Economic Growth & Stock Market Development in Nigeria - Research Paper Example

ECONOMIC GROWTH & STOCK MARKET DEVELOPMENT (NIGERIA) A strong financial sector in any economy is one basic asset that largely steer the economic growth of an economy. Many experts have re-confirmed this by setting and establishing the relationship. Financial sector will have to include a vibrant stock market which can attract foreign direct investment into the country can to a large extent steer an economy to greater heights. But some economists have sharply disagreed with the assertion and contrast the findings. They argue that a vibrant stock market and financial market can thrive but the economic indicators can show the exact opposite. The objective of the research is to ascertain the regression analysis between stock market development and economic growth in Nigeria. Several effects of financial and stock market development on gross National product, Gross domestic development and Employment rate shall be used to establish the relationship. Objective of the research To establish the development of the stock market. To determine the economic growth rate To establish a relationship between economic growth and stock market development. Excluding South Africa, Nigeria has the largest economy in sub-Sahara Africa. In the last two decades ,there has been no progress made in alleviating poverty, expanding and enhancing economic development despite the massive effort made and the many programmes established for that purpose's growth pattern of the Nigerian economy has been quite sluggish over the last two decades. The level of poverty is further exuberated by the pandemic of inequality. The economic performance has had a mixture as the macro-economy environment has witnessed positive and negative influences. Even though several programmes have been aimed at consolidating the arrangement for private sector -led economic growth and government demonstrated a commitment to implementing the privatization programme and improving major infrastructure, the realization of this goal could be met because of the disparity in monetary and fiscal policies. There has been marked improvement in power supply and the privatization of the telecommunications sector among, stimulated economic activities. But the economy has been unable to take fuel advantage of the development, as interest rate and inflation have continued to raise in response to high government spending and subsequent liquidity control measures. High interest rates during a period of time have attracted funs away from the stock market and constrained corporate access to working capital. Nevertheless the exchange rate has been relatively stable facilitating, planning and budget control for companies with high import content. For some time now, the Nigeria stock Exchange has recorded a major turnover growth, in 2001,the market turnover increasing by 104.9% from N28.1billion in 2000 to N57.6billion.In value terms, this is by for highest annual turnover growth of the exchange since also have increased both in primary and secondary market has been realized. In the stock capitalization in the total market value of 261 securities listed on the Nigeria stock Exchange appreciated by 40% to the end of 2001 at N662.6 billon. A combination of supplementary issue and price appreciation in the equities sector accounted for much of the growth in market capitalization. By the end of 2001 the Nigeria Stock Exchange share index grew by 35.2% to close the year at 10,963.11.Remarkably,the index had on 10th may 2001 crossed the 10000 points mark, And on 17th October 2001 reached all time high of 11,339.67 before dropping to its year end position. In lieu of the ever increasing favorable condition bestowed on the Nigeria economy, since the inception of democracy in May 1999, foreign investors continued to invest in Nigeria through the Nigerian stock exchange. The returns of the foreign portfolio transaction are soaring higher. The Nigerian stock exchange has remained focused on improving market infrastructure, expanding market investor base, and consolidating the global outlook through active relationships with participating organizations in the international arena. The stock exchange has been upgraded of its trading, clearing and depository system, officials of the exchange successfully completed an orientation programme. Undoubtedly, the experience of the Nigerian economy is o one trapped within the orbit of widespread poverty. According to the economic policy watch (2002), poverty in Nigeria is widespread, severe and deep and almost 50% population lives in poverty. Nigerian gross domestic product dropped significantly between 1980 and 1985. Table 1: Nigerian GDP between 1979 & 1987 YEAR GDP in billions US$ 1979 75.17 1980 93.13 1983 64.57 1984 73.43 1985 75.30 1986 24.39 Source: UNDP human development report 2001. At the period of down towns in the growth of the economy such as in 1987 where the GDP had terrible exacerbation of poverty and compoundment of the economic troubles, which manifested itself in the economic growth, widespread poverty and low income. Table 2: rate of savings in Nigeria (1988-96) Macro economic indicators 88 89 90 91 92 93 Gross material savings % GDP 9 9 11 12 10 10 Gross fixed capital formation % (GDP 6 6 5 9 4 Population growth Rate 3.1 3.1 3.1 3.1 3.1 2.8 Source: CBN annual report & statement of account (1980 & 97. Table 3: inflationary trends in Nigeria (1990-01) Years 1990 1991 1992 1993 1994 1995 1996 1997 1998 Rate in % 7.5 13.0 44.5 57.5 57.2 70.8 29.3 Source: CBN statistical bulletin: Real sector statistics (2002). Table 4: Bi-variant Regression on GDP per capital, stock market, stock market rate. Year GNP per capital GC 1987 1.209 1988 1.595 1989 2.440 1990 2.755 