EFFECT OF FISCAL POLICY ON ECONOMIC GROWTH IN NIGERIA (A CASE STUDY OF CENTRAL BANK OF NIGERIA, ABUJA 1999-2020)

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Fiscal policy is the process by which a government adjusts its spending levels in order to monitor and influence the economy of a country. It is used in conjunction with monetary policy, which is used by the central bank to influence the money supply in a country. These two policies are used to help a country achieve its macroeconomic objectives. Price stability, full employment, poverty reduction, high and sustainable economic growth, a favorable balance of payments, and debt reduction are among these objectives. Nigeria's growth and poverty-reduction potential has yet to be realized. The recent conduct of macroeconomics, particularly fiscal and monetary policies, has been a major constraint. As a result, inflation has risen and real incomes have fallen. As the economy deals with the volatility of revenue and expenditure, national economic management has become a Herculean task. Poor fiscal policy coordination among the three tiers of government exacerbated the widespread lack of fiscal discipline. Furthermore, due to a low tax compliance rate and a high marginal tax rate with a very narrow tax base, there is a weak revenue base. As a result of these and other factors, serious macroeconomic imbalances have emerged in Nigeria. A review of these macroeconomic indices shows that inflation has accelerated to double-digit levels in 2000 and 2001. It increased from 6.94 to 18.87, respectively. This double-digit inflation continued up to 2005, and decreased to single digit in 2006 and 2007. In 2008, the inflation rate reverted to double digit (11.58) and continued to increase, and in 2010, it was 13.72% (International Monetary Fund [IMF], 2011). Unemployment is a major political and economic issue in most countries. In Nigeria, the years of corruption, civil war, military rule, and mismanagement have hindered economic growth of the country. Nigeria is endowed with diverse and huge resources both human and material. However, years of negligence and adverse policies have led to the under-utilization of these resources (Economic Watch, 2010), and this has contributed to the increasing unemployment rate in Nigeria. In 2000, the unemployment rate was 13.1%, and 21.10% in 2010. On the average, there has been an upward trend (CBN, 2005, 2006, 2009; Nigerian Bureau of Statistics, 2010).The use of government revenues and expenditures to influence macroeconomic variables developed as a result of the Great Depression when the previous laissez-faire approach to economic management became discredited. Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics indicated that government changes in the levels of taxation and government spending influences aggregate demand and the level of economic activity. Fiscal and monetary policies are the key strategies used by a country's government and central bank to advance its economic objectives. The combination of these policies enables these authorities to target the inflation (which is considered "healthy" at the level in the range of 2%–3%) and to increase employment. Additionally, it is designed to try to keep GDP growth at 2%–3% and the unemployment rate near the natural unemployment rate of 4%–5%.This implies that fiscal policy is used to stabilize the economy over the course of the business cycle.

