CBN ECONOMIC & FINANCIAL REVIEW, VOL.39 NO.

1 1-19

THE PERFORMANCE OF THE NIGERIAN CAPITAL MARKET SINCE

DEREGULATION IN 1986
BY
J. A. BABALOLA AND M.A. ADEGBITE

ABSTRACT
The capital market in Nigeria had been influenced by variousfactors which
are associated with the level of development of the Nigerian economy The paper
discusses the development of the capital market with emphasis on the period since
deregulation in 1986. The institutions that are crucialfor the delivery ofjnancial
services in the market were analysed withfocus on their evolution,performance and
prospects. The.market in Nigeria was compared with other emerging markets with
the conclusion that the market, remains shallow and without the expected variety
that characterised markets in countries at similar level of development. The
prospects of the market appear to be bright considering the current posture of the
government in the areas of privatization and commercialisation of government
enterprises. Also, with appropriate regulatory framework that would guide the
operators more efectively, the market could assume the expected role ofproviding
long-term financing for the development of the economy.

1. INTRODUCTION

The role of capital in the production process and economic performance of a

nation has long been recognised. Capital provides the impetus for the effective and
eficient combination of factors of production to ensure sustainable economic
growth. Moreover, the effective utilization of productive resources accumulated
over time would determine the pace of growth of an economy. Growth in productive
activitiesand its distributiondeterminesthe social well being ofthe population. Capital
formation, however, can only be achieved through conscious efforts at savings

J. ABabalola and M.A. Adegbite are Assistant Directors of Research , Central Bank of Nigeria
 2 CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 NO. 1

mobilization and accumulation of resources by both the public and private sectors
of an economy. The unique position of the capital market could, therefore, be
appreciated fiom this perspective. Financial markets generally provide avenue for
savings of various tenors that are made available for utilization by various economic
agents. The capital market, which is a major segment of financial markets, provides
a setting through which medium to long-term resources are provided for productive
utilization.
The objective of the paperis to appraise the Nigerian Capital Market since
1986 when the liberalisation policy was introduced. The introduction of the
StructuralAdjustment Programme (SAP)in 1986 put pressure on the Nigerian capital
market. This was in response to the high interest rates in the money market, which
led enterprisesin the private sector to partronisethe capital market for equity capital.
As a result, greater oppo&nities for private investors who wanted to borrow from
the capital market were created.

The response of the Nigerian capital market to these developments is therefore the
thrust of this paper.
Accordingly, the rest of the paper is structured into five parts. The
theoretical and conceptual issues are treated in part 2, performance appraisal of the
market using some of the market indicators is done in part 3, and problems and
prospects are discussed in part 4. The last part contains the summary, conclusion
and recommendations

2.0 THEORETICAL AND CONCEPTUAL ISSUES: THE ROLE OF

THE CAPITAL MARKET IN ECONOMIC DEVELOPMENT

Financing the savings - investment gap, especially, in the less developed economies
where savings mobilization could not keep pace with the level of investment, has
necessitated the need to encourage foreign capital inflows in order to bridge the gap
and thus promote economic growth. This is in line with the general belief that in the
I

I
 Babalola / Adegbite 3

absen’ce of domwtic saving which is the source of needed capital, the

encouragementof foreign capital inflows is more likely to have a positive influence
on the development process. This involves the convertion of domestic and foreign
resources into tangible and intangible productive assets that would improve the overall
output of the economy. These resources would also need to be structured into
acceptable tenors ( Short, Medium and Long) so as to promote development.
Therefore, the cardinal roles expected of the money and capital markets are to
provide such investible funds. The capital market in particular contributes to
economic development through the provision of the required resoitrces which are
within the medium to the long term spectrum. The capital makket also provides
veritable avenue for private enterprises to raise investible h d s for expansion and
other long-term purposes.
Portfolio theory considers the efficiency of the capital market based on its
ability to respond to market information. A market could either be strong,
semi - strong or weak in form. The efficient market hypothesis describes an efficient
market as one where security prices fully and speedily reflect available information.
Strong market, reflects totally the information on the performance of the listed
company which then impacts on the pricing of such company’s shares while semi
strong and weak markets have some degree of imperfections in the ability of the price
to respond to the information on such shares. The relevance of the efficient market
hypothesis with respect to quoted companies is that the hypothesis holds true when
the company’s ‘real’ financial position is reflected in its share price.
Many development economists consider investment as the most important
factor in the growth process. Rostow (196 1) in his wdrk defined the ‘take off of an
economy into a sustained 1evel.interms of a critical ratio of investment to national
output. Arthur Lewis (1955) described the process of development as one of
transforming a country from being a low saver and investor to a high saver and
investor. It is conventional for economic planners to calculate fairly accurate ratios
of investment to national income that will be required either to achieve a particular
rate of growth or to prevent capital per head or income per head fiom falling.
4 CBN ECONOMIC & FINANCIAL REVIEW, VOL.39 NO. 1

The computation involves assumptions about the normal relationship between capital
and output, a relationship usually expressed in the concept of capital output ratio.
H.G . Johnson (1969) considers capital accumulation in its widest sense as the
distinguishing characteristic of development and the structural transforhation of
economies as a process of capital accumulation.
The conditions for development consist, in the main, sustainable capital
accumulation over time and creation of social and economic environment that
guarantees effective utilization of capital resources. Also of relevance for policy
analysis is the incremental capital output ratio (ICOR), which is critical for
estimating the level of investment that would sustain, given level of output? The use
of ICOR for estimating investment outlay for a given level ofoutput was inspired by
Harrod (1939) and Domar (1947). Although, their work was originally designed to
establish the condition for equilibrium growth, their equationshave been manipulated
for various alternative uses.
The Harrod-Domar equation predicts an inverse relationship between growth
and ICOR, but since ICOR is assumed constant in the long run, it is ICOR that
influences growth and not the other way round. Reddway (1962) had a divergent
view on the relevance of ICOR in predicting growth. He suggested that before
calculating the additional capital requirement for a target growth rate, it would be
prudent for a developing economy to assess the4evel of output that might be expected
from increased utilization of existing factors and better methods applied to existing
stock of capital.
The roles of financial institutions are critical in economic development as
they engage in facilitating reliable payments system, mobilising savings, allocating
credit and diversiQing risks (Haley and Schel, 1973). Capital market institutions in
particular are in position to encourage investment, as investors are able to borrow
funds and invest more than they would have done without such institutions. The
institutions are thus able to pool savings and direct them into viable investment outlets
(Copeland and Weston, 1980).
 . Babalola / Adegbite 5

The issue of creating a reliable capital market for development revolves around
the emergence of enabling environment which allows competition to flourish. As
Lowy et a1 (1 996) noted, creation of an acceptable climate for investment is critical
for development. Such clihate has certain prerequisites which include a freely
convertible currency; effective legal and institutional framework, reliable accounting
standards and a system of regulation that protects consumers but does not otherwise
inhibit competition.
The reforms in the Nigerian capital market attempt to address some of the
issues enumerated by Lowy et a1 (1996). The recent report on the market recognised
the need for an enabling environment while competition is being addressed through
the establishment of additional stock exchanges and capital trading points.

