As the economy continues to face
challenges which demand innovative and radical policies, the stakes are
high on President Muhammadu Buhari. He is expected to provide inspiring
leadership and deliver on key mandates, ensuring security of lives and
property, galvanise state resources to engender prosperity, keep a
watchful eye and maintain rigorous stewardship over federal treasury,
tax collection, public service recruitment and development and deliver
services that are responsive to citizens’ need, be accountable and
ensure public trust in government. Nigeria is expected to be among the
top 20 economies in the world with a minimum GDP of N144tn (US$900bn)
and a GDP per capita income of no less than N640,000 (US$4,000) per
annum by 2020 and the priority areas to achieve this target include
physical infrastructure, real sector development, human capital
development and governance. The current stock of core infrastructure in
Nigeria is estimated to be about 30-40 per cent of the GDP, which is
said to be far below the international bench mark of 70 per cent of the
GDP even as experts believe Vision 20:2020 target may not be realisable
outside the mechanism of the capital market which is one of the most
important factors of funding infrastructure with strong socio-economic
impact. Forward looking nations explore the mechanism of the capital
market to drive economic growth and development.
The
United States with the largest bond market in the world, and other
advanced economies utilise optimally the mechanism of the capital market
to finance capital intensive and innovative projects. In India, the
expansion of the capital market has been noted as a major factor for its
consistent economic growth. The Indian market is characterised by its
vibrant equity and debt markets. As a strategy to develop infrastructure
and deepen the bond market, the Indian government had raised Foreign
Institutional Investors’ investment limit in corporate bonds from
US$20bn to US$40bn, with a prescription that the additional limit of
US$20bn will be available to FIIs only for investments in corporate
bonds issued by companies in the infrastructure sector. The capital
market in terms of the GDP rose from 75 per cent in 1995 to 130 per cent
of GDP in 2005, while the Indian economy grew at 8.6 per cent in
2010-2011 as a result of increased activity in the capital market on the
back of strong investor confidence. Net capital inflows increased to
US$123.2bn in April 2011 as against US492.1bn in April 2010, dominated
by Foreign Institutional Investors (FIIs), Investment and Trade Credit
and Foreign Direct Investments. In 2010-11, 40 new companies listed on
the two exchanges, National Stock Exchange and Bombay Stock Exchange.
The Gross Domestic Savings rate in India is 33.7 per cent with
investment rate at 36 per cent, while the rate of savings in financial
assets grew to 11.8 per cent in 2009-10, from 10.8 per cent in 2008-09.
Malaysia, which shares similar
characteristics with Nigeria, was reportedly transformed sequel to the
successful launch and implementation of the first and second Capital
Market Master Plans (CMP1 and CMP2), and has since moved ahead of
Nigeria in all metrics. The market capitalisation as a share of the GDP
for Nigeria in 2013, was 27 per cent, compared with 247 per cent for
Malaysia, 207 per cent for South Africa and 112 per cent for Brazil. The
average trading volume for Nigeria is about US426m and the turnover
rate is 10.1 per cent compared to US$647m and 107.6 per cent for
Malaysia. Also, the Value of Assets Under Management for Nigeria is
US$910m compared to US4114bn for Malaysia. Some of the measures
introduced in Malaysia to achieve the impressive objectives include
broad fiscal incentives, measures to enhance market liquidity in the
bond market, deregulation in investment management industry,
institutional and regulatory reforms including demutualised securities
exchange and corporate governance. It is also instructive that equity
financing through the mechanism of the capital market has remained an
important source of funding for SMEs in Malaysia.
On the contrary, banks dominate business
financing in Nigeria as most businesses are averse to equity financing
through the stock exchange, a major reason SMEs have not made the
desired impact on the economy. Cumulative bank loans to the private
sector stood at N6.5tn in 2013, while bond market capitalisation
(excluding FGN bonds), stood at N2.05tn for the same period. The
dominance of bank-based financing has severe shortcomings and is a major
reason the growth pattern of the economy is anomalous. Banks are
conservative in their disposition and strategies which often hinder
entrepreneurial and industrial risk-taking necessary for innovation and
development of SMEs, crucial to economic growth. They are averse to
lending to the real sector and tend to extract more from the future
profit of firms. The Nigerian economy is conducive for a vibrant and
dominant capital market-based financing system in order to fast- track
and restructure the growth pattern and engender inclusive growth.
Market-based financing system has several
advantages over the bank-based based: One, it is superior in processing
information in new and uncertain situations involving innovative
products. Two, it optimally allocates capital and enhances economic
performance. Three, it catalyses industrial growth faster than the
bank-based and helps economies to achieve inclusive growth through
greater employment opportunities. Four, it helps companies to meet
international best practices which in turn, attracts foreign direct
investments. Five, it engenders macroeconomic stability as money market
interest rates are more sensitive than long-term rates in the capital
market. Six, it provides tailor made risk management tools as the
economy matures and the method to raise capital increases. Seven, it
offers in-depth insights into the direction of the overall economy based
on the movement of the stock market. Eight, it provides a window for
the growth of small and medium scale enterprises, the engines of growth,
through venture capitalism.
For the Nigerian economy to achieve a
double digit, and inclusive growth with greater job opportunities, the
Federal Government should follow in the footsteps of Malaysia and
collaborate with market operators and other stakeholders in the capital
market to launch a transformation campaign of the capital market as one
of its developmental programmes; which among other things, will
encompass capacity building on concepts and operations of the capital
market for government functionaries, continued privatisation and
introduction of policies to incentivise more listings of local firms on
the stock exchange and stimulate appetite for investment in securities.
Culled from:Punch
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