How stock exchange market affects nigerian economy

The dwindling economic performance, due to the last global recession, has continued to negatively affect the value of the naira. Foreign exchange is the rate at which one currency is exchanged for another. Appreciation of the Naira Examining a series of developments in the Nigerian economy that caused the naira to appreciate between and Inthe Olusegun Obasanjo administration liberalised the telecommunication sector.

Before then, Nigeria had only one phone service provider, the Nigerian Telecommunications Limited NITEL. NITEL phones were a luxury. The cost of phones was prohibitively high, and services were inefficient. Phones were not readily available and since phones are necessary infrastructure for business, the economy suffered.

If a meeting had to be arranged, if a deal had to be sealed, and if a document had to be delivered, it would take days to do so because of inadequate telephone services. All that changed with the advent of the Global System for Mobile Communications phones. Business transactions that used to take days were done within one day; sometimes within seconds. When the speed of doing business improves, it has a multiplier effect on economic growth. Amongst other things, the economy is now more efficient.

New Jobs, More Taxes Due to the telecoms revolution, new jobs were created in the economy. Investors such as MTN, Globacom, Econet etc, and service companies such as Alcatel, Huawei, Ericsson etc. New small businesses like fashion salons, shops, cafeteria that never existed before sprang up to service new employees who now had money to spend. Another additional effect is the creation of more jobs in the healthcare, construction and retail sectors. Since these new employees, who are members of a growing middleclass, will need healthcare coverage, homes, cars, clothes etc, the new consumption demand will cause new small business to spring up around those sectors of the economy.

The ripple effect was evident throughout the economy. In addition to running a countercyclical economic policy, Nigeria also significantly reduced her debt. This development meant that the Nigerian government accumulated surpluses; the government was lean, mean and efficient. A low debt to GDP ratio meant that Nigeria was able to significantly attract new investment.

For the Nigerian consumer class, it meant that there were more jobs available and therefore more money to spend.

Reforms in the agricultural and finance sectors also improved productivity and increased the number of jobs available for Nigerians. The poverty rate declined moderately in this period and a new middleclass reemerged. Overall, economic liberalisation and improved economic management ushered in an era of greater productivity and prosperity so that the naira appreciated.

To put it succinctly, economic growth based on sound fundamentals causes currency appreciation. Postit gradually lost its value against the dollar. Below are the series of events that caused this development: This development negatively affected government revenues and therefore her ability to pay bills. For instance, although the capital market and the banking sector had their own local problems such as the lack of transparency and a non-diversified stock market, the bad loans that caused the banking sector crash was given out based on the oil price.

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When the price crashed, payments failed. Economic liberalisation also made the link between the Nigerian and the global economy stronger than it used to be. As investors pulled out their monies to support operations in the west where the crises was worse, there were job losses, business closures, loss of revenue to the government, decrease in consumption, contraction of the middleclass and incease in poverty.

The end result was a decline in GDP and the naira depreciated. A managed float regime is one where the currency is allowed to freely float in how stock exchange market affects nigerian economy exchange markets but is the philippine stock market to intervention from the Central Bank of Nigeria CBN if the fluctuation is deemed undesirable or detrimental to economic growth.

What the CBN did to drive down the value of the dollar against the naira was to flood the foreign exchange market with dollars in exchange for naira. That way, naira is made a little scare and it appreciates in value. Another alternative would be to raise the interest rate, that way, capital will flow in from overseas because of the higher rate of return and the currency will then appreciate. This kind of interventions is typical of countries with a managed float regime. Reasons for the CBN Intervention To curb demand-pull inflationary pressures.

Usually, when a currency depreciates forex trading plattformen loses its value like the naira did init how stock exchange market affects nigerian economy inflation.

Inflation just means that your stock market closing commentary july 2016 is worth less.

It discouraging savings and consumption. It also discourages investment and dampens economic growth.

Limitations of Nigeria’s Foreign Exchange Policy | FinIntell

Individuals are less likely to save if the naira is depreciating. If individuals cannot save, it negatively affects lending to the real economy because banks must pool savings to be able to lend to businesses.

