NEED FOR CREDIBLE COMMODITY RISK ASSET MARKET IN NIGERIA: THE ROLES OF STAKEHOLDERS

Abstract

Just about a decade ago, Nigerian government indicated interest to operate credible commodity and derivatives market in Nigeria. This is sequel to her inauguration of the spot market segment of the Abuja Securities and Commodity Exchange (ASCE) in 2006. But since this period, research efforts on the basic rationale for the risk asset arm of the market is lacking. Besides, evidence on how this segment of the market can be consolidated into a fully efficient and credible standard capable of competing favorably across the globe is still insufficient. This article is a piece of contribution to filling this gap. Specifically, the paper appraised extant research efforts comparing the operating modalities of the Exchange with global standard conditionalities for efficient commodity risk asset markets. It also reviewed basic limitations to the development of credible commodity risk asset market in Nigeria. Lastly, it buttressed the expected roles of identified major stakeholders towards ensuring the development of viable commodity risk asset/derivatives market for Nigeria.

Keywords: Risk Asset Market, Commodity Exchange, Derivatives, Hedging

Introduction

The issue of commodity risk management in a deregulated business environment has recently appeared very topical and challenging to nations all over the world but mostly to developing economies including Nigeria. Over the last two decades of the past century, the global market has witnessed extraordinary growth in trade in commodity markets which largely is attributable to technological innovations and trade liberalization. While expansion in world trade has stimulated income growth in emerging markets by expanding demands for most primary commodity exports, studies have shown that it has also contributed to greater market volatility in commodity prices (Bleaney & Greenaway, 2001; John, Rodney& Shamila, 2002; Okoh, 2004; Obadan, 2008, Eleje, 2014). Between the period 1987 to 2006, prices of commodities fluctuated from below 50 percent to above 150 percent of their average prices (Onwumere and Eleje 2008/09). Yet, more than 50 developing countries depend on three or fewer leading commodities for more than one half of their export earnings. In Africa, commodity exports account for about three-quarter of total merchandize exports and in Nigeria, commodity production and trade affect the livelihood of millions of people and impact heavily on such macroeconomic indices as government revenue, public expenditure, the balance of trade, and foreign reserves. Over the past two decades, many of the classical instruments for public intervention in primary commodity problem such as diversification strategy, supply management via the marketing boards, and compensation schemes for exporters have disappeared due to pressure for governments to curtail their direct involvement in the production and marketing of primary commodities in spirit of deregulation and liberalization of trade. At the same time, the increased openness of all countries to trade and improvement in transport and communication facilities have increased cross border pressure on commodity prices.


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