The Effect Of Monetary And Fiscal Policies On The Growth Of Nigeria Economy

Project and Seminar Material for Accountancy / Accounting

Abstract

This research work titled “The effect of central bank of Nigeria monetary and fiscal policies on the growth of Nigeria economy. The researcher evaluated the effect of Federal government capital expenditure on the growth of Nigeria economy. Examined the effect of interest rates on economic growth of Nigeria.Examined the effect of taxes on the growth and development of Nigeria economy. The researcher made use of only secondary data from fifteen years annual report and accounts of the central bank of Nigeria were collected and regression analysis was utilized in the data analysis. The researcher found out that Federal government capital expenditure has significant effect on the growth of Nigeria economy. It was also observed that interest rate has significant effect on economic growth of Nigeria. This study equally shows that taxes has significant effect on the growth and development of Nigeria economy. This study equally shows that there is significant relationship between Gross Domestic product (GDP) and the growth and development of Nigeria economy.

Chapter One

Introduction

1.1 Background of the Study

The Nigerian economy has been plagued with several challenges over the years. In spite of many, and frequently changing, fiscal, monetary and other macro-economic policies, Nigeria has not been able to harness her economic potentials for rapid economic development (Ogbole, 2010). According to Adeoye (2006), the debate on the effectiveness of fiscal policy as a tool for promoting growth and development remains inconclusive, given the conflicting results of current studies.

Over the last decade, the growth impact of fiscal policy has generated large volume of both theoretical and empirical literature. However, most of these studies paid more attention to developed economies and the inclusion of developing countries in case of cross-country studies were mainly to generate enough degrees of freedom in the course of statistical analysis (Aregbeyen, 2007).

Fiscal and monetary policies are inextricably linked in macro-economic management; developments in one sector directly affect developments in the other. Undoubtedly, fiscal policy is central to the health of any economy, as government’s power to tax and to spend affects the disposable income of citizens and corporations, as well as the general business climate.

Monetarist strongly believes that monetary policy exact greater impact on economic activity as unanticipated change in the stock of money affects output and growth i.e., the stock of money must increase unexpectedly for central bank to promote economic growth. In fact, they are of opinion that an increase in government spending would crowd out private sector and such can outweigh any short-term benefits of an expansionary fiscal policy (Adefeso and Mobolaji, 2011). On the other hand, the concept of liquidity trap which is a situation in which real interest rates cannot be reduced by any action of the monetary authorities was introduced by Keynesian economics. Hence, at liquidity trap an increase in the money supply would not stimulate economic growth because of the downward pressure of investment owing to insensitivity of interest rate to money supply. John Maynard Keynes recommends fiscal policy by stimulating aggregate demand in order to curtail unemployment and reducing it in order to control inflation. While there are several studies on this debates between Keynesian and Monetarist in the developed countries, only fragmented evidence have been provided on this issues in the case of Nigeria (Adefeso and Mobolaji, 2011).

Today, monetary and fiscal policies are both commonly accorded prominent roles in the pursuit of macroeconomic stabilization in developing countries, but the relative importance of these policies has been a serious debate between the Keynesians and the monetarists. The monetarists believe that monetary policy exert greater impact on economic activity while the Keynesian believe that fiscal policy rather than the monetary policy exert greater influence on economic activity. Despite their demonstrated efficacy in other economies as policies that exert influence on economic activities, both policies have not been sufficiently or adequately used in Nigeria (Ajisafe and Folorunsho, 2002). The objective of this research work is to examine the effect of central bank of Nigeria monetary and fiscal policies on the growth of Nigeria economy.

1.2 Statement of the Problem

The quest for and the challenges of economic development across the world increase on daily basis. In many countries of the world, the level of income disparity, inflation, unemployment and poverty is astronomically high such that the standard of living of an average person remains completely low. The situation state above is more popular in developing and less developed countries of the world. Governments and policy makers in these nations seek policies and strategies to “push” their economies out of the low socioeconomic ebb Robbins (2006).

As noted above, countries seek ways and means of advancing themselves technologically, industrially and economically in order to minimize the level of inequality, illiteracy and poverty. One of the basic measures used is the formulation and implementation of macroeconomic policies such as monetary and fiscal policies Ekpo (2004).

In principle fiscal dominance occurs when fiscal policy is set exogenously to monetary policy in an environment where there is a limit to the amount of government debt that can be held by the public. Hence if the inter-temporal budget constraint must be satisfied, fiscal deficits would have to be magnetized, sooner or later. In fact when the size of the financial system is small relative to the size of the fiscal deficits, a central bank may have no choice but to magnetize the deficits. Thus… in countries with shallow financial systems, monetary policy is the reverse side of the coin of fiscal policy and can only play an accommodative role.

