AN ANALYSIS OF THE ECONOMIC IMPACT OF STOCK MARKET ON NIGERIAN ECONOMY (1986-2010)

ABSTRACT

A major engine of economic growth and development of any nation is the stock market. It impacts positively on the economy by providing financial resources through its intermediation process for financing long term projects. These projects could be promoted by governments or private institutions. The analysis scope covered a period of twenty-five years spanning from 1986-2010. The econometric methodology adopted is the Ordinary Least square method (OLS). Using the independent variables of market capitalization, value of trade, inflation rate and exchange rate and the dependent variable of gross domestic product, this study analyzes the impact of the stock market on the Nigerian economy. In conclusion, the result shows that the stock market has a highly significant impact on the Nigerian economy. Hence, without an efficient stock market, the economy may be starved of the required long term funds for sustainable growth and development.

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The stock market is supposed to play an important role in the economy in the sense that it mobilizes domestic resources and channels them to productive investments. However, to perform this role it must have significant relationship with the economy.

The development of stock market in Nigeria, as in other developing countries has been induced by the government. Though prior to the establishment of stock market in Nigeria, there existed some less formal market arrangement for the operations of the stock market. It was not prominent until the visit of Mr. J.B. Lobynesion in 1959, on the invitation of the federal government, to advice on the role the central bank could play in the development of the local money and stock market. As a follow-up to this, the government commissioned and set up a Barback committee to study and make recommendations on the ways and means of establishing a stock market in Nigeria as a formal market. (Alile and Anao 1990)

Capital markets are key elements of a modern market-based economic system as they serve as the channel for flow of resources from the SAVERS of capital to the BORROWERS of capital. Efficient capital markets are hence essential for economic growth and prosperity. With growing globalization of economies, the international capital markets are also becoming increasingly integrated. While such integration is positive for global economic growth, the downside risk is the contagion effect of financial crisis especially if its origin lies in the bigger markets.

As for the effect of macroeconomic variables such as money supply and interest rate on stock prices, the efficient market hypothesis suggests that competition among the profit maximizing investor’s impact of macroeconomics. Variables on stock market will ensure that all the relevant information currently known about changes in macroeconomics variables are fully reflected in current stock market, so that investors will not be able to earn abnormal profit through prediction of the future stock markets investments. (Chong and Koh 2008).

Therefore, since investment advisors would not be able to help investors earn above average returns consistently except through access to employer insider information.

Stock market is a critical log in the wheel that smoothens the transfer of funds for economic growth. Broadly speaking, stock exchanges are expected to accelerate economic growth by increasing liquidity of financial assets, making global diversification easier for investors and promoting wiser investment decisions. In principle, a well functioning stock market may help the economic growth and development process in an economy through growth of savings, efficient allocation of investment resources and alluring of foreign portfolio investments. The stock market encourages savings by providing the household having investable funds, an additional financial instruments which meets their risk preferences and liquidity needs better, it in fact provides individuals with relatively liquid means for risk sharing in investments projects.(Agrawalla 2006).

The stock markets capacity to contribute to the development of the economy has been largely impaired by various inadequacies. The market over the years have been characterized by-Lack of depth with few securities-poor liquidity, partly due to inefficiency-Poor infrastructural for secondary market operations-Basically, an equity market with largely dormant bond market-High transaction costs-Lack of sophisticated product investments and instruments. The market is mainly dominated by traditional instruments such as BONDS and EQUITIES with limited derivatives-Unfavorable tax regime-Unstable and largely in appropriatein macro-economic environment.

1.2 STATEMENT OF THE PROBLEM

In Nigeria, the capital markets have over the years been performing its traditional role. However, its efficiency and effectiveness in this regard have been greatly limited by various factors notable among which are price level and the structure of the economy, which is dominated by oil production, yet, the oil producing companies are listed on the stock market, the lack of long term capital in the business, the business sector depends mainly on short-term financing such as overdrafts to finance even long term-capital. The economic reforms of the federal government particularly those that have taken place in the financial sector are therefore intended among other objectives to attain. The focus of this paper is to examine stock market and it’s impact on the Nigerian economy.

As a result of the above, the market has therefore not been in the best position to contribute maximally to economic growth and the real sector. These inadequacies have made the reforms that have taken place over the years imperative. Recent reforms in stock market with the enactments of the Investments and Security Act (ISA) no 45 of 1999 which replaced the SEC degree of 1986. Other reforms that have been taken place in the stock market include:
-Review of minimum capital requirement for operators.
-Reduction of transaction costs.
-Introduction of code of corporate governance.
-Reactivation of the Bond market.
-Introduction of market makers.
-Introduction of self registration.
-Development of a commodity market.

