The Impact of the Nigerian Capital Market on Economic Growth (1990-2010)

This paper seeks to examine the impact of the Nigerian capital market on its economic growth from the period of 1990-2010. This means that the performance of the stock market is an impetus for economic growth and development. The economic growth was proxied by Gross Domestic Product (GDP) while the capital market variables considered include; Market Capitalization (MCAP), Total New Issues (TNI), Value of Transactions (VLT), and Total Listed Equities and Government Stocks (LEGS). Applying Johansen co-integration and Granger causality tests, results show that the Nigerian capital market and economic growth are co-integrated. This implies that a long run relationship exists between capital market and economic growth in Nigeria. The causality test results suggest a bidirectional causation between the GDP and the value of transactions (VLT) and a unidirectional causality from Market capitalisation to the GDP and not vice versa. The F statistics is significant at 5 percent using a two-tailed test. On the other hand, there is no “reverse causation” from GDP to market capitalization. Furthermore, there is independence “no causation” between the GDP and total new issues (TNI) as well as GDP and LEGS. This is a clear indication of the relative positive impact the capital market plays on the economic growth of the country. The evidence from this study reveals that the activities in the capital market tend to impact positively on the economy. It is recommended therefore that the regulatory authority should initiate policies that would encourage more companies to access the market and also be more proactive in their surveillance role in order to check sharp practices which undermine market integrity and erode investors’ confidence.
Introduction The growth and development of the capital market in Nigeria can be traced to 1946 with the floating of N600,000 (more than 300,000 pounds sterling) worth of government stocks. However, an organized market for the secondary trading of issued stocks was lacking. In 1959, following the establishment of the Central Bank of Nigeria (CBN) a year earlier, a N4 million (2 million pounds sterling). Federal Government of Nigeria development loan stock was issued in line with its role of fostering economic and financial development. In 1986, Nigeria embraced the International Monetary Fund (IMF) Structural Adjustment Programme (SAP) which influenced the economic policies of the Nigerian government and led to reforms in the late 1980s and early 1990s. The programme was proposed as an economic package to rapidly and effectively transform the Nigeria economy within two years (Yesufu, 1996). government to judiciously implement some of its policy measures (Oyefusi and Mogbolu, 2003). However, until SAP was abandoned in 1994, the objectives were not achieved due to the inability of The notable reforms include monetary and fiscal policies, sectoral reforms such as removal of oil subsidy in 1988 to the tune of 80%, interest deregulation from August 1987, financial market reform and public sector reform which entails the full or partial privatization and commercialization of about 111 public owned enterprises.
The Nigeria stock exchange was to play a key role during the offer for sale of the shares of the affected enterprises (World Bank, 1994; Anyanwu et al, 1997; Oyefusi and Mogbolu, 2003). The introduction of SAP in Nigeria has resulted in significant growth of the financial sector and the privatization exercise which exposed investors and companies to the significance of the stock market (Alile, 1996; Soyode, 1990).
Ariyo and Adelegan (2005) contend that the liberalization of capital market led to the growth of the Nigerian capital market, yet its impact at the macro-economic level was negligible. Again the capital market was instrumental to the initial twenty five Banks that were able to meet the minimum capital requirement of N25 billion during the banking ector consolidation in 2005. The stock market has helped government and corporate entities to raise long term capital for financing new projects, and expanding and modernizing industrial/commercial concerns (Nwankwo, 1991). We use econometric techniques the relationship between capital market performance and economic growth. Given the roles the capital market has played during the privatization of public owned enterprises, recent recapitalization of the banking sector and avenue of long term funds to various governments and companies in Nigeria, the objective of this study therefore is to evaluate the level of development of the capital market and how it has impacted on her economic growth.