In such low income countries, government securities markets are underdeveloped and central banks do not hold sufficient amounts of tangible securities and the central bank’s lack of suitable and adequate instruments of monetary control constitutes one of the factors that induce fiscal dominance…. Where fiscal dominance applies, the country’s economic policy is only as good as its fiscal policy and institutionalized central bank independence may not necessarily bring about an independent monetary policy (Oyejide, 2003).

1.3 Objective of the Study

The aim of this research work is to examine the effect of central bank of Nigeria monetary and fiscal policies on the growth of Nigeria economy. The general objective of this project work includes the following;

To evaluate the effect of Federal government capital expenditure on the growth of Nigeria economy.
To examine the effect of interest rates on economic growth of Nigeria.
To examine the effect of taxes on the growth and development of Nigeria economy.

1.4 Research Questions

Based on the research objective above, the researcher developed the following question;

To what extent does f Federal government capital expenditure influence the growth of Nigeria economy?
What is the extent of influence which interest rates exert on economic growth of Nigeria?
To what extent does taxes influence/ affect economic growth of Nigeria.

1.5 Research Hypotheses

Ho: Federal government capital expenditure does not have significant influence on the growth of Nigeria economy.
H1: Federal government capital expenditure has significant influence on the growth of Nigeria economy.
Ho: Interest rate does not have significant influence on economic growth of Nigeria.
H1: Interest rate has significant influence on economic growth of Nigeria.
Ho: Taxes does not have significant influence on economic growth of Nigeria.
H1: Taxes has significant influence on economic growth of Nigeria.

1.6 Significance of the Study

As a result of unequal importance of a stable and unstable economy to both the public and private sectors, this research work will be of benefit to;

Government for better planning of all policies related to their responsibilities to the economy in particular and the country as a whole.
The professional – who analyze the economic system and whom this study will give an insight into further research and application in their academic fields.
Students – as part of their academic pursuit.
The entrepreneurs and Business men who also need to understand the implications and effects of certain fiscal policies that can have on their fortunes directly or indirectly.

1.7 Scope and Limitation of the Study

The study is to examine the effect of central bank of Nigeria monetary and fiscal policies on the growth of Nigeria economy, how it is used to fight inflation, unemployment, encourage, investment/production of goods and services and generally encourage private participation in economy building.

This study further highlights the relevance of fiscal policies in the Nigeria economy. Its emphasis, encompasses the component of fiscal policies. Its relationship with other disciplines, how it is used in the economy. It does not however include comparison with other countries since economic structure and system differ and therefore would amount to unfair comparison. Constraints faced during this research work include.

Limitation of cost and time
Restricted access to some classified document.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain the effect of monetary and fiscal policies on the growth of Nigeria economy.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of monetary and fiscal policy on the growth of Nigeria economy

5.2 Summary

From the studywe observe that monetary and fiscal innovations are not all neutral in the short-term or long term; rather, these innovations depend on the policy instruments used. Money supply was seen to be a positive and significant function of both the consumer price index and the real gross domestic productThat money supply was found to impact positively on economic growth corroborates with the findings of Suleman et al. (2009). The stock of money exerts a positive and significant influence on the growth of the economy and at the same time generates increase in prices, which are found to have significant reducing effect on the growth of the economy. One of the key findings is that fiscal policy matters for economic growth.

5.3 Conclusion

The research study examined the impact of fiscal and monetary policies on economic growth of Nigeria with particular reference to the period of stable democratic dispensation. The study concluded that narrow money, broad money, government recurrent expenditure and capital expenditure are significant policy variables that affect economic growth in Nigeria (i.e., using Real Gross Domestic Product as proxy for economic growth). This also conforms to the apriori expectations. The study therefore opined and recommends that in order to put Nigeria economy on the path of sustainable growth and development, the democratically elected government must harnessed and better co-ordinate her fiscal and monetary policies in conjunction with the Central Bank of Nigeria in order to enhance the welfare of the citizenry

5.4 Recommendations

Haven completed the study, the following recommendations were made

The Apex Bank must persistently remind the authorities of the need for significant reduction in fiscal deficits in order to overcome the high extra budgetary expenses associated with past budgets which often necessitated the seemingly irreversible and depreciation in the naira exchange rate at the unofficial market.

The nation would be better off if it pursues sound macro-economic policies and effectively adopt market based reforms, which are capable of stimulating the domestic market and boosting industrial production as well as improving the social and physical infrastructures.

Government should increase the number of fiscal policy instrument over and above the ones currently in use. This is so because the more policy instruments, the more target variables and more effective and successful it will be in economic growth and development.

While the government intends to increase its expenditure, it should as well adopt measures that would ensure income generation and government revenue generating ventures.

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