Impact Of Cash Management On State Public Sector In Nigeria (A Case Study Of Osun State Of Nigeria Between August 2014 And July 2015)

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Impact Of Cash Management On State Public Sector In Nigeria

Abstract

The research work was to investigate the impact of cash management on the state public sector of Nigeria. The stated hypothesis is to determine the effect of money supply and fiscal deficit on the gross domestic product of Nigeria. On the literature review we were able to determine the advantages of cash management on the public sector of Nigeria. The method used for the purpose of analysis was the ordinary least square regression analysis.

From the analysis, we were able to find out that the value of that the value of the R2 is 0.781 which shows the explanatory variable was able to explain 78.1% of the dependent variable while the value of the adjusted R2 is 0.776 which also shows that the explanatory variable was able to explain 77.6% of the dependent variable.

From the table of ANOVA above we found out that the p-value is 0.008; which is less than

(0.05) level of significance so we concluded that there is a significant effect of money supply and fiscal deficit on the gross domestic product of Nigeria.

We found also that the value of d is 2.223 and we concluded that Since dU {1.654} < d*{2.239} < {4-dU}{2.346}, we accept the null hypothesis of autocorrelation.

We concluded that there is significant effect of money supply, fiscal deficit on the GDP.

Chapter One

Introduction

1.1 Background to the Study

As many as 17 states in Nigeria were reported to have challenges in meeting cash payment obligations across the country, as at June 23, 2015 (City News 2015). The states owed their workers for different number of months, ranging from one month to seven months. Among these states, Osun State owed the highest number of months at eight months in total as at that date. The table below gives a breakdown of the states and their arrears as at the June 2015 date.

The is a table showing 17 states in Nigeria owing different arrears in cash obligations as at June 2015.

S/NSTATESNUMBER OF MONTHS OWED
1ABIA3
2AKWA IBOM3
3BAUCHI2
4BENUE5
5CROSS RIVER4
6EKITI3
7IMO6
8JIGAWA1
9KANO3
10KATSINA2
11KOGI2
12ONDO1
13OGUN1
14OSUN8
15OYO4
16PLATEAU6
17RIVERS2

Source: City News, June 23, 2015.

The magnitude of states indebtedness was such that the Federal Government had to organize a bail out for all the states.

Using Osun State as a case study, this study seeks to examine the origin, causes, implications and solutions to this cash management crisis. It will examine the impact of cash management on public sector accounts, with particular focus on Osun State, Nigeria, as a representation of the overall public sector in Nigeria.

Public sector organisations must have a solid cash management system. Liquidity could mean cash or near cash assets. Cash management refers to a broad aspect of finance relating to the assortment, behaviour, and usage of cash. It involves assessing market liquidity, cash flow, and investments.

One of the functions of public sector cash management is to manage the cash balances of a public sector organisation in such a way as to maximize the availability of cash not invested in fixed assets or inventories and to do so in such a way as to avoid the risk of insolvency.

In some ways, managing cash flow is the most important job of public officers. If at any time a public sector organisation fails to pay an obligation when it is due because of the lack of cash, the organisation is insolvent. For instance, Osun State received bail out from the Federal Government. The key to successful cash management, therefore, lies in tabulating practical projections, monitoring collections and disbursements, establishing valuable billing and collection measures, and adhering to budgetary limitations. Kinnery (2012:808) indicated that cash flow was the receipt or disbursement of cash; when related to capital budgeting, cash flows arise from the purchase, operation, and disposition of a capital asset.

1.2 Statement of the Problem

Eighteen (18) states in Nigeria have experienced crisis over inability to meet up with due obligations particularly salaries of civil servants in the states in the period under study, that is, between August 2014 and July 2015. The problem was not limited to the 18 states only, but to virtually all 36 states in Nigeria. This created a national challenge with short and long term implications, worthy of examination and solution. This study seeks to examine the impact of cash management in public sector in Nigeria, in light of the foregoing experience.

1.3 Purpose

The purpose of the study is to contribute to public sector cash management accounting in Nigeria, to proffer possible solution to a national challenge and to promote scholarship in the area of public sector accounting.

1.4 Objectives of Study

The objectives of this study are as follows:

  1. To examine state government cash payment obligations in Nigeria, with Osun State as case study.
  2. To examine sources of cash for state public sector operations in Nigeria.
  3. To examine the application of cash in state public sector in Nigeria.
  4. To examine the relationship between cash management and public sector in Nigeria.