1991 3.384 1992 5.317 1993 6.716 1994 8.821 1995 14.462 Variables Entered/Removed (b) Model Variables Entered Variables Removed Method 1 Stock Market Growth(a) . Enter a All requested variables entered. b Dependent Variable: GDP Per Capita (GC) Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 .933(a) .871 .853 1.57337 a) Predictors: (Constant), Stock Market Growth ANOVA (b) Model Sum of Squares df Mean Square F Sig. 1 Regression 117.233 1 117.233 47.358 .000(a) Residual 17.328 7 2.475 Total 134.562 8 a) Predictors: (Constant), Stock Market Growth b) Dependent Variable: GDP per Capita (GC) Coefficients (a) Model Un standardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) -6.277 1.785 -3.516 .010 Stock Market Growth 1.455 .211 .933 6.882 .000 a) Dependent Variable: GDP per Capita (GC) Curve Fit Literature review According to the stock market is one of the most important sources for companies to raise money. It allows businesses to go public or raise additional capital for expansion. The liquidity that an exchange provides affords investors to quickly and easily sell securities. It is an attractive feature of investing in stocks compared to other less liquid investment such as real estate. History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator or social mood. Rising prices, for instance tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of household and their consumption. Therefore central banks tend to keep an eye on the control and behavior of the stock market and in general, as the smooth operation of financial system functions, financial stability is the raison of deter of central banks. Exchanges also act as the clearing house for each transaction meaning that they collect and deliver the shares, and guarantee payment of the seller of a security, this climates the risk of an individual buyer or seller that the counter party could default transaction. The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risk promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity. Some researchers are of the view that riskier long term savings require that an individual process the ability to manage the associated risks. Stock prices fluctuate widely, in market contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. According to the efficient market hypothesis (ENH), only changes in fundamental factors, such as profits or dividends ought to affect share prices. Efficient market hypothesis is surely tested by such events as the stock market crash in 1987, when EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e. non-trading). Many studies have shown a market tendency for the stock market to trend near time periods of weeks or Other research has shown that psychological factors may result in exaggerated stock movements. Psychological research has demonstrated that people are predisposed to bring to seeing patterns and often will perceive a pattern in what is n fact suit wise. In Nigeria the stock market development may have an enormous input on the economy, with the fact that there is more foreign direct investment and a market improvement in inflation, local investment and gross national product. Research methodology, Nature & sources of data. Data may be grouped into two main categories, qualitative data attributes and quantitative in frequently made on the loans of process rather than on properties inherent in phenomenon. The major sources of data in this study are documented materials such as written information accessed through websites. The documented materials were inevitably used conceptual frameworks of the research and related literature review. Summary and conclusion The purpose of the study /research is to determine or to assess the correlation or the relationship between the economic growth and stock market development in Nigeria. Nigeria, with a very strong and advanced stock market has had a resurgent growth and expansion of its stock market. The stock market currently accommodates more than 260 listed companies in its market. But, with a very slow and at times a no economic growth, the stock market has seen itself resurge and stand the tide. It is no secret that any positive stock market activity will automatically and definitely influence the economic performance of any given country. In the case of Nigeria, that relationship has been a clear manifestation. In a period from 1887-94, there was a very positive stock market development, but at that very time, the gross National Product had a relatively positive jump. The confidence in the minds of investors to put their money in the stock market has a big impact in the economic activity of any given country. Conclusion Based on the theoretical, mathematical manipulation and primary findings I can conclude that there exist a clear cut and obvious correlation between the stock market and economic growth. That the effect of stock market development and growth is considerably big on the growth of the economy and the economic growth can still be attributed to factors other than stock market. That the economic performance of the Nigerian economy has been sluggish but then does not mean the stock market growth was any minimal. Bibliography 1. www.nigeriastock.com 2. www.gdnet.org/pd/draft_country_studies/Nigeria.iyoha RIR part2.pd. 3. www.cenbkank.org/supervision/all finInstruction.asp 4. www.inf.org/external/pubs/if/ftandd/1196.03/pd/Levine.pdf. 5. www.oneworld.net/grudes/countries 6. www.measuredhs.com/pd_fr115/14/references.pdf 7. www.Nigeriabusinessinfo.com/nse.htd. 8. www.unstats.un.or/unsd/databases.html. 9. The Economics of Nigerian Federalism: Osayimwese and Iyare Publius 10. Financial Management in the Nigerian Public Sector by Koleade Oshisami, Peter N. Dean. 11. Nigerian Journal of Economic and Social Studies. Read More