Fiscal Policy as a tool of macroeconomic management used by the government to control the economy via its revenue and expenditure portfolios is an important concept in economics. The revenue portfolio consists of components like tax revenue, trade surplus, and foreign aid, while the expenditure portfolio consists of recurrent and capital expenditure. In other words, fiscal policy is the government’s deliberate actions towards spending money and for levying taxes aimed at influencing macro-economic variables so as to achieve desired macroeconomic objectives. The relationship between fiscal policy and economic growth has been discussed extensively in the literature using empirical analysis. According to Tanzi and Zee (2017), there are three cardinal indicators of fiscal policy—government expenditure, taxes, and deficits. There have been macroeconomic imbalances of varying degrees in Nigeria. Inappropriate public expenditure and revenue policies, a large deficit in the public sector have been identified by experts as responsible for the macroeconomic disequilibrium (Ajisafe and Folorunso, 2015). Evidence reveals that there was a substantial increase in government spending, primary deficit and debt in Nigeria between 1991 and 2005 (CBN Statistical Bulletin, 2012). This was a result of the oil windfall between 1991 and 1992 which was followed by rapid growth in government spending with an average of about 21 percent of GDP during that period. However, as the oil market weakened in subsequent years, oil receipts were not adequate to meet increasing levels of demands and expenditures as being reinforced by political pressures. Although the democratically-elected government in 1999 adopted policies to restore fiscal discipline, the rapid monetization of foreign exchange earnings between 2000 and 2004 and another era of oil windfall resulted in large increases in government spending. In 2005 alone, the government spending alone increased to 19 percent of GDP from 14 percent in 2000, extra-ordinary budgetary outlays not initially included in the budget increased (CBN Statistical Bulletin, 2012). The growth and development of the Nigerian economy have not been stable over the years. As a result, the country’s economy has witnessed so many shocks and disturbances both internally and externally over the decades. Internally, the unstable investment and consumption patterns, as well as the improper implementation of public policies, changes in future expectations, and the accelerator, are some of the factors responsible for it. Similarly, the external factors identified are wars, revolutions, population growth rates and migration, technological transfer and changes, as well as the openness of the country’s economy are some of the factors responsible. Fiscal policy is a major economic stabilization weapon that involves measures taken to regulate and control the volume, cost, and availability, as well as direction of money in an economy to achieve some specified macroeconomic policy objective and to counteract undesirable trends in the Nigerian economy (Gbosi, 2016). Therefore, economic stabilization cannot be left to the market forces of demand and supply and as well, other instruments of stabilization such as monetary and exchange rate policies among others, are used to counteract the problems identified (Ndiyo and Udah, 2013). This may include either an increase or a decrease in taxes, government expenditures, as well as public debt which constitute the bedrock of fiscal policy but in reality, government policy requires a mixture of both fiscal and monetary policy instruments to stabilize an economy because none of these single instruments can cure all the problems in an economy (Ndiyo and Udah, 2013). Advocates of government intervention in economic activity maintain that such intervention can spur long term growth. They cite the government’s role in ensuring efficiency in resource allocation, regulation of markets, stabilization of the economy, and harmonization of social conflicts as some of the ways in which government could facilitate economic growth. In the context of endogenous growth, government role in promoting accumulation of knowledge, research, and development, productive public investment, human capital development, law, and order can generate growth both in the short- and long-run [Osuala & Jones, (2014), Success, Success & Ifurueze, (2012), Okafor, (2012), Rena, (2011)]. Opponents hold the view that government operations are inherently bureaucratic and inefficient and therefore stifle rather than promote growth. It seems then that as to whether the government’s fiscal policy stimulates or stifles growth remains an empirical question. Even so, the existing empirical findings are mixed, with some researchers finding the relationship between fiscal policy and growth positive, negative, or indeterminate. Nations the world over device comprehensive strategies directed towards the attainment of distinctive national goals. The transformation agenda of the present government is one such step. Nigeria has always witnessed well-articulated economic and social reforms intended to launch the nation on the path of meaningful development (Abdul-Rahamoh, Taiwo & Adejare, 2013). The problem with past governments in Nigeria has always been non-achieving of the required results. However, results can only be achieved when the vision is clear to all, the goals are broken down into simple manageable success milestones and responsibility delegated on the basis of competence and result periodically reviewed and laced with the implementable fiscal policy framework (Babalola & Aminu, 2011). The transformation Agenda is achievable only if we can break from the past and chart a new course in the implementation process more especially as it concerns fiscal policy management. We must realize that the primary goal of governance is to ensure that the services of a state are properly harnessed towards achieving an optimal quality of life for the people derived from the most feasible outcome of real gross domestic products' measurement in Nigeria otherwise called good economy.

Higher government expenditure finance with borrowing may or may not contribute positively to the overall performance of the economy. For instance, if the government increases borrowing in order to finance its expenditure, it will compete (crowds-out) away from the private sector, thus reducing private investment or it may spend the substantive amount on servicing its existing liabilities that can otherwise be used for investment. Furthermore, in a bid to score cheap popularity and ensure that they continue to remain in power, politicians and government officials sometimes increase expenditure and investment in unproductive projects or in goods that the private sector can produce more efficiently. Thus, government activity sometimes produces misallocation of resources and impedes the growth of national output. In such cases, unfortunately, rising public debt for ever-mounting public expenditure will not be translated into meaningful growth and development.

