Nigerian economy’s low financialisation

Low financialisation or financial leverage is very evident in the Nigerian economy, which may help explain the lack of infrastructure development.

Economists call this rather curious phenomenon the paradox of thrift, which is a theory that states that if everyone tries to save an increasingly larger portion of his or her income, they would all become poorer.

The low financial leverage can be seen in Nigeria’s total financial assets as a percentage of Gross Domestic Product (GDP), which stood at 60 percent, at the fourth quarter of 2013, according to Central Bank of Nigeria (CBN) data.

This compares with the African average of 100 percent and Switzerland’s average of about 1000 percent.

Key takeaways

• Nigeria’s Debt to GDP ratio is low at 21.2 percent and it may further decline to between 10 and 14 percent post rebasing of official GDP figures.

• This compares with South Africa at 39.9 percent and Malaysia at 53 percent.

• Equity market capitalization at $75.4 billion is equivalent to 27.6 percent of GDP, compared with South Africa’s JSE, with a equity market capitalization of $612 billion or 177 percent of GDP. Post GDP rebasing the Nigerian numbers are further expected to fall.

• M2 (a broad measure of money supply) growth has been largely stagnant at N15.465 trillion as at January 2014, compared with N15.483 trillion as at December 2012. This means that the velocity of money is low as money velocity is roughly the ratio of the size of the economy (gross domestic product) to the size of the money supply.

• In economics and finance the more times a naira is used to buy something, the greater its velocity, and the quicker the economy grows.

• Other indices such as the total value of mortgage debt, and consumer credit as well as the near absence of securitisation also reveal very low levels of financial leverage in the economy.

• It is suffice to say that no economy in the world has attained developed nation status with these abysmal levels of financialisation. It is perhaps up to the next CBN governor to fashion out policies that may help increase the Nigerian economy’s financial leverage.

 PATRICK ATUANYA & BALA AUGIE