The above objectives could further be explained and detailed out as below;

  1. Cash obligation of government in Nigeria must necessarily be multi-various. The obligations would have to be to individuals, groups, societies and institutions across the public of the respective tiers of government. In other words, these obligations would cover all the strata of the society who have elected the functionaries of government to their offices.
  2. By its nature, government controls vast income earning resources which may vary from government to government and from country to country. This study would identify the sources of income in the Nigerian public sector with particular reference to Osun state.
  3. How does government in Nigeria apply its income and revenue across its different level of responsibilities? This study will also find out how government in Nigeria uses public fund.
  4. This study will also examine what manner of relationship exists between cash management and the public sector in Nigeria. Is the relationship direct, indirect or inverse? Is there an efficient use or an inefficient of cash in the public sector in Nigeria.

1.5 Research Questions

  1. Does cash management and performance in public sector organizations have significant relationship?
  2. Does effectiveness have impact in public sector cash management?
  3. Can cash management be effective in public sector?

1.6 Hypotheses

  • H0: there is no significant effect of money supply, fiscal deficit on the GDP.
  • H1: there is significant effect of money supply, fiscal deficit on the GDP.

1.7 Significance of Study

  1. Cash is significant in public sector operations. Perhaps without cash there may be no public sector. In other words, public sector activities may be grounded in the absence of cash. Cash could be described as the life wire of government operations. Its impact on public sector therefore deserves to be examined from time to time in critical areas and at varying times. It must be under regular study and analysis.
  2. Public sector contributes more than 20% of Nigeria’s economy. This contribution is significant to deserve constant examination.
  3. Public sector cash management is topical in view of the number of states in Nigeria which experienced cash management crisis. The issue of public sector in Nigeria meeting its obligations especially in the areas of salary payments to civil servants became a national issue in recent times, becoming a constant subject of news reports and analyses. This makes the issue current and topical deserving research work. Hardly would a week pass without commentators including state governors making remarks and taking actions on the issue of meeting cash obligations.
  4. Public sector operations affect Nigeria’s total population of about 170 million people.
  5. The study hopes to contribute to improved cash management policy in state operations in Nigeria.

1.8 Scope of Study

The study examined cash management in the Osun State Government over a year period (August 2014- July 2015), to gain insight into cash management efficiency in state public sector in Nigeria. The study focused on Osun State as a representation of public sector in Nigeria.

1.9 Definition of Terms

Critical concepts in the study include:

  • Impact
  • Cash
  • Cash Management
  • Public Sector
  • Accounts
  • Nigeria and
  • Osun State.

The concepts are hereby defined as below:

1.9.1 Cash:

Cash in the context of this study refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately as in the case of money market instruments. Money market instruments include bank notes, pass-books, cheques, treasury bills and deposit certificates, among others. Cash comprises of cash on hand and demand deposits. Demand deposits have the same level of liquidity as cash, as these deposits can be withdrawn at any time (Wingerard, Well, Pretotius, Ferreira, Badenhost,and Van Der Merwe 2013:62).

1.9.2 Cash Management:

Cash management in the context of this study refers to finance activities involving the collection, handling, and usage of cash in public sector in Nigeria. Cash management is a very broad subject and there are a lot of factors to consider when trying becoming more efficient (Ekanem. 2010).

The goal is to manage the cash balances of a public sector organisation in such a way as to maximize the availability of cash and to do so in such a way as to avoid the risk of insolvency.

Factors monitored as a part of cash management include a public sector organisation’s level of liquidity, its management of cash balances, and its short-term investment strategies.

1.9.3 Impact:

Impact in the context of the study refers to the effect of cash management on public accounts in Nigeria. Effect could be positive, negative or neutral. Neutrality implies no effect.

In other words, impact would be determined by answering the question: is cash management of positive on effect on public sector? Is cash management of negative effect on cash management? Is cash management of no effect on public sector? Impact will also be determined in term of the size of the effect. Is the effect of cash management little? Is the effect big?

Also, how is the impact on the public? How is the impact on government?

1.9.4 Nigeria

Nigeria in the context of this study refers to a country in West Africa with 36 states and the Federal Capital Territory, Abuja. By its constitution, the country operates three tiers of government which comprises of the federal government, state government, and local government.