3.0 PERFORMANCEOF THE NIGERIAN CAPITAL MARKET SINCE 1986:

An evaluation of the performance of the Nigerian Capital Market from

1986 - 1999 is done in this section, using some of the generally accepted criteria,
which include:
(i) Number of listed companies;
(ii) Number of listed securities;
(iii) Size of the market or market capitalization; and
(iv) All-share price index, which is a measure of the performance of the
market.
The analysis of the major indicators of activity in the capital market showed
that the market has experienced remarkable progress since 1986. Transactions in
equities in the market based on its current level of development could be considered
to be weakly formed as.the level of information dissemination and processing to
influence market behaviour remained weak. However, with the computerization of
trading and increased transparency in delivery of corporate information, the market
has become more efficient. Transactions in the market recorded increwes in the
6 CBN ECONOMIC k FINANCIAL REVIEW, VOL. 39 NO. 1

number of listed securities, companies, market capitalization and price index during
the period under review. The improved performance of all four key indicators was
traceable largely to the establishment of the second-tier securities market (SSM) in
1985 and the deregulation of interest rates in 1987, coupled with the privatization of
some government owned companies in 1991. Eighteen (18) government parastatals
(16 Federal and 2 state government-owned), contributed to the increased tempo in the
number of companies and new securities issued and listed in the market.
Furthermore, the deregulation of interest rates made many private enterprises/
investors to patronise equity market to source funds as bank lending became
relatively more expensive. The number of companies listed on the exchange
(equities) grew by 95.0 per cent from 100 at the beginning of 1988 to 195 at
end-December, 1999. The number of total securities listed and traded also increased
from 244 in 1987 to a peak of 276 in 1996 before declining to 268 in 1999. Some of
the major securities traded on the market during the period were government
development stocks, corporate bondddebentures and equities. As at end-December
1999, securities listed and traded on the market were made up of 15 government
bonds, 58 corporate bonds/debentures and 195 equities.
The growth of listed companies coupled with greater awareness on the part of
investors resulted in increase in the number of securities issued and traded in the
market. This also contributed to the increase in market capitalisation, which grew
from 8.3 billion or 7.6 percent of GDP in 1987 to 294.1 billion or 8.7 percent of GDP
at the end of 1999.
The number of listed companies on the Nigerian Stock Exchange is
comparable with those of many emerging markets. Though capital listing was higher
than in most stock markets in Africa, it fell below some other emerging markets of
Asia and Latin America. For example, out of the 17 stock markets in Africa, Nigeria
had the third largest number of equity listings of 183 in 1998, surpassed only by
Egypt (650) and South Africa (642). Nigeria also had a higher number than Poland
(143), Jordan (1 39), Argentina (136) and Venezuela (91). It, however, recorded fewer
 Babalola / Adegbite 7

listings compared to India (5843), Brazil (536); Malaysia (780); Indonesia (282) and
Turkey (257). Further insight into the performance of the market showed that
share-price indices rose during the period under review. The observed upward trend
of share prices in the stock market was an indication of relative prosperity in the
economy. The all-share price index grew by 22 per cent in 1988,38per cent in 1990,
33.9 per cent in 1995 but dropped in 1998 and 1999.
Activities in the new issues market improved during the review period. The
entry of some corporate entities into the Nigerian capital market after the
deregulation of the market contributed to the upsurge witnessed in the market.
Between 1988 and 1998, new issues grew remarkably fiom 400 million to 15,018.1
million in 1998, but fell to 12,038.5 million in 1999. On the aggregate, 355 new
issues of 28,527.9 million shares valued at 56994.0 million were offered for
subscription between 1990 and 1999.
Trafisactions in the secondary market also showed remarkable growth. A
total of 1,528.4 million shares valued at 37,488.8 million in 5,855.7 deals were traded
between 1988 and 1998. Transactions csn the Nigerian Stock Exchange (NSE) grew
fiom 21.5 million shares valued at 249.5 million in 1988to 33.4 million shares worth
553.2 million at the end of 1990. By 1995, the total volume of shares traded on the
mdrket had risen to 396.91 million shares valued at 838.8 million. Between 1996
and 1997,the average volume of shares traded was 1,062.7 million, valued at 8,564.1
million. Between 1998 and 1999 securities traded averaged 3,025.7 million shares,
valued at 13,826.6 million, while transactions in equities dominated the market ’
during the period of analysis.

4.0 PROBLEMS OF THE NIGERIAN CAPITAL MARKER

The Nigerian capital market, like the national economy, has been faced with
many problems. These problems are both endogenous and exogenous. The
exogenous problems are those outside the direct control of the market but which are
8 CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 NO. 1

regulation-induced. The endogenous problems are those that are internal to the market
but which are amenable to changes with improved operational procedures including
the adoption of information technology. Some of these problems are discussed be-
low:
(i) Small Size of the Market:

Among the major problems facing the Nigerian capital market is the size of
the market. At about 200 quoted companies and a market capitalization of 294.1
billion at the end-December, 1999 the size of the market can be considered to be
small when compared with stock market in other emerging markets. For example,
the South African stock market has about 650 listed companies while South Korea
has about 700 listed companies. The small size of the Nigerian Stock market has
been traced to apathy of Nigerian entrepreneurs to go public due to the fear of losing
control of their businesses. Another factor is the weak private sector which is a
serious constraint militating against healthy growth of the stock market.

