Financial Market Funds and Economic Growth Nexus in Nigeria: A Cointegration Perspective with Lessons

Abstract

Informed by the need to evaluate the prevailing interrelationships between the structure of financial market funds and Nigeria’s economic growth, this study employs secondary data sourced from the Central Bank of Nigeria, Nigerian Stock Exchange and the National Bureau of Statistics over the period 1981 to 2011 (31 yrs). The Augmented Dickey – Fuller, (ADF), Johansen’s Cointegration, Error Correction Model (ECM) and Granger Causality tests were executed. The results indicate significant long-run relationship between Nigeria’s GDP and the study’s financial market components – Government Securities, Bonds, Equities and Bank Credits to Private sector. The Error Correction Model indicates a coefficient of determination (R²) of 69.08% with an F-statistic value of 699.63 which is significant at 0.00 level. The Granger Causality results indicate bi-directional causalities between GDP and Government Securities, Equities and Bonds, as well as bonds and credit to private sector. However, Uni-directional causalities  are observed between Bonds and GDP, Equity and GDP, Bonds and Government securities, Credits to Private Sector and Government Securities as well as Equity and Credits to Private Sector. For the observed unidirectional causalities, causality flows from GDP to Bonds, Bonds to Government Securities, Government Securities to Credits to Private Sector and also, from Equity to Credits to Private Sector. No significant causalities are observed between Bank Credit to Private Sector and GDP as well as between Equity and Government Securities. The study concludes that; (i) majority of the financial markets sectors largely exist to service the economy (demand following roles) in place of supply leading roles, (ii) there prevails significant level of disconnect  between government and private sector programs in Nigeria as indicated by insignificant causality between equity and government securities as well as between GDP and bank credits to the private sector. Urgent policy actions to curtail the observed disconnections are recommended to enable the financial market components function coherently and play more creative roles in the economy.

Keywords: Bonds, Equity, Government Securities, Credit to Private Sector, Economic Growth.