Many emerging stock markets are being restricted by lot complaints which impede the realization of capital market serving as a catalyst for economic growth. Such problems include:
A.Unquoted companies: Many companies are not quoted because of perceived loss of control. They are afraid of sharing the ownership of the company with others and because of this reason they prefer to restrict themselves to funds provided by family members and friends and are therefore unable to unanticipated challenges in a timely manner.
B. Domination of public sector: The dominance of public sector like government s has greatly hindered the capital market growth as many them are yet to be privatized(especially the public utilities)that can deepen the market almost immediately.
C. A lot of sharp practices exist in the flow of the exchange fostering improper disclosure of information, unfair pricing, insider dealings e.t.c

Currently, the performance of the Nigerian stock market during the last month rallied 118 points or 7.3%. from 2013, the Nigerian stock market average 1106 index points reaching an all time-high of 1718 index point in may 2013 and a record of 848 index points (NSE 30). This rise and fall of the Nigerian stock market index point has resulted in the slow meltdown of the capital market. This meltdown of the capital market could result in unbalanced on the economy.

According to the NSE report the process of this rise and fall began in January 2007 as the capital market nose-dived from all time high of ₦13.5 trillion to less than ₦4.6 trillion by the second week of January. The all share index has also plummeted from abroad 66,000 basis points to less than 22,000 points in the same period. It has also experienced a free for all downward movement with more than 60% of 300 quoted stocks. Consequently, many of the quoted stocks lack liquidity as their holders are trapped, not able to convert to cash to meet their domestic needs thereby creating a major problem. When this occurs, stockholders begin to withdraw and foreign investments are lost and this results to a negative development on the Nigerian economy.

1.3 OBJECTIVES OF THE STUDY

The central objective of this study is to analyze the economic impact of stock market on Nigerian economy. The specific objectives include;
1. To examine the relationship between stock market and Nigeria’sgross domestic product.
2. To assess the level of stock market stability in Nigeria.
3. To appraise the performance of the Nigerian stock market.
4. To make policy recommendations at the end of this study.

1.4 RESEARCH HYPOTHESIS

The research work is guided by the following hypothesis.
1. Ho: There is no significant relationship between stock market and Nigeria’s gross domestic product.
H1: There is a significant relationship between stock market and Nigeria’s gross domestic product.
2. Ho: Stock market does not have economic impact on the Nigerian economy.
H1: Stock market has economic impacts on the Nigerian economy.

1.5 SIGNIFICANCE OF THE STUDY

The general relevance of the study lies in its understanding of the Economic Impact of Stock Market on Nigerian economy and so will be particularly relevant in the following areas.
A. In particular, by using Nigeria stock market as empirical evidence, the research will provide quantitative information which will enable us to ascertain whether or not stock price fluctuations have impact on the Nigerian economy. The finding of the study will reveal or will therefore be relevant to the government and policy makers in fine-tuning stock market policies that will be applied to ascertain sustainable in the Nigerian stock market.
B. Also, it will relevant to the stock market operators, monetary institutions or authorities and regulating agencies to harness and fine-tune stock market prices to promote high performance level especially at this critical moment of global economic crises and the nation’s economic circumstances.
C. The findings if the study will equally afford quoted companies the stock opportunity to assess whether or not they have been performing well in terms of price stability.
D. Finally, a further justification for the study is the benefit of applying the economic analysis of the impact of stock market in Nigeria to economic and financial analysis kits and increases the stock of knowledge in both the stock market and the Nigerian economy.

1.6 SCOPE AND LIMITATIONS OF THE STUDY

This work is a study of economic impact of stock market on the Nigerian economy. The study employs empirical evidence from both stock market using the Nigerian stock exchange and Nigerian economy as whole. The choice is made out of the researcher’s interest in the given country’s stock market and economic circumstances. The period covered by the research is twenty-five (24) years period 1986-2010. The availability of uniform data on the variables informed the researcher’s choice of the period of analysis.

This study is limited by the following factors;
1. Paucity of materials: Materials for the study were not adequate which could not allow for an in-depth study.
2. Inaccessibility of data: Difficulty in accessing data for the study was yet another limitation.
3. Financial constraint: Lack of adequate funds on the part of the researcher constituted another problem.