(ii) Problem of Illiquidity of the Market:

The liquidity of a stock market relates to the degree of access, which
investors have in buying, and selling of stocks in such a market. The more liquid a
stock market is, the more investors will be interested in trading in the market. The
lack of adequate number of irivestors in the Nigerim stock market is a reflection of
problem- of illiquidity in the market.
-
At an average ratio of 2 per cent per year, the
turn-over ratio, a measure 'of the value of shares traded relative to local market
capitalization is very low in Nigeria, compared with 10.0 per cent, 9.0 per cent and
4.6 per cent in Botswana, Zimbabwe and Mauritius, respectively. The low trading
activities.are also a result of the awnership structure. Until 1995, when the Nigerian
Investment Promotion Commission Decret 16 and the. Foreign Exchange
(Monitoring and Miscellaneous) provisions Decree 17 were promulgated to replace
the Nigerian Entevrises Promotion Decree of 1984 and Exchange Control Act of
1962, the Nigerian stock market was restricted largely to local investors apart from
 Babalola / Adegbite 9

the original investors in foreign companies who were already in the market before the
indigenisation Decree of 1972.
New foreign capital had little or no access to the market. The good
performance of Botswana, Zimbabwe and Mauritius has been traced to the open door
investment policy of these countries. In addition,” the buy and hold” attitude of
Nigerian investors contributed to the problem of illiquidity. The holdings of original
investors and the public sector are normally not traded’except for terminal
divestment. This often leaves only the proportion of shares held by few individuals
and institutional investors for trading on the market, thus, limiting the liquidity of
the market.

(iii) Slow growth of Securities Market:

Lack of cooperation between the-Securities and Exchange Commission (SEC)

and the Nigerian Stock Exchange (NSE) has been responsible for slow growth of the
securities market. For example, one of the major criticisms of SEC was that it did
not allow the issuing houses and stockbrokers to undertake the pricing of equities.
With the transfer in 1993 of pricing and allotment of initial public offer to market
operators, positive movement was observed in share prices. The issue of cost of
raising funds in the market is also important. The cost of transaction could be said to
be a measure of efficiency in the market. Transaction cost in the Nigerian capital
market is enormous. The costs which an average investor would have to meet in the
course of raising funds include; brokerage fees; stamp duties, and other charges that
may be imposed by the SEC, apart from other fees payable to stockbrokers.
Therefore, the cost of going public, raising additional equity or obtaining loan
facility fiom the capital market is high. It has been estimated that the cost of raising
US$ 1 million equity capital in Nigeria is about 4 per cent of the value, whereas, the
cost of raising the same amount in Kenya, Zimbabwe and Ghana is 2.35 and 2.3 per
cent, respectively.
10 CBN ECONOMIC 8c FINANCIAL REVIEW, VOL. 39 NO. 1

.(iv) Delay in Delivery of Share Certificates:

Prior to April, 1997 when the Central Securities Clearing System (CSCS) started
operation, the delay in delivery of share certificates to investors and intra-firm
settlements used was a problem in the market. Many of the unclaimed certificates
and dividend warrants that are being published regularly are as a result of the delay in
delivery of certificates. With the introduction of CSCS, shareholders are now able to
take advantage of capital appreciation while transaction period-has been reduced to
T+5. The objective of the CSCS system is to achieve real-time transaction reporting,
through automated order routing and executing system, which allows post-trade com-
parison and analysis, and ensures audit trail of all the market transactions.

(v) Problem of Manual Call-over

The manual call-over whereby all stockbrokers have to be physically present

on the floor of the Exchange for trading in securities had also contributed to the slow
growth of the market. With the recent introduction of Automated Trading System
(ATS), it is expected that stockbrokers will be able to do business more efficiently
and thus contribute to the growth of the market.

(vi) Double Taxation

The Nigerian stock market is faced with the problem of double taxation. In
a capital market, the operating tax policies have implications for the supply and
demand for financial assets. Depending on its nature and structure, taxation could
either enhance or retard capital market growth. Tax can be a source of hindrance to
development when it is high or levied at multiple stages. Currently in Nigeria, there
is income tax, capital gain tax, withholding tax and company income tax. All these
taxes together have the tendency of retarding investment because of their burden on
investors. Most often, countries that have experienced growth in their stock market
 Babalola / Adegbite 11

have come to realise the role which taxation plays in the promotion of investment in
the stock market. For instance, countries like Botswana, Ghana, Kenya, Mauritius,
Namibia and Swaziland have recognised the important role which taxation can play
in the development of the market. Taxation of equities at both the corporate tax and
dividend withholding levels is an important arFa that needs to be examined. The
practice in the U. K. may offer a useful example for Nigeria. In the UK, through the
Advance Corporate Tax (ACT) System, individuals are given tax relief at the
corporate level for distributed earnings. The ACT was introduced in Britain to cor-
rect the distortions which double taxation had on corporate investment. A number of
developing countries like Columbia, Jamaica, Indonesia and Mexico,haveone form
of tax integration or the other.
Presently, Nigeria has not taken any step to reduce the burden of double
taxation as incentive for investment in the capital market. Apart from its use as a
means of generating revenue, some countries have used tax policies as incentives for
developin8 capital market. They have been used not only for the supply and demand
for securities, but also as penalties for companies that were reluctant to go public.
For example, Brazil used dividend tax exemption or reductions, stock acquisition
tax incentivesand provision of tax fund shares as incentives for developingthe capital
market.

(vii) Lack of Effective Underwriting

Lack of effective under-writing is one of the problems confronting the

Nigerian capital market. Underwriting could be in the form of firm contract, or
stand-by arrangement and when an issue is large, there would be need for an
underwriting syndicate. An observed deficiency of the Nigerian securities market is
the non-existence of eff'ective underwriting. Though the issuing houses claim to
undertake underwriting as part of their functions, and a consortium of underwriters
often exist when shares are being offered, underwriting business has hardly taken
place in the real sense of it. Underwriting entails effective placing of entire issues,
12 CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 NO. 1

and establishing or maintaining a stable trading market for the under-written

securities for which there would always be a lead or mahaging underwriter. Only a
few of the existing issuing houses can undertake such functions that guarantee the
underwriting of the shares not absorbed by the investors up to a certain percentage.
The .underwriters are in fact the ‘market makers’ who purchase the securities
concerned on their own account to maintain a price when the market price of the
offered security falls under the issue price. When such problem arises, the lead or
managing underwriter would be expected to buy all such securities and distribute
them to the other members of the underwriting syndicate or consortium accordingto
predetermined ratio.

(viii) Problem of MacroEconomic Instability

Lastly, the problem of macroeconomic instability in the country has

continued to be a hindrance in the development of the Nigerian capital market.
Macroeconomic policies that would ensure long-term stability are essential in
attracting a sustainable long term investments. Such policies should be conducive
to both savings and investment to ensure confidence in the economy. Policies must
ensure an attractive long-term yields for equities in comparison with other domestic
and foreign investment alternatives. Frequent fluctuations in exchange rates and
negative real rates of return on investments often force investors to move to other
investment outlets or out of the economy entirely.