If businesses cannot get the loans they need for operations, there will be no jobs and the economy will contract. On the consumption side, inflation reduces the purchasing power of individuals.

If people cannot spend money on goods and services, it will cause businesses to shrink and lose profits. Loss of profit will cause investors to flee, thereby, increasing unemployment and poverty. Economic consequences of depreciation can be dire and that is why the Central Banks intervene. To reduce the currency trading in indian market of imported capital and technology.

Usually, depreciation means that you have to exchange more naira to regulation 1.16 of the commodity futures trading commission the dollar. For local manufacturers, this is a big problem, especially, in Nigeria where manufacturers import inputs from abroad.

This increase in cost means that the farmer must cut down operations and lay off workers. This is the challenge manufacturers in Nigeria faced in and hence the Central Bank had to intervene to support the manufacturing sector. This is a serious limitation because it means that you could completely deplete your reserves defending the naira and it will still lose its value.

how stock exchange market affects nigerian economy

If the economy is still not performing as well as it was beforehow did the black death spread trade routes the naira cannot appreciate to the level monetary authorities would like it to how to earn money with online poker. The CBN defending the naira is tantamount to a stimulus for the manufacturing sector.

The truth is that in a recession, almost every sector suffers due to a fall in consumer demand and, the manufacturing sector was bailed out at the expense of other sectors of the economy. The farmer too will still lose profits and be forced to lay off workers because his operation is not supported by the markets.

Eventually, unemployment and poverty will still increase and the policy, although, well intentioned has produced the exact opposite effect. The manufacturing sector will still shrink in the worse possible way because billions of dollars was wasted to save it.

Another unintended consequence of this policy is possible fraud and abuse. The dairy farmer is smart enough to know that the economy is in a recession and consumption is low, his profit will still suffer. What he might do is obtain foreign exchange at the official rate and turn around and sell it in the black market for a profit.

It is far more profitable for the dairy farmer to do this due to naira depreciation. There is possibly higher and faster demand for foreign exchange than there is for his milk and cheese.

Remember, the fact that the CBN made foreign exchange easily available to the manufacturing sector means that forex is scarce for businesses in construction, retail, healthcare etc, not to mention the informal sector of the economy. A managed float regime can be used to improve the balance of trade in goods and services.

The trade deficit will not be reduced by depreciating the naira. In other words, this policy will only be useful if Nigeria has a solid manufacturing base.

Another reason countries run a managed float regime is that it can be used to rebalance the economy away from domestic consumption towards exports and investment. For instance, the CBN can cause the naira to depreciate by lowering interest rates.

A low naira will increase exports because goods and services will be cheaper in the international market. The major limitation here is that Nigeria is not an industrialised country. We do not manufacture cars, fridges, computers etc. This policy will not grow the manufacturing sector.

Even if Nigeria was industrialised, this policy would only favour manufacturers of exported finished goods. Exports and investment will grow but only for manufacturers of finished goods at the detriment of other manufacturers and sectors of the economy. When interest rates are lowered to depreciate the naira, it will cause capital flight because investors will not get significant returns for their investment.

It will also discourage savings because people will not leave money in the bank when the interest on it is very low.

Poor savings means that financial institutions will reduce lending to businesses. If businesses cannot get the credit they need to expand, the economy will contract. A small business manufacturer of classroom chalk will not get the credit it needs to expand because available credit in the economy is channeled for manufacturers of exported finished goods. Small businesses will be forced to lay off workers and increased unemployment.

This means that people will spend less and consumption in the wider economy will decrease. In other words, a country cannot depend on exports for economic growth. Conclusion Every currency moves according to the strength of the economy it represents.

If an economy is booming, its currency appreciates and vice versa if the economy is in a recession. It is impossible to divorce the performance of a currency from the economy it represents. Although a hard truth to accept, it is a waste of resources to defend your currency when your economy is failing because the currency will still lose its value and all the monies used to defend it would have been wasted.

Because resources are scarce and have alternative uses, this policy will eventually leave the country worse off economically. Published in FinIntell Magazine, January-February Edition.

how stock exchange market affects nigerian economy

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