AHMADU BELLO UNIVERSITY, ZARIA

FACULTY OF ADMINISTRATION
DEPARTMENT OF BUSINESS ADMINISTRATION

NAME:
ZAITUNA HADI
REG. NO.:
U17DLBA10087

COURSE:
BUAD 342

QUESTION(S):
1. COVID-19 pandemic has been an unprecedented economic shock for the
world economy affecting the GDP of Nigeria drastically. As a student of
finance, advice your country in five ways on how to raise capital formation
internationally.

2. Due to the level of economic recession faced by Nigeria, and level of

inflation affecting the nation, you are required to advice the country about
five strategic channels to raise capital formation domestically.

3. There are peculiar instruments that are being offered for transactions in the
money market. Explain.

September, 2021.
1.0. INTRODUCTION
The literal notion of COVID-19 is defined to be a physical health,
communicable respiratory disease caused by a new strain of coronavirus
that causes illness in humans. On a more comprehensive note, it is an
economic, financial, physical and social disease that has never been
prevalent in any part of the world.

The COVID-19 has affected economies and finances of nations worldwide.

As lot of measures are suggested by experts as strategies to curb the excess
effects of the pandemic, below are some of the suggestions that could help
the government of Nigeria in mitigating the effects of the pandemic.

1.1. Capital Formation

Capital formation means increasing the stock of real capital in a country.
There are various ways Nigeria can raise capital format internationally.
1.1.1. Creation of savings - An increase in the volume of real savings so that
manufactured goods, that would have been concentrated to consumption
goods, should be released for the purpose of capital formation.
1.1.2. Government Borrowing - Borrowing by the government is another way in
which the capital format of the economic community may be mobilized for
economic development. In developing economies, the Governments should
resort to public borrowing in order to raise the capital format of the
country (Nigeria). Public borrowing becomes an essential commodity to the
country’s capital format because taxation alone does not provide sufficient
capital for economic development. However, inflation of taxation of income
should be avoided as it has a great dis-advantage on saving and investment
of the country (Nigeria).
1.1.3. Foreign capital - Capital formation in a country can also take place with the
help of FOREIGN CAPITAL. Loans by international agency like world bank
can help raise capital formation for the country. There are less country
which have successfully/Greatly accelerated on the Chart of economyic
development without the assistance of foreign capital in one form or the
other.

1.2. Disguised Unemployment

Another source of capital formation is to mobilize the saving capacity that
exists in the form of disguised unemployment. Surplus agricultural Staffs
can be transferred from the agricultural sector to the non-agricultural
sector without reducing agricultural output.

1.3. Deficit Financing

The government can also increase its capital format by deficit financing.
Deficit financing means the creation of new money. By issuing more notes
and exchanging them with the productive goods the government can raise
a real capital formation. But the method of deficit financing, as a resource
of development finance, is dis-advantage because it mostly leads to
inflationary pressures in the Country’s economy. Taking certain Precautions
in deficit financing, however, can be had without creating such pressures.

2.0. FIVE STRATEGIC CHANNELS OF RAISING CAPITAL FORMATION DOMESTICALLY

2.1. Agricultural Modernization
Prepares conditions for industrialization by boosting labor productivity,
increasing agricultural surplus to accumulate capital, and increasing foreign
 exchange via exports. Modernization also helps achieve humanitarian goals
by raising incomes and productivity of poor farmers, lowering food prices.

As agriculture becomes more productive, excess labor moves from rural

farm jobs to urban manufacturing jobs. While the result of this stage is a
decreased share of agriculture to GDP and the labor force, the process of
agricultural modernization is critical for economic transformation and
achieving food security and improved nutrition

2.2. Voluntary Savings

There are two main sources of voluntary savings (a) households (b)
business sector. As regards the volume of personal savings of the
households. It depends upon various factors such as the income per capita,
distribution of wealth, availability of banking facilities, value system of the
society, etc.

In the under-developed countries, the saving potential of the people is low

as a greater number of them suffer from absolute poverty. So far as the rich
section of the, society is concerned, they mostly spend their wealth on the
purchase of real estates. Luxury goods, or take it abroad to safe keeping.
There is, therefore very little saving forthcoming from the high income
group.

2.3. Deficit Financing

Deficit financing is regarded an important source of capita! Formation. In
the developed countries this method is used for increasing effective
demand and ensuring continued high levels of economic activity. In the less
 developed countries, it is used to meet the development and non-
development expenditure of the government

2.4. Use of Idle Resources

In the developing countries of the world there are many resources which
remain unutilized and underutilized. If they are properly tapped and
diverted to productive purposes, the rate of capital formation can increase
rapidly
For instance, in most of the low income countries, there is a disguised
unemployment in the rural sector. If the surplus farmers are employed at
nominal wages in or near their villages for the construction of roads, tube-
wells, canals, school buildings, etc., or their services are acquired on self-
help basis for capital creating projects, they can be a valuable source of
capital formation in the country.

2.5. Involuntary Savings

In the developing countries, the income per capita of the people is low.
Their propensity to consume mainly due to demonstration effect is very
high. As the flow of savings is inadequate to meet the capital needs of the
country, the government, therefore adopts measures which restrict
consumption and increase the volume of savings.

3.0. THE INSTRUMENT USED FOR TRANSACTIONS IN THE MONEY MARKET

CFI (2021) defines the money market as “an organized exchange market
where participants can lend and borrow short-term, high-quality debt
securities with average maturities of one year or less”. The money market
enables governments, banks, and other large institutions to sell short-term
securities to fund their short-term cash flow needs. Money markets also
 allow individual investors to invest small amounts of money in a low-risk
setting. Some of the instruments that are being offered for transactions in
the money market include the following:

3.1. Bills of Exchange or Commercial Bills

3.1.1. The bills of exchange - it is drawn by the creditor and is accepted by the
bank of the debater. The bill of exchange can be discounted by the creditor
with a bank or a broker. Additionally, there is a foreign bill of exchange
which becomes due for payment from the date of acceptance.

3.1.2. Inter-bank Term Market - The inter-bank term market is for the cooperative
and commercial banks in India who borrow and lend funds for a period of
over 14 days and up to 90 days. This is done without any collateral security
at the rates determined by markets.

3.1.3. Banker’s Acceptance - A Banker’s Acceptance is a document that promises

future payment which is guaranteed by a commercial bank. Also, it is used
in money market funds and will specify the details of repayment like the
date of repayment, amount to be paid, and details of the individual to
which the repayment is due.

3.1.4. Commercial Papers - Commercial papers can be compared to an unsecured

short-term document which is issued by top rated companies with a
purpose of raising capital to meet requirements directly from the marke.
They offer higher returns as compared to treasury bills. They are
automatically not as secure in comparison. Also, Commercial papers are
traded actively in secondary market.
4.0. CONCLUSION
COVID-19 is to be a physical health, communicable respiratory disease
caused by a new strain of coronavirus that causes illness in humans. It is
also an economic, financial, physical and social disease that has never been
prevalent in any part of the world. Capital formation means increasing the
stock of real capital in a country. Market as “an organized exchange market
where participants can lend and borrow short-term, high-quality debt
securities with average maturities of one year or less.
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