4.0 PROSPECTS FOR IMPROVED PERFORMANCE OF THE

MARKET
Developments in the Nigerian capital market represent positive indication
of the prospects and promise the market has for the future. Resolving the
outstanding problems of the market is a major task that must be accomplished for
the future development of the market. To this effect, a number of reform meawes
have already been undertaken to refocus the market so as to meet hture challenges.
 Babalola/M A. Adegbite 13

For instance, in pursuance of its deregulation policy which began with the
introduction of SAP in 1986, several efforts have been made by the government to
ensure that the Nigerian capital market operates like its counterparts in other
economies. The deregulation of interest rates has had positive effect on the number
of private enterprises sourcing f b d s from the market and it has also affected the
volume and market capitalization. In 1991, the government deregulated the pricing
of securities in the market by disengagingthe SEC from securities pricing. In effect,
the pricing of new stocks on the market was left in the hands of stock brokers and
issuing houses. Further steps have also been taken to improve the settlement process
and brokerage services, Before the introduction of the Central Securities Clearing
System (CSCS) in April, 1997, the process of transacting shares used to be
unnecessarily long and worrisome to investors. With the CSCS, which is a
computerised depository, clearing and settlement system that acts as the clearing
house for all shares traded on the Exchange the NSE has evolved a gradual
dematerisation of share certificates, thus de-emphasisingthe use of share certificate
as evidence of share ownership. An assessment of the CSCS indicates that the
settlement and delivery systems of transactions in the market have been reduced
from 3-6 months to 6 days.
In order to encourage continuous stock trading throughout working hours
and allow dynamic pricing system, the Nigerian Stock Exchange replaced the old
manual call-over method of trading with the Automated Trading System (ATS). The
ATS is a computerised electronic system in which dealers from their work stations
are linked to a central server at data control room of the NSE. It is expected that the
electronic based trading system would enhance the efficiency of trading,
transparency in the market, realistic pricing of securities and generate new trading
opportunities for dealing members. Apart fiom that, it will also establish a trading
link with all regional markets in Africa and other parts of the world. The ATS
project was designed to bring the Nigerian securities market at par with
international standards and enhance settlement and delivery of transactions in the
market.
14 CBN ECONOMIC &FINANCIAL REVIEW, VOL.39 NO. I

The removal of legal restrictions on foreign investors is also a positive

development. The promulgation of the Nigerian Investment Promotion
Commission OIJIPC) Decree No. 16 and the Foreign Exchange (Monitoring and
Miscellaneous) provisions Decree No. 17 of 1995 were made to replace the
Nigerian Enterprises Promotion Decree of 1989 and the Exchange Control Act, of
1962. The enabling environment created by these legislations opened up the economy
to foreign investors and also removed barriers restricting foreign investors’ access to
the capital market. The new Decree repealed the previous indigenisation Act which:
limited foreign participation in the capital market,
allowed unrestricted foreign interest in Nigerian quoted.companies,
allowed free repatriation of capital, dividends, capital gains, and other
interests from investments in securities,
allowed unhindered transactions in the foreign exchange market and provided
for foreign investors to buy shares of Nigerian companies in any convertible
currency.
Other efforts made at repositioning the Nigerian capital market was the
constitution of the Dennis Odife panel in 1996 to review the structure and evaluate
the performance of the capital market. The Panel’s recommendationsresulted in the
promulgation of the all-embracing Investment Services Decree of 1999 to amend,
modify and codify the provisions of the principal laws and regulations within the
capital market as well as the re-establishment of SEC as the apex regulatory agency
in the market. The panel recommended the establishment of the Abuja Stock
Exchange, which has commenced operation, in addition to twelve capital trading
points in other parts of the country. It is expected that the new Exchange will enhance
competition and make the market fully functional and effective. The recent decision
to repeal and refocus the Trustee Investment Act of 1962, the Insurance Decree of I

1991 and the adoption of the strategy of sourcing funds for financing capital projects
from the market by the 3 tiers of government would go a long way in enhancing the
deepening of the market.
 Babalola /A4 A: A degbite 15

5.0 SUMMARY AND RECOMMENDATIONS.

5.1 Summary

The paper examined the performance of the Nigerian capital market since
1986. It was observed that prior to 1986, activities in the market were very low due
largely to availability of other financial instruments for irivestment at a relatively
cheaper rate. Befbre 1987, the interest rates were low and access to cheap funds in ,

the maney market was easy. Also, tbe level of activiq in the market depended.on
govemment 'policy, such as government'borrowing though Developmpnt Stkks
and indigenisation policy of 1972 and 1977. . .
From 1986, however, the market respondecpositively to the liberalization
policies of the government. The market witnessed increased modernization of its .,

facilities while the operators became more active in the market. In addition, the
deregulation of interest-rates in 1987 stimulated keen competition in the financial
system, thereby, resulting in many enterprises in the private sector approaching the
capital market for funds. From 1988 onwards, the market witnessed remarkable
p o d in the number of listed securities, resulting its intense market competition.
In spite of the improved performance in the market, the Nigerian capital
market continued to be faced with many problems, Some of these problems are
endogenous while others are exogenous. Among the major problems facing the
Stock Exchange is the small size of the market, with only about 200 quoted
companies and a market capitalization of 256.9 billion in 1998. The size of the
market is considered very small when compared with stock markets in other
emergkg markets. Other problems highlighted in the paper included illiquidity,
lack of cooperation between SEC and NSE, the high cost of raising h d s on the
market, double taxation, delay in the transfer and delivery of share certificates to
investors, lack of effective underwriters and problem of macroeconomic instability.
With the recent efforts of the government at deregulating the economy and
reforming the market, the prospects of improved activities in the market are very
bright. The pricing of new stocks has been transferred to the issuing houses while a
 16 CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 NO.1

new stock exchange, the Abuja Stock Exchange is in place and 12 trading points are
to be established in Abuja and other parts of the country. A Central Securities Clear-
ing System (CSCS) has been introduced to reduce the time it takes to transact and
deliver shares to investors while an Automated Trading System(ATS) has been intro-
duced to enhance efficiency and transparency in the market .
The problem of macroeconomic instability .is being addressed through
appropriate policy measures and the strengthening of the institutional regulatory
framework. The removal of legal restrictions on foreign investors to the extent
which they can invest in the market represents .apositive development. Also the
promulgation of an all-embracing Investment Services Decree in 1999 to amend,
modify and codifl the provisions of the principal laws and regulations within the
capital market as well as the re-establishment of SEC as the apex regulatory agency
in the market are in the right direction. These in addition to the liberalization and
internationalization of the market would go a long way inrepositioning the market,

5.2 Recommendations

(i) Review of cost of borrowing from the market.