1.2 Statement of the Problem

Over the years, there has been expansion in deficit financing and unstable fiscal policy, driven largely by oil prices between 1991 and 1992, and 2000 and 2002; revenue and expenditure have increased sharply. This, as typically seen, followed the reduction of expenditures as oil prices substantially decline, though at times with an interval after the decline in oil prices. The implications of such boom-burst fiscal policies include transmission of oil-price volatility to the stable provision of government services. This has added to the failure over the years of public spending and stagnancy in economic growth. The Nigerian economy started experiencing recession from early 1980s that led to a depression in the mid-1980s. This depression continued until early 1990s without recovering from it. As such, the government continually initiated policy measures that would tackle and overcome the dwindling economy. Drawing from the experience of the great depression, government policy measure to curb the depression was in the form of increased government spending (Nagayasu, 2003). According to Okunroumu (1993), the management of the Nigerian economy in order to achieve macroeconomic stability has been unproductive and negative; hence one cannot say the Nigerian economy is performing. This is evident in the adverse inflationary trend, government fiscal policies, rippling foreign exchange rates, the fall and rise of gross domestic product, unfavourable balance of payments as well as increasing unemployment rates which are all symptoms of growing macroeconomic instability. As such, the Nigerian economy is unable to function well in an environment where there is low capacity utilization attributed to shortage in foreign exchange as well as the volatile and unpredictable government policies in Nigeria (Isaksson, 2001). Studies have been conducted on the impact of fiscal policy on economic growth of Nigeria as seen in the literature review and it has been discovered that emphasis is laid on the relative effectiveness of the fiscal policy components. Therefore, this research study will contribute to the stock of knowledge by considering the impact of fiscal policy on economic growth from 1999 to 2020 and the relative effectiveness of the fiscal policy instruments.

1.3 Objective of the Study

The broad objective of this study is to examine the effect of fiscal policy on economic growth in Nigeria from 1999 to 2020

1. To determine the trend and pattern of government expenditure on economic growth in Nigeria.
2. To ascertain the extent to which fiscal policies have reduce inflation in the country economic growth.
3. To ascertain how revenue affect the growth of the Nigerian economy.
4. To recommended ways to improve the effectiveness of fiscal policy instruments in Nigeria
   1. Research Questions

1. What are the determinants of government expenditures on economic growth in Nigeria?
2. What impact have the policies created in inflation in Nigeria?
3. To what extent does revenue affect economic growth in Nigeria?
4. What are the recommended ways to improve the effectiveness of fiscal policy instruments in Nigeria?

1.5 Statement of Hypotheses

Hypothesis 1

Ho:  There is no significant relationship between inflation rate and Nigerian economic growth.

H1:  There is a significant relationship between inflation rate and Nigerian economic growth

Hypothesis 2

Ho: Government expenditure does not have any significant positive impact on Nigeria economic growth.

H1: Government expenditure has a significant positive impact on Nigeria economic growth.

Hypothesis 3

Ho: There is no significant relationship between revenue and the growth of the Nigerian economy.

H1: There is a significant relationship between revenue and the growth of the Nigerian economy.

1. Significance of the Study

The research will be of immense benefit to the following:

Government and her agencies (CBN): The various findings of this study would enable the government and financial authorizes to devices, modify and adopt a better fiscal policy on the economy that is policy makers of the central bank of Nigeria who issue guideline governing international trade practices.

Banks especially the commercial banks:Importantly, this study would help banks to identify the strength and weakness of each foreign exchange system and hence adopt the policy that suits their activities. This will definitely enhance growth and development of the economy of commercial banks in Nigeria.

Students of financial and banking: who might take a cue from the work done have to further research into the field of exchange rate fluctuations and international trade. Hence, the study will also serve as a guide to future researchers on this subject.

The general public: who have a right to contribute and informed to the activities of our banking institutions. It is hoped that the, findings and recommendations of this study will be of great importance to the above mentioned group.

1. Scope of the Study

The study is restricted to the effect of fiscal policy on economic growth in Nigeria, a case study of Central Bank of Nigeria (CBN), Abuja. This study focuses exclusively on fiscal policy and its relationship with gross domestic product (GDP) in Nigeria. The study appraises the impact of fiscal policy actions of the government for the period 1999 to 2020. This period of time is chosen due to the availability of data on the subject matter and the change in the economic structure of Nigeria in the year 2012. The study would make use of key variables such as government expenditure, government revenue and inflation rate.

1. LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1. DEFINITION OF TERMS

Fiscal Policy:Is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply.

Government Spending: Itrefers to the purchase of goods and services, which include public consumption and public investment, and transfer payments consisting of income transfers (pensions, social benefits) and capital transfer

Economic Growth: Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.