Impact Of Nigeria Capital Market On Economic Growth (2002-2010)

At the dawn of the 21st century, Nigeria, only recently restored to democratic rule, had a promising economic outlook for the ensuing decade. After several years of sanctions stemming from the political misadventures of the Abacha regime, the international business community was  ready to welcome her 150 million plus market back into the global economy.

Crude oil prices, a critical benchmark of her economy, were steadily inching up from the low of $10 recorded in the latter part of the 20th century’s last decade. International oil majors, previously barred from doing serious business with her, were getting ready to significantly expand their oil production capacities especially in the under-tapped offshore sector.

Telecommunications, agriculture and power were also attracting substantial Foreign Direct Investment. Initial auction for GSM telecom licences in January 2001 raised over $850million. The influx of foreign capital helped stimulate considerable expansion of small and medium scale enterprises in the real sector. By 2006, Nigeria’s gross domestic product (GDP) stood at $150 billion, having grown by 6.90% that year.

About a decade earlier, in 1996, GDP stood at $33 billion, having grown by 4.9% that year. For the first time since independence, economic expansion was consistently outstripping population growth – resulting in real increases in per capita income ($1,200 in 2005 as against $329 in 1996).

With a little more cash on his hands, the average Nigerian could now sensibly extend his monthly savings and more and more people began to explore investment opportunities.

The immediate impact of the excess liquidity was increased demand for investment vehicles like equities, bonds, treasury bills and foreign exchange. But the lion share of new investments went to the Nigerian Stock Exchange (NSE) and, in 2007, the NSE All-Share Index (ASI) recorded an annual increase of 74.9% to close the year at a historic 54,678.83 points.

The total market capitalisation, which grew at a compounded annual rate of 66.5 per cent over the preceding five fiscal years, recorded an unprecedented increase of 126.2 %, from N4.2 trillion in 2006 to N9.6 trillion in 2007. Thus, the NSE easily became one of the best performing exchanges in the world.

With such apparently high demand for equities, banks and other organizations proceeded to raise capital via public offers, rights issues and private placements with over subscription for these stock offers being commonplace. There was a preponderance of investment in the so-called growth stocks that showed manifold share price appreciation.

However, herd behaviour and a naive disregard of tendency for regression towards the mean – cognitive biases that are the socionomic underpinnings of many economy bubbles were endemic.  A relatively unenlightened mass of common stock investors were ignorant of the fact that such levels of growth were unsustainable in the medium term. Many stocks, with relatively unproven fundamentals, would become over-priced by excessive speculation.

By 2008, the American economy found itself enmeshed in a grave financial crisis arising from liquidity shortage in her major banks. Soon, recession in the world’s largest economy had a knock-on effect on other G-8 countries and eventually the developed world was enmeshed in severe economic crisis.

As oil prices fell with markedly reduced demand in the industrialized world coupled with militant-activity induced shut-in of oil production in the Niger Delta, the Nigerian capital market began to feel the pinch. The All-Share Index embarked on a steady decline that became magnified into an uncontrolled downward spiral once loss aversion behaviour kicked in.

Capital market is defined as the market where medium and long terms finance can be raised Akingbohungbe (1996). Capital market offers a variety of financial instruments that enable economic agents to pool, price and exchange risk. Through assets with attractive yields, liquidity and risk characteristics, it encourages saving in financial form. This is very essential for government and other institutions in need of long term funds, Nwankwo, (1999).

According to Al-Faki (2006), the capital market is a network of specialized financial institutions, series of mechanism, processes and infrastructure that, in various ways facilitate the bringing together of suppliers and users of medium to long term capital for investment in economic developmental project”. According to Al-Faki (2006), the capital market is a “network of specialized financial institutions, series of mechanisms, processes and infrastructure that, in various ways, facilitate the bringing together of suppliers and users of medium to long term capital for investment in socio-economic developmental projects”. 

The capital market is divided into the primary and the secondary market. The primary market or the new issues market provides the avenue through which government and corporate bodies raise fresh funds through the issuance of securities which is subscribed to by the general public or a selected group of investors. The secondary market provides an avenue for sale and purchase of existing securities.