There is need to encourage more enterprises to come into the market so as to

expand and deepen the market. This can be achieved through the review of costs of
I borrowing from the market. The high costs of raising funds on the market has been I

recognised as one of thesfactorsmilitating against the growth of the Nigerian Capital /

i
Market.

(ii) Appropriate Savings / investment inducing measures

,

There is need to pursue economic and financial policy reforms that encourage
investment in the capital market. In this respect, monetary policies should be
I designed in such a way that savings are encouraged for investment.
 Babalold M.A. Adgbite 17

(iii) Tax incentives and listing requirements

Furthermore, small scale enterprises need to be encouraged through various

tax incentives and listing requirements to come to the market. Such policy has been
used in Brazil and some south east Asian countries. Though government has
repealed all laws restricting free flow of foreign investment into the country, there is
further need to ensure that all infrastructure in the country are revamped so as to
provide the necessary basic support for the new enterprises.

(iv) Enlightenment on need to patronise the capital market.

The problem of illiquidity needs to be addressed through public
enlightenment of the general public on the need to patronise the capital market and
also to discourage Nigerian investors from the buy and hold attitude.

(v) Increased internationalisation of the capital market

Given the low depth of the market, there is need for some vigorous policies
to internationalise the capital market to allow for the listing of foreign currency
denominated securities on the stock exchanges in Nigeria.

(vi) Formation of under-writing syndicate.

Lack of effective under-writing has remained one of the problems of the

Nigerian stock market. There is need to re-examine this problem and form an under
writing syndicate.

(vii) Cooperation between SEC and the stock exchanges

The issue of cooperation and understanding between SEC and the exchanges should
also be looked into.
18 CBN ECONOMIC &FINANCIAL REVIEW, VOL. 39 NO. 1

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Nigerian Capital Market”: a paper presented’at a Seminar organised by NES at
NIIA, Lagos on 21st January, 1998.

Aigbokan, B. E. (1996): “Financial Sector liberalization and Capital

Market Developments in Nigeria” in S.Mensah Ed. ( Rector Press Limited,
Massachusetts), pps 196 - 209.

Akamiokhor, G. (1996): “The role of Securities Commission in Emerging

Capital Markets” in S.Mensah Ed. (Rector Press Limited, Massachusetts)
pp. 59 - 68.

Alile, H. i. (1996): “The role of the Capital Market in Africa’s Economic

Deve1opment”in S. Mensah (Ed.) (Rector Press Limited, Massachusetts), Pages
180 - 195.

Anyanwu, J. C., (1996): “Towards Capital Market Integration in Africa” in

S.Mensah Ed. (Rector Press Limited, Massachusetts) pp. 210 - 229.

Alile, H. i. (1992): “Establishing A Stock Market - Nigerian Experience” a paper

presented at International Conference on promoting Capital Market in Africa at
NICON Hotel, Abuja.

CBN (1999): “Reform of the Nigerian Capital Market”- an unpublishe paper of I

Financial Institutions Ofice, Research Department, CBN, Abuja.

 Babahla /MA.Aakgbite 19

CBN (1999): “Briefs on Lagos Stock Exchange’s Central Securities Clearing System
(CSCS) and Automated Trading System (ATS)” - An unpublished paper of FIO,
Research Department, CBN, Abuja.

Emenuga, C. (1998): “The Nigerian Capital Market and Nigeria’s Economic

Performance:” Paper presented at a Seminar organised on 2 1st January 1998 by
Nigerian Economic Society (NES)at NIIA, Lagos.

Falegan, S. B. (Chief): (1991) “Nigeria’s Capital Market: Development, Problems

and Prospects”- a paper presented at a Seminar on Stimulating the
Nigerian Capital Market for the challenges of 1990s organised by SEC at Gateway
Hotel, Abeokuta.

Kineh, D.E. (1998): “ The Nigerian Capital Market:”

Present State and Challenges in the millennium” - a paper presented at a workshop on
public offer of securities disclosure and other SEC Requirements at the Gateway Hotel,
Ota, Ogun State.

Ogwumike, F. 0. and Omole, D. A. (1996): “The Stock Exchange and Domestic

Resources Mobilization in Nigeria in S . Mensah Ed.” (Rector Press Limited,
Massachusetts), pp.230 - 25 1.

Ojo, M. 0. (1993): “Deregulation of Government Securities: Implication for

Nigerian Capital Market” - being a paper presented at MIDAS Capital Market forum
organised by Guardian and Midas Merchant Bank on 24th September, 1993.
CBN ECONOMIC 8 FINANCIAL REVIEW, VOL. 39 NO. 1 20-39

DETERMINANTS OF FOREIGN DIRECT INVESTMENT (FDI) IN

NIGERIA: AN EMPIRICAL INVESTIGATION
BY
H.A. Salako and B. S. Adebusuyi

This paper examines, empirically, the determinants of foreign direct

investment in Nigeria. The results indicate that exchange rate, government
capital investment ifi infiastructure and credit to the domestic economy are some
of the mainfactors that influence FDIflow to Nigeria. In particular; it shows that
the ratio of external debt to GDP (Debt/GDP) was an important determinant of
theflow offoreign investment. FDI was also observed to be sensitive to domestic
interest rate and real per capita income. The study also highlights the need. to
maintainpolitical stability in order to attract FDI.

1. INTRODUCTION
The need to accelerate the pace of economic growth and development by
many countries, especially the Less Developed Countries (LDCs), have propelled
them to make deliberate efforts to attract Foreign Direct Investments (FDI). This is
because most LDC' s economies (including Nigeria) are characterized by in
adequate domestic savings, excessive imports relative to exports as well as high
level of external debts. They therefore require external capital to finance their
current account deficits and to accelerate the pace of economic growth and
development through increased production activities. In this regard, FDI augments
domestic savings in bridging the savings investment gap.