1.9.5 Osun State

Osun State in the context of this study is one of the 36 states in the Federal Republic of Nigeria. Osun state is an internal state in south-western Nigeria. The modern Osun State was created in 1991 from part of the old Oyo State. The state’s name is derived from the River Osun, the venerated natural spring that is the manifestation of the Yoruba goddess of the same name.

The state’s current governor is Rauf Aregbesola, who was declared as the winner of 2007 election by Appeal Court in Ibadan on 26 November 2010. Its capital is Osogbo. It is bounded in the north by Kwara State, in the east partly by Ekiti State and partly by Ondo State, in the south by Ogun State and in the west by Oyo State. Its estimated population as of 2005 was about 4,137,627. Osun state has an area size of about 14,875 (square kilometres). The state is nicknamed the ‘land of virtue’.

Its major cities are Aiyedade, Aiyedire, Atakumosa East, Atakumosa West, Boluwaduro, Boripe, Ede North, Ede South, Egbedore, Ejigbo, Ife Central, Ife East, Ife North, Ife South, Ifedayo, Ifelodun, Ila, Ilesha East, Ilesha West, Irepodun, Irewole, Isokan, Iwo, Obokun, Odo-Otin, Ola-Oluwa, Olorunda, Oriade, Orolu and Osogbo.

1.9.6 State Public Sector

Public sector in the context of this study refers to all organisations which are not privately owned and operated, but which are established, run and financed by government on behalf of the public. The public sector consists of organisations where the control lies in the hand of the public as opposed to private owners and whose objectives involve the provision of services, where profit making is not a primary objective. The Public Sector is the principal actor in macro socio-economic policy making infrastructure and an architect of an enabling environment for national development.

The 1999 Constitution of the Federal Republic of Nigeria defines the Nigerian public sector. By the Constitution, Nigeria is one indivisible and indissoluble sovereign state, whose constituent units are bound together by a Federal arrangement. The Constitution further provides for the operation of three tiers of government, at the Federal, State and Local levels. In other words, the Nigerian public sector comprises of the Federal, State and Local Government units.

Why this study will look at public sector generally, its focus is on the state unit of the public sector group.

1.10 Methodology

This paper is formed as a case study. This means that the study shall be a deep analysis of one state in Nigeria, Osun State, as a representation of public sector in Nigeria. The reason is to get detailed understanding on the subject of cash management in State public sector in Nigeria.

Methodology shall be based on analysis of reports and commentaries in publications, as well as review and analysis of data from Nigerian financial regulatory and supervisory sources, including The National Bureau of Statistics and the Central Bank of Nigeria.

1.11 Plan of Study

This study is expected to establish the significant relationship that exists between cash management and state public sector.

The project will be divided into five (5) chapters, namely;

  1. Introduction.
  2. Literature Review.
  3. Research Methodology.
  4. Data Presentation and Analysis.
  5. Summary, Conclusion and Recommendation.

Chapter Five

Summary, Conclusion and Recommendation

The main aim of the research work is to find:

  1. To examine state government cash payment obligations in Nigeria, with Osun State as case study.
  2. To examine sources of cash for state public sector operations in Nigeria.
  3. To examine the application of cash in state public sector in Nigeria.
  4. To examine the relationship between cash management and public sector in Nigeria.

The above objectives could further be explained and detailed out as below;

  1. Cash obligation of government in Nigeria must necessarily be multi-various. The obligations would have to be to individuals, groups, societies and institutions across the public of the respective tiers of government. In other words, these obligations would cover all the strata of the society who have elected the functionaries of government to their offices.
  2. By its nature, government controls vast income earning resources which may vary from government to government and from country to country. This study would identify the sources of income in the Nigerian public sector with particular reference to Osun state.
  3. How does government in Nigeria apply its income and revenue across its different level of responsibilities? This study will also find out how government in Nigeria uses public fund.
  4. This study will also examine what manner of relationship exists between cash management and the public sector in Nigeria. Is the relationship direct, indirect or inverse? Is there an efficient use or an inefficient of cash in the public sector in Nigeria.

From the above objective we see that we can find the source of cash management from the CBN statistical bulletin. We were able to find out the advantages and the disadvantages of cash management both in the private and public sector of Nigeria.

