THE PERCEIVED IMPACT OF INFLATION ON THE NIGERIAN CAPITAL MARKET: A CASE STUDY OF THE NIGERIAN STOCK EXCHANGE, ONITSHA, ANAMBRA STATE

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

This study undertakes a careful examination of the perceived impact of inflation on the Nigerian capital market, a subject that has acquired renewed urgency given the unprecedented inflationary pressures the Nigerian economy has experienced since 2022. Inflation, broadly defined, refers to a sustained and generalised increase in the price level of goods and services in an economy over a given period, resulting in a corresponding decline in the purchasing power of money. While classical definitions such as Ile's (1990) description of inflation as a persistent upward movement in the general price level remain conceptually valid, contemporary scholarship has refined this understanding by linking inflation more explicitly to monetary expansion, exchange rate dynamics, and structural supply-side bottlenecks peculiar to developing economies such as Nigeria.

Recent empirical evidence underscores the severity of this phenomenon in Nigeria. The Nigerian economy experienced a rapid escalation in inflation following the removal of the petroleum subsidy in May 2023 and the unification of foreign exchange windows by the Central Bank of Nigeria (CBN) in June 2023, both of which intensified cost-push pressures on transportation, imported inputs, and food prices across the country.

Data from the National Bureau of Statistics (NBS) illustrate the magnitude of this trend: headline inflation, which stood at roughly 21.3 percent in December 2022, rose to 28.92 percent by December 2023, and further escalated to 34.80 percent by December 2024, before moderating to 22.97 percent by May 2025 following the CBN's aggressive monetary tightening, including a cumulative increase in the Monetary Policy Rate (MPR) to 27.5 percent, and the rebasing of the Consumer Price Index (CPI) to a new 2024 base year.

These movements have not occurred in isolation; they have had observable spillover effects on the Nigerian capital market. The Nigerian Exchange (NGX), formerly the Nigerian Stock Exchange, recorded a 37.65 percent return in 2024, with market capitalisation rising from N12.79 trillion in 2019 to N62.76 trillion by the end of 2024, driven substantially by new listings such as Geregu Power Plc, Transcorp Power Plc, Aradel Holdings, and BUA Foods. Despite these nominal gains, analysts have cautioned that when adjusted for inflation, real returns on many asset classes, particularly fixed-income and dollar funds, remained negative, with some funds recording losses as steep as 27 to 88 percent in real terms during 2024.

This apparent paradox, where the equities market posts strong nominal growth even as inflation erodes real purchasing power and depresses fixed-income returns, lies at the heart of the perception problem this study seeks to investigate. It raises an important empirical and theoretical question: does inflation genuinely undermine capital market performance in Nigeria, as the Fisher hypothesis and proxy hypothesis would predict, or do equities, as several recent Nigerian studies suggest, serve as a partial hedge against inflationary erosion?

The theoretical literature offers no settled consensus. Some studies report a negative relationship between inflation and capital market performance, while others find an insignificant or even hedging relationship, and a smaller body of work identifies a weak unidirectional causality running from inflation to stock market indices, suggesting inflation is not always a dominant determinant of market movements in Nigeria.

On the structural side, the capital market continues to be properly understood as comprising two broad segments. The primary market is the market for the issuance of new securities, that is, financial instruments such as shares, bonds, and debentures that are issued for the first time to raise long-term capital for issuers. The secondary market, by contrast, is the market in which previously issued securities are subsequently traded among investors, providing liquidity and continuous price discovery for instruments already in circulation. Obasikene's (2003) characterisation of the capital market as a market for long-term funds remains broadly accurate, although contemporary Nigerian capital market literature increasingly situates the NGX within a wider financial ecosystem that includes the Securities and Exchange Commission (SEC) as apex regulator, the Central Securities Clearing System (CSCS), and an expanding base of Exchange-Traded Funds (ETFs), Real Estate Investment Trusts (REITs), and green and sustainability-linked bonds.

It is against this backdrop, of historically high but recently moderating inflation, a capital market posting strong nominal but uneven real returns, and a regulatory environment in transition, that this study examines how inflation is perceived to impact the Nigerian capital market, using the Nigerian Exchange branch in Onitsha, Anambra State, as a case study.

1.2 STATEMENT OF THE PROBLEM

Persistent and, at times, accelerating inflation poses a considerable threat to the depth, liquidity, and credibility of the Nigerian capital market. Several interrelated problems necessitate this study.

First, there is no firm consensus among Nigerian capital market stakeholders, regulators, and researchers on the actual direction and magnitude of inflation's effect on capital market performance, given that empirical findings remain genuinely mixed. This study finds that some recent works such as Adesina and Ogundipe (2023, as reflected in current sectoral analyses) report a negative and statistically significant relationship between inflation and stock market capitalisation, while others find the relationship statistically insignificant, and yet others identify only a weak causal link running from inflation to market indices. This lack of consensus complicates policy formulation and leaves market operators and regulators without clear guidance on how aggressively to respond to inflationary episodes.

Second, the management of the Nigerian Exchange and its branch offices, including the Onitsha branch, have historically been perceived by market participants as playing a largely passive role in directly checking inflationary trends, a role that, strictly speaking, falls within the mandate of the monetary authorities rather than the Exchange itself; nonetheless, this perception shapes investor confidence and trading behaviour at the branch level.

Third, fiscal and monetary authorities have, at various points, been criticised for delayed or inconsistent responses to inflationary pressures, including limited extension of affordable credit to productive sectors of the economy, even as the Central Bank of Nigeria pursued an unprecedented tightening cycle between 2023 and 2025 that raised the Monetary Policy Rate to 27.5 percent specifically to contain inflation and stabilise the naira.