;HA. Salako and B.S. Adebusuyi are Assistant Directors and Principal Economist,
respective&,in the Research Department of the CentralBank of Nigeria.
 SaIakdAdehwyi 21

The efforts made by LDC' s are geared toward improving the general
investment climate through the adoption and implementation of foreign
investment-friendly policies and programmes such as tax incentives, export
promotion and macroeconomic adjustments. Significantly, the drive for foreign
investment derives fiom the various benefits it confers on the host country. These
benefits include addition of new capital, technology, improved management and market
access. FDI has also been acknowledged as a potent source of improving eficiency
of the productive sectors throub' competition, stimulation of economic progress,
creation of jobs and fostering growth in the host economies. However, in spite of
the genuine desire and efforts by the LDCs to attract the much needed foreign
investment, a number of factors render them unattractive. Some of the factors
include heavy debt burden which has eroded confidence in developing countries as
well as low credit worthiness. Others are recession and,persistent macroeconomic
and political instability whibh have further worsened the perception of foreign
investors.
A proper understanding of the determinants of FDI inflow therefore, would
guide policy choices and facilitate the institutionand implementationof appropriate
measures to attract the inflow of the desired quantum of investment. This paper is an
attempt in this regard, as it aims to bring to the fore variables that influence the flow
of FDI to Nigeria. The rest of the paper is divided into six sections. Section I1
reviews the framework and trend of foreign investment inflow into Nigeria. The
theoretical framework and review of literature on FDI flows is undertaken in section
111, while section IV contains an econometric model of determinants of FDI flows to
22 CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 NO. 1

Nigeria. Section V presents the results of the empirical analysis of the model, while
section VI concludes the paper with some policy recommendations.

SECTION I1
APPRAISAL OF POLICIES AND INCENTIVES FOR INFLOW OF FDI
In recognition of its importance and role in the nation's economic growth
process, the government has put in place various policies and incentives to attract FDI
to Nigeria. For example, to augment the domestic shortfall of capital resources for
the realisation of sustainable' level of growth and development, the government
expressed her readiness in the 1997 budget, to enter into investment protection,
agreements with foreign governments or private organisations wishing to invest in
Nigeria, as well as discuss additional incentives with prospective investors. In this
connection, the government inaugurated, the Nigerian Investment Promotion
Commission (NIPC), which replaced the Industrial Development Coordination
Committee (IDCC), as a one-stop agency that would facilitate the inflow of FDI.
The IDCC was established in 1988 for the purpose of fostering a conducive
regulatory environment and serve as the first port of call to a potential investor. The
Nigerian Investment Promotion Decree No. 16 of 1995 reflected the new enhanced
liberal foreign investment policy of the government. There were also tax related
incentive measures such as pioneer status, tax relief for Research and Development
which provides for a graduated amount of tax allowance to be deducted from profit;
company income tax which has been amended to encourage potential and existing
 Salako/ Rdebusuyi 23

investors; tax free dividends as well as tax relief for investments in economically
disadvantaged lokal government area.
The Debt Conversion Programme (DCP) was also introduced ks a major
vehicle for the inflow of foreign investment. The privatisation and commercialisation
programme in which government disengage fiom activities that could be effectively
undertaken by private economic,agents was among others meant to encourage the
inflow of foreign investments. Similarly,the establishment of the Export Processing
Zone at Calabar was aimed at attracting more foreign investments through provision
of infiastructural facilities and elimination of bureacratic bottlenecks. While, the
repeal of the Nigerian Enterprises Promotion Decree (NEPD) of 1972, and the
Exchange Control Act of 1962, were aimed at making the investment climate more
conducive for foreign investors.
However, these measures are observed not to have yielded the desired results
in terms of attracting FDI inflows. For instance, aggregate FDI inflow into Nigeria
through existing foreigdjointly owned companies during the 1970s averaged 562.3
million yearly in nominal terms. As a proportion of the gross domestic product (GDP),
it accounted for 3.6 per cent during the period. Before the introduction of the
Structural Adjustment Programmes (SAP) in 1986, total foreign investment inflow
for 1980s averaged 8,178.2 million annually and represented 4.3 per cent of GDP.
During the period 1987 - 1990, average foreign investment inflow rose to 8,183.6
million, representing 3.0 per cent of GDP, while the average inflow was 15,402.5
million or 1.4 per cent of GDP during 1991 - 1998.
24 CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 NO. 1

Specifically, Nigeria has not benefited significantly from this vital resource
during the last two decades in spite of its high potential for the attraction of foreign
investments because some aspects in her investment policies have not been generally
investor-fiiendly.

SECTION 111
THEORETICAL FRAMEWORK AND LITERATURE
REVIEW I

Theoretically, foreign direct investment is expected to be influenced by the

size of the market for the products of such investments. Foreign direct investment is
also expected to increase where there exists higher profit rates so as to follow the
direction of marginal productivity of capital. Availability of relevant raw materials is
also expected to catalyse the inflow of foreign direct investment, while the existence
of protectionist policies is also expected to attract foreign investments for locally
produced goods. Other factors which are likely to influence the direction and
magnitude of FDI include domestic investment, low labour and production costs;
political stability and enduring investment climate; internationalproduct differentials
as weil as cordial supplier relationships. Additionally, favourable regulatory

environment as well as functional infrastructural facilities are expected to be

pull-factors for FDI inflow. These above mentioned factors or determinants of FDI
have been succinctly documented in numerous research works. In general, the results
of most of these previous studies show that the principal determinants of FDI are
related to the economic and political nature of the host country’ s economies.
 Salako/Adebumyi 25

For the developing economies, Pfeffermann and Madarassy (1992)

identified the major determinants of foreign direct investment to include; the size of
the domestic market, inflation, exchange rate volatility, interest rate and
macroeconomic policies. They found that the size of the domestic market and
capacity utilization are positively related to direct foreign investment, while inflation
and volatile exchange rates have negative effects on foreign investment. High and.
rising inflation rates heightens fears of rising costs of imported capital goods and
inputs, while an unstable exchange rate also creates foreign exchange risk and
uncertain investment climate.
Several researchers have variously explored the importance of the size of
domestic market on the inflow of FDI. They used tested proxies of market demand
levels and market growth rates of host economies to see if there was a significant
correlation between these proxies. For example, Dunning (1 973) indicated that the
dominant influences on FDI are the growth and size of the host country' s market
while Root and Ahmed (1 978) as well as Schneider and Frey (1 973), also found a
statistical relationship between FDI and market demand as measured by per capita
GDP (GNP)of some developing countries. In addition to Pfeffermann and Madarassy
(1 962), the statistically significant relationship between inflation rates and Foreign

