
Log likelihood
-346.3786
F-statistic
19.07377
Durbin-Watson stat
1.763651
Prob(F-statistic)
0.000007