The advantages were stated as follows:

  1. Cash accounting is the easiest to maintain and serves the stewardship function of accounting well by furnishing information that can assist in assessing whether resources were used in accordance with the legally adopted budgets;
  2. The estimates on cash basis are meeting the requirements, which are placed by the control function (Langendijk 1990);
  3. As a result of it’s widely use, it facilitates the international comparison of the budgets and accounts;
  4. It provides useful data that permit analysis of the monetary impact of fiscal transaction and facilitates review and assessment of the cash position (United Nations 1984);
  5. It produces the same data as accrual basis when expenditures are mainly for salaries, travel and for goods and services which are received, paid for and consumed within a fiscal year;
  6. It is simple, relatively cheap and easier to understand than accrual-based accounting and in many countries even preferred by national legislatures;
  7. The popularity of the cash basis in government accounting arose from the need for Parliament, or other representatives of the electorate, to monitor the collection of taxation receipts and the subsequent spending of those receipts by the government each year (IFAC1998).
  8. It describes over which management has full control, although it ignores resources over which full control has not been established, and it reflects legal reality associated with fiscal compliance as reflected in government budgets.
  9. It is more objective in comparison with the accrual basis. Cash accounting does not include the subjective adjustments that have to be made to produce balance sheets and income statements;
  10. It provides necessary information on receipts and expenditures made during the fiscal year, expenditures reflect that part of the acquisition of goods and services for which payments are made during the fiscal year.

Of course the essential point is not whether the accounting system is simple, easy to understand, cheap or objective; it is the extent to which it provides the required and useful information that satisfies the user’s needs.
From the above stated advantages we see that cash management plays a very important role in the growth and development of businesses both in the primary and the public sector of Nigeria.

The study was also to investigate the effect of money supply and the fiscal policy on the gross domestic product of Nigeria. And the method of analysis used was the OLS regression analysis.

From the analysis we found out that the value of R is 0.842 which shows that there is a strong relationship between the dependent variable and the rest of the independent variable. We can also see from the analysis that the value of the R2 is 0.781 which shows the explanatory variable was able to explain 78.1% of the dependent variable while the value of the adjusted R2 is 0.776 which also shows that the explanatory variable was able to explain 77.6% of the dependent variable.

From the table of anova above we found out that the p-value is 0.008 which is less than 0.05 level of significance so we concluded that there is a significant effect of money supply and fiscal deficit on the gross domestic product of Nigeria.

We found also that the value of d is 2.223 and we concluded that Since dU {1.654} < d*{2.239} < {4-dU}{2.346}, we accept the null hypothesis of autocorrelation.

Conclusion

We concluded that there is significant effect of money supply, fiscal deficit on the GDP. And also that cash management is of greater advantages than the disadvantages.

Recommendation

From the above result we see that cash management plays on role on the gross domestic product of Nigeria. So the federal government of Nigeria should encourage or set up a program on cash management. Cash management should be one of the criteria for employment in most of the bigger sector of the Nigerian economy.

The federal should also monitor the fiscal deficit since it has a negative effect on the gross domestic product of Nigeria.

Policy Recommendation

Given the potency of monetary policy in promoting economic growth in Nigeria, the following policy recommendations could be made

  1. The Nigerian financial system should be made more effective in its monetary management by making all financial markets organized so as to accentuate the effects of monetary policy variables like Broad money supply, Real Interest Rate and Real Exchange Rate. This promotes real GDP in Nigeria.
  2. The effectiveness of monetary policy also depends largely on the quantity of information available to the central bank. In this regards, the central bank should endeavor to improve on its current performance in producing accurate and credible balance sheet information in a timely manner. They should also estimate properly the length and variability’s of lags that affect policies.
  3. Government should introduce a specification of the financial structure that is richer than the existing ones, recognizing the positive effect of a stable monetary policy.
  4. Attempts should be made by the government to improve on its infrastructure in order to reduce cost of production and increase exportation so as to achieve the objective of naira devaluation. This adds to the country’s national income and in general promotes the real GDP.
  5. The monetary authorities should develop a money stable policy that would propel the economy towards a positive end.
  6. Government should formulate policy that is aimed at raising broad money supply so that by so doing it would encourage capital flight into the country and increase real GDP since its coefficient is quite higher.
  7. Government should intensify its effort in pursuing the policies that are anti-inflationary in nature such that its monetary policy objective will not be derailed.
  8. The CBN should also look into the transmission mechanisms of money supply in order to determine its lag effects on economic growth.

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