Direct Investment (FDI) have further been established by Dornbusch and Reynoso
(1 989) who stated that it affected private investment rates in developing countries
where inflation is less often correlated with rise in economic output than in industrial
countries. This is because high rates of inflation adversely affect private investment
by increasing the risk of longer term investment projects, reducing the average
26 CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 NO. 1

maturity of commercial lending (credit), and distorting the information content of

relative prices. Obadan (1994), also noted that high inflation rate reduces
international competitiveness of exports, foreign exchange earnings and puts
pressure on current account and exchange rates. In short, high inflation rates may be
considered as indicator of macroeconomic instability and a country' s inability to
control macroeconomic policy, both of which contribute to an adverse investment
climate.
The influence of political stability or conversely political risk on FDI flows
have also been tested. Early studies of foreign investment decision process indicated
that political instability was one of the main factors investors cited in explaining
decision for not investing in a particular country. For instance, Bas and Aharoni
(1963) concluded from their .research works that next to market size and growth,
political instability was the most dominant influence in investment flows. Root and
Ahmed (1978) also found that political stability was a significant variable in direct
investment flows. The importance of government investment, the change in bank
credit and capital inflow to the private sector in determining private investment was
confirmed by Wai and Wong (1 982).
Osuagwu (1982) found that the determinants of investment demand in
Nigeria from 1960-1975 were the expected rate of returns, the supply of funds;
absorptive capacity and government policies. Obadan (1982) also confirmed the
importance of market size, trade policies and raw materials as important determinants
of foreign direct investment in Nigeria. This was further corroborated by Anyanwu' s
(1 998) study which additionally highlighted the significance of domestic investment,
 SaIakd Adebusuyi 27

openness of the economy and indigenisation policy. Also, the rising bank lending
rate profile in Nigeria during the 1987-90 period was noted by Ajakaiye (1995) to
have discouraged productive investments. This is because lower lending rate in the
host economy is expected to have an overall effect of higher internal rate of return
(IRR) on investment, and boost investment inflow. Mckinnon and Shaw (1973), on
the other hand hypothesised that private investors in LDCs must accumulate money
balances before undertaking investment projects because of limited access to credit
and equity markets in the LDCs. But Aremu (1997) observed that the host country of
FDI make credit available to investors in the form of subsidized loans, loan
guarantees as well as guaranteed export credits. These credits are provided directly
to foreign investors for their operationsparticularly at defiaying some inevitable costs
which invariably have an immediate impact on cash flow and liquidity.
The importance of exchange rate on inflow of foreign private investment has
been traced by Obadan (1 994), who noted that its importance as the centre piece of
the investment environment derives fkom the argument that a sustainedexchange rate
misalignment in terms of overvaluation or undervaluation, is a major source of I

macro-economic disequilibria which spells danger for investment. Consequently, an

over valued exchange rate will discourage export and negatively affect the foreign
private investment environment.
The presence of large external debt burden according to Borensztein (1989)
and Froot and Krugman (1990) also plays a vital role in reducing investment
activities. This is because the higher debt service payments associated with a large
external debt reduce the funds available for investment. Secondly, the existence of a
28 CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 NO. 1

large debt overhang in the form of high ratio of external debt to GDP, can reduce the
incentives for investment, because much of the returns from investments must be
used to repay existing debt. Thirdly, if substantial, external debt leads to difficulties
in meeting debt-service obligation, which may strain relations with external creditors
and make it harder or more costly to finance or attract private investment. The work
of Essien and Onwioduokit (1999) finally confirmed that there is a long run
equilibrium relationship between FDI flow to Nigeria and variables such as credit
rating, debt service, interest rate differential, nominal effective exchange rate and real
income.
The present study, apart from adopting the existing ones, incorporates
government capital expenditure to capture infrastructural development and a proxy
for political stability. It covers a period (1970 - 1998)which is consideredto be large
enough to test for stationarityand cointegration of the variables.
SECTION IV
MODEL SPECIFICATION AND ESTIMATION PROCEDURE
Contrary to the open policies adopted towards foreign investments in East
Asian industrializing countries since the sixties, Nigeria, in the seventies and
eighties, introduced a regulatory framework and institutional arrangements which
had the unintended effect of retarding the inflow of foreign investments. In addition,
there were other factors such as the debilitating external debt burden as well as some
social, economic and political developments which militated against the inflow of
foreign direct investments. These issues therefore become very crucial in speciQing
the determinants of FDI flows to Nigeria.
 Salako/ Adebusuyi 29

Generally, various approaches have been used in the literature in the

modeling and estimation of investment functions depending on the objective at hand.
- by Tun and Wong (1988) and is
These approaches are variants of the approach used
adapted for this study. The model with expected signs is specified as follows:
FDI = f (DPCI, HGI. DIR, DEXR. DIF. DCPS. EDR. POLS) ........
(+I (+I (+) ( +1 (-) (+) (3 (+I

where:
FDI = Inflow of Foreign Direct Investment
FPCI = Domestic per Capital Income
HGI - Host Government Investment

DIR - Domestic Interest Rate

DEXR = Domestic Exchange Rate

DIF -- Domestic Inflation Rate

DCPS - Domestic Credit to Private Sector

EDR - External Debt Ratio

POLS = Domestic Political Climate (Dummy Variable)
The estimation period is from 1970-1998. The data used in this study are
from the Statistical Bulletin of the CBN (1998), CBN Annual Report (1998) and the
International Financial Statistics Year Book of the IMF (1 996). The ordinary least
squares technique (OLS) estimation method was applied using computer software,
I "

microfit 286.
30 CBN .ECONOMIC& FINANCIAL REVIEW, VOL.39 NO. 1

Iv.1 Stationarity and Cointegration

For a guide to an appropriate specification of the regression equation, the
characteristicsof the time series data used for estimation of the model were examined
to avoid spurious regression which results from the regrebsion of two or more
non-stationary series. Statistical properties of any regression analysis using
non-stationary time series has been considered as being spurious” (Philips, 1987)
The presence of cointegration means that long-run equilibrium relationship
exists among the non-stationary variables. Granger and Newbold, (1 977) and Granger
and Engle, (1985) have all shown that the existence of cointegration is a sufficient
condition for the formulation of a model that allows for the incorporation of an error
correction term (ECT). The’inclusion of the ECT in a model ensures that the long-run
relationship is preserved.
To test for stationarity and cointegration, the study adopted the Augmented
Dickey-fuller (ADF) test, and the Sargan-Bhargavan Durbin-Watson (SBDW) test.

