Effects Of Fiscal And Monetary Policies On Economic Growth (1990-2017)
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.
1.1 Background to the Study
Monetary and Fiscal policies are the two major macroeconomic policies obtainable anywhere in the globe to achieve economic growth and sustainable development. Nigeria is not an exception of the countries whose major macroeconomic policies are monetary and Fiscal policy. One of the major objectives of monetary and fiscal policies in any economy is the achievement and maintenance of economic growth. The achievement of this is paramount not excluding achievement of other macroeconomic variables like; employment generation (full employment), price stability, attainment of economic development, equity in the system (income redistribution), achievement of balance of payment (BOP), exchange rate stability and increment in investment (Tchokote and Philemon, 2016).
Fiscal policy is the means by which a government adjusts its level of spending in order to monitor and influence a nation’s economy. It is used along with the monetary policy which the central bank uses to influence money supply in a nation. These two policies are used to achieve macroeconomic goals in a nation. These goals include price stability, full employment, reduction of poverty levels, high and sustainable economic growth, favourable balance of payment, and reduction in a nation’s debt (Agu, Idike, Okwor and Ugwunta, 2014).
According to Ogar, Nkamare and Emori (2014) fiscal policy is a built-in stabilizer in the sense that taxes and government expenditure can be varied at any time the government deems it necessary, so as to suit the economic climate of the country since fiscal policy is goal oriented, it is usually geared towards achieving price stability, full employment, economic growth, income redistribution, fixed and stable exchange rate, favorable balance of payment and aid to friendly countries. On the whole, fiscal policy is an instrument for drawing resources from the private sector of the economy for public sector used.
Monetary policy is one of the macroeconomic instruments with which nations use to manage their economies. Monetary policy is seen as an important aspect of the macroeconomics which deals with the use of monetary instruments designed to regulate the value, supply and cost of money in an economy, in line with the expected level of economic activity (Ubi, Lionel and Eyo, 2012). It covers the gamut of measures or combination of packages intended to influence or regulate the volume, prices as well as direction of money in the economy per unit of time. Specifically, it permeates all the debonair efforts by the monetary authorities to control the money supply and credits conditions for the purpose of achieving diverse macroeconomic objectives. In Nigeria, the responsibility for monetary policy formulation rests with the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance (FMF).
The monetary environment in Nigeria has been very unstable in the recent past, with the economy being vulnerable to shocks from volatile commodity prices. If the economy slows and employment declines, policy makers will be inclined to soften monetary policy to stimulate aggregate demand. When growth in aggregate demand is boosted above growth in the economy’s potential to produce, slack in the economy will be absorbed and employment will return to a more sustainable path. In contrast, if the economy is showing signs of overheating and inflation pressures are building, the Central Bank will be inclined to counter these pressures by tightening the economy through monetary policy to bring growth in aggregate demand below that of the economy’s potential to produce for as long as necessary to defuse the inflationary pressures and put the economy on a path to sustainable expansion (Anowor and Okorie, 2016).
While these policy choices seem reasonably straightforward, fiscal and monetary policies makers routinely face certain notable uncertainties because the actual position of the economy and growth in aggregate demand at any point in time is only partially known as key information on variables only come with lags such that policy makers are constraint to rely on estimates of these economic variables when assessing the choice of appropriate policy and therefore could act on the basis of misleading information.
Hence, this study seeks to examine fiscal-monetary policy interaction and growth dynamics in Nigeria.
1.2 Statement of the Problem
One of the major objectives of fiscal and monetary policies in Nigeria is to achieve economic growth. Despite the adoption of fiscal and monetary policies, sustainable economic growth and development associated with other macroeconomic trends of unemployment, inflation, system inequality, deficit Balance of Payment (BOP), low rate of investment, exchange rate instability still pose threat to Nigeria’s economic growth.
In this vein, Greenspan (2003) observed succinctly that “uncertainty is not just an important feature of the fiscal and monetary policies landscape; it is the defining characteristic of that landscape” within the Nigerian monetary environment, data “robousity”; data transmission mechanism and fiscal environment are notably found as her greatest challenge and uncertainty. This has become particularly interesting because the Nigerian external sector (balance of payment) via change in net foreign assets; government budget (net credit to government) influence monetary policies as much as the real growth of the economy and prices.
Most of the available studies on fiscal and monetary policies in Nigeria by Celina (2014), Morakinyo, David and Alao (2018), Usman and Adejare (2014), Adigwe, Echekoba, Justus and Onyeagba (2015) were not depth in investigation since they were theoretical studies whose findings were subjectively influenced by leading argument in literature. It is noted that available past studies did not give adequate attention to the subsisting relationship between fiscal policy, monetary policy and economic growth in Nigeria, as well as highlighting effective strategies for stimulating real growth in Nigeria. Hence, it was on the identification of this gap in knowledge that this study was conceived to critically examine fiscal-monetary policy interaction and growth dynamics in Nigeria.
1.3 Objectives of the Study
The major objective of this research study is to assess fiscal-monetary policy interaction and growth dynamics in Nigeria. Other specific objectives are:
- To examine the effect of fiscal policy on economic growth in Nigeria.
- To investigate the impact of monetary policy on economic growth in Nigeria.
- To evaluate the degree of causal relation between the key monetary and fiscal variables and economic growth.
1.4 Research Questions
The study intends to answer the following research questions:
- What is the effect of fiscal policy on economic growth in Nigeria?
- How does monetary policy impact on economic growth in Nigeria?
- What is the degree of causal relation between the key monetary and fiscal variables and economic growth?
1.5 Research Hypotheses
- H0: Fiscal policy has no significant effect on economic growth in Nigeria.
- H1: Fiscal policy has a significant effect on economic growth in Nigeria.
- H0: Monetary policy does not have a significant impact on economic growth in Nigeria.
- H1: Monetary policy has a significant impact on economic growth in 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
Summary, Conclusion and Recommendation
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 1990-2017.
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
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 product. That 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.
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
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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