Fourth, episodes such as the fuel subsidy removal of May 2023 and the unification of foreign exchange rate windows in June 2023 demonstrate how government policy decisions, even when fiscally necessary, can trigger sharp inflationary surges with direct and indirect consequences for capital market valuations, investor sentiment, and the real returns available to investors in Onitsha and across Nigeria.

The problem this study therefore investigates is the perceived impact of inflation on the operations, share pricing, and investment climate of the Nigerian capital market, as experienced and interpreted by staff and stakeholders of the Nigerian Exchange branch in Onitsha, Anambra State.

1.3 OBJECTIVES OF THE STUDY

This study is designed to achieve the following specific objectives:

1. To evaluate the way inflation affects the share prices of quoted companies on the Nigerian Exchange.

2. To determine the effect of inflation on the ability of investors to purchase securities in the Nigerian capital market.

3. To ascertain whether inflationary trends adversely affect the operations of the Nigerian capital market.

4. To examine the trend and level of inflation in Nigeria from 2022 to date.

5. To examine the impact of inflation on the pricing of securities in the Nigerian capital market.

1.4 RESEARCH QUESTIONS

This study seeks to provide answers to the following research questions:

1. To what extent does inflation affect the share prices of quoted companies on the Nigerian Exchange?

2. To what extent does inflation affect the purchasing power of investors in the Nigerian capital market?

3. How far does the inflationary trend in Nigeria affect the operations of the Nigerian capital market?

4. What impact does inflation have on the pricing of securities in the Nigerian capital market?

5. Do equities listed on the Nigerian Exchange serve as an effective hedge against inflation, based on recent market trends?

1.5 FORMULATION OF HYPOTHESES

The following hypotheses have been formulated to guide the empirical investigation and to develop evidence for or against the propositions under consideration:

i. H0: Nigerian Exchange staff perception is that inflation does not significantly affect the share prices of quoted companies on the Nigerian Exchange.
H1: Nigerian Exchange staff perception is that inflation significantly affects the share prices of quoted companies on the Nigerian Exchange.

ii. H0: Nigerian Exchange staff perception is that inflation has no significant effect on the pricing of securities in the Nigerian capital market.
H1: Nigerian Exchange staff perception is that inflation has a significant effect on the pricing of securities in the Nigerian capital market.

iii. H0: Nigerian Exchange staff perception is that inflationary trends in Nigeria do not significantly affect the operations of the Nigerian capital market.
H1: Nigerian Exchange staff perception is that inflationary trends in Nigeria significantly affect the operations of the Nigerian capital market.

iv. H0: Nigerian Exchange staff perception is that the inflationary trend in Nigeria does not affect investors' willingness to purchase securities in the Nigerian capital market.
H1: Nigerian Exchange staff perception is that the inflationary trend in Nigeria affects investors' willingness to purchase securities in the Nigerian capital market.

1.6 SIGNIFICANCE OF THE STUDY

The findings of this study are expected to benefit the following groups:

1. Students and researchers in banking and finance, and related disciplines, who require an empirically grounded and up-to-date understanding of how inflation affects the Nigerian capital market, and who may wish to extend this work through further research.

2. Investors, both existing and prospective, who require long-term capital, as the study will guide their investment decisions by clarifying how inflationary trends interact with share pricing and real returns.

3. Management and staff of the Nigerian Exchange, including its Onitsha branch, in the formulation of policies that better insulate market operations from inflationary shocks.

4. Regulatory bodies, including the Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN), in calibrating monetary and capital market policy responses to inflationary episodes.

5. Policy makers and the federal government, in designing fiscal measures, such as targeted subsidies or palliatives, that minimise the adverse capital market consequences of necessary but inflationary reforms.

1.7 SCOPE OF THE STUDY

This study covers the effect of inflation on the operations of the Nigerian capital market, with particular attention to the period from 2022 to date, a period marked by historic highs in Nigerian inflation following the fuel subsidy removal and foreign exchange unification of 2023, and the subsequent disinflation associated with the Central Bank of Nigeria's tightening cycle and the 2024 CPI/GDP rebasing exercise. The study extends to the inflationary impact on share pricing, investor purchasing power, and the broader investment climate within the Nigerian capital market, while also examining the structural forces, including monetary policy, exchange rate movements, and new equity listings, that influence capital market activity during this period.

While the Nigerian Exchange maintains branches and trading facilities across the country, this study, for reasons of feasibility and depth, is restricted geographically to the Nigerian Exchange branch located in Onitsha, Anambra State.

1.8 LIMITATIONS OF THE STUDY

In conducting this research, the researcher encountered the following constraints, which are common to similar studies undertaken in Nigeria:

1. Finance: Limited financial resources constrained the scope of data collection and the extent of field investigation that could be undertaken for this study.

2. Time constraints: The time available for this research was limited by competing academic assignments and examination preparations, which placed pressure on the depth of data gathering and analysis.

3. Dearth of statistical data: Although recent National Bureau of Statistics (NBS) and Central Bank of Nigeria (CBN) publications have improved the availability of inflation and capital market data, gaps and inconsistencies in disaggregated, branch-level data for locations such as Onitsha persisted, requiring the researcher to rely on national-level proxies in places.

4. Respondent availability: Obtaining timely responses from Nigerian Exchange staff and capital market operators in Onitsha was occasionally difficult, given respondents' work schedules and, in some cases, reluctance to discuss sensitive market performance issues.

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