SECTION V
INTERPRETATION OF RESULTS
The results of the stationarity tests are presented in table 1 and it shows that all
data points used were stationary.
The result from the regression of the inflow of FDI against the regressors, is
as shown in Table 2. The result shows that exchange rate, government domestic
investment, credit to private sector, external debt and political stability conformed
with the a priori expectation while inflation rate, domestic interest rate, and
 Salako and Adebusuyi 31

per capital income failed to conform to a priori expectation. The DW - statistic of

1.88 indicates the absence of serial correlation between FDI and the independent
variables.
The exchange rate is directly correlated with FDI inflow in line with a priori
expectation of a depreciating exchange rate. It was statistically significant,
The positive government capital investment shows the importance of the
existence of basic infrastructure to attracting foreign investment inflow. Availability
of sound and functional infiastructural facilities entice foreign-investors into an
economy.
The External Debt ratio (DebVGDP) reflects the apriori expectation that a
debt ridden country will not be able to attract foreign investors; i.e. the higher the
Debt-GDP ratio the lower the foreign investment in the country. The result showed
that when the external debt ratio rises by’one per cent, the inflow of FDI will reduce
by about 15 per cent.
Credit to the private sector is positive because since a foreign investor will be
operating in the domestic environment and therefore benefit from such credits. This
implies therefore that a favourable credit environment would result in higher inflow
of FDI.
The period of relative stable political situation in the country as compared
with coup years has a positive effect on the inflow of FDI. That is, the more stable
the political climate in a country, the more inflow of FDI it might attract as this would
create confidence in the business community. However, the relationship is satistically
insignificant
32 CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 NO.I

Inflation failed to conform to apriori expectation though the result shows a

sbtisticaily significant relationship with FDI flows.
The Real Per Capita Income is negative as against the positive apriori
expectation, though statistically significant. This may be due to the fact that the PC1
in the country is not being properly calculated especially with the contentious
population figure used in the computation. Also, the fact remains that there are lots
of income from several informal activities which enhance the purchasing power of
the populace but which are not captured in the GDP used in computing 'Per
Capita Income.

The coefficient of interest rate was also expected to be positive because a

high interest is expected to induce savings and hence make more fund available for
investment in the country. But from the result, it is negative probably due to the fact
that the interest rate (especially the CBN discount rate) is tied to the lending rate and
this means that a high interest rate will lead to a fall in investment and vice-versa.
The GDP for the Industrial Countries (XGDP) who are potential investors was
expected to be negative as shown in the result of the regression. The decline in per
capita income in the industrial countries is expected to induce investors to look for
better investment avenues in other countries as this is indicative of depression in
economic activities in these countries.
 Salako/Adebusuyi 33

I? RECOMMENDATIONS AND CONCLUSIONS

A. Recommendations
From the results of the empirical study carried out, the following
recommendations are proposed to encourage and improve the inflow of foreign
private investment. There is need to put in place appropriate policies and strategies
that will ensure the maintenance of stable foreign exchange rate as this has been
shown to be a very important factor influencing the inflow of FDI. Government
should improve its investment especially on basic infrastructuresuch as road, energy,
water supply, telecommunications, security etc. The provision of adequate
functional basic infrastructure will go a long way in reducing the cost of operating
business in Nigeria and encourage foreign investment inflow.
The issue of the country’s debt problem should also be adequately addressed
as it affects the country’s credit worthiness and discourages foreign investments.
Further efforts should therefore be geared towards reducing the debt burden in such a
manner that it would boost the credit image of the country while not impairing the
provision of financial resources for the improvement of infiastructural facilities.
B. Conclusions
The major factors which influence foreign direct investment inflow into
Nigeria for the period 1970-1998were examined. The preliminary empirical results
show that exchange rate, government capital investment, domestic credit to the
economy, rate of inflation and real per capita income are significant factors
influencing foreign direct investment in Nigeria. However, domestic interest rate
I

and per capita income are not properly signed though statistically significant, on the
34 CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 NO. 1

other hand,. inflation rate was statistically insignificant though not properly
signed. Furthermore, available data used in computing per capita income
probably led to its non-conformity with a priori expectation. The political
stability variable was included to capture uncertainty in the economic
environment. Though not statistically significant, it has positive impact on
foreign investment.
 Salako/Adebusuyi 35

TABLE 1
TESTING THE ORDER OF INTEGRATION OR UNIT ROOT TEST

VARIABLES DF/1 ADF/2-t statistics with constant

RFPI -3.284(-3.5943) -2.53231(-3.60 I --I( 1)
-3.134 " -2.4262 '' --I(1)
-1.7979 " -2.4706 " --I( 1)
DIR
-3.7455 " -4.2744 " --J(0)
EDR --I( 1)
-1.258 " -1.9515 Lb

XGDP
-2.2523 '' -2.3348 " --I( 1)
RPCR --I( 1)
-2.0731 " -2.1812 "
RGDIV --I(0)
-3.7331 " -4.6883 66

REXR --I( 1)
-2.143 " -2.5074 "
INFR
RPCI

First Differences

VARIABLES DF/1 ADFd- t statistics with constants

DRFPI -7.0886(-3.6027) -4.6596 (-3.6119)
DDIR -6.6797 " -5.1227 "
DEDR -42245 " -3.0114 "
DXGDP -5.3718 " -5.2091 "
DRPCR -3.8157 " -4.9413 "
DRGDIV -6.1862 " -3.3833 "
DREXR -4.2262 " -4.0580 "
DINFR -4.6696 " -4.8240 "
DWFR -4.5907 " -5.2747 "
DRPCI -4.8586 " -3.2094 "

Note:
1Dickey -Fuller $teststatistics
2/Augmented Dickey - Fuller test statistics
36 CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 NO. 1
TABLE 2

ORDINARY LEAST SQUARES ESTIMATION

Dependent Variables is DRFDI

27 Observation used for sentimation from 1970 to 1998

Regressor Coefficient Standard Error T-Ratio(prob.)

E -2.388 2.085 1.1453(270)

DREXR -3.279 1 1.0175 3.227(0.006)*
DDRGDIV -0.10985 0.033664 3.2633(0.005)*
DDEDR -0.15191 0.091236 -1.6651(.117)
DDCPS 0.2694 0.094276 2.8575(0.012)*
DINFR 0.253 19 0.10326 2.45119(0.027)*
DDIR -0.1 1753 0.4936 .23830(0.815)
POLS 3.3152 3.6866 0.89927(0.383)
DRPCI -2.4782 0.9 1065 -2.7214(0.016)*
DXGDP -2.6426 1.0451 -1.5717(0.137)

R- Square 0.81342 F- satistics; F(9,17) 7.2662(.000)

R- Bar - Square 0.70148 S.E of Regression 7.1929
Residual sum of Squre 776.0744 Mean of Dependent variable 0.199 13
S.D. of Dependent 1.3164 Maximum of log likelihood -78.4156
DW- Satistics 1.8854

* Significant t- ratio at 5% level

 Salako/ Adebusuyi 37

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