The Role Of Fiscal Policy In The Nigeria Economic Growth

Project and Seminar Material for Economics

The Role Of Fiscal Policy In The Nigeria Economic Growth


Abstract


This study was carried out to examine the role of fiscal policy in the Nigeria economy growth using Ecobank plc, Lagos State as a case study. The study employed the survey descriptive research design. A total of 105 responses were validated from the survey. From the responses obtained and analysed, the findings revealed that fiscal policy significantly improve economy growth. The study recommend Public Sector Development Programmes should guide our national economic agenda which should have as its objectives, the improvement of the general well being of the entire citizenry. More so, the following policy measures should be adopted: Diversification of the economy, Government should continue to modify the policy instruments and ensure the maintenance of financial stability, the CBN should be granted autonomy to operate in line with current global trend, Government should examine the interest rate policy necessary to improve the allocation of credit and development of the informal financial market and Exchange rate reform to enhance monetary policy management should be adopted.


Chapter One


1.0 Introduction

1.1 Background of the Study

The growth and development of the Nigerian economy has not been stable over the years as a result, the country’s economy has witnesses 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 Nigerian economy are some of the factors responsible.

The cyclical fluctuations in the country’s economic activities has led to the periodical increase in the country’s unemployment and inflation rates as well as the external sector disequilibria (Gbosi, 2001). In other words, fiscal policy is a major economic stabilisation weapon that involves measure 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, 1998). Therefore, they cannot be left to the market forces of demand and supply as well as other instruments of stabilization such as monetary and exchange rate policies among others, are used to counteract are problems identified (Ndiyo and Udah 2003). This may include either an increase or a decrease in taxes as well as government expenditures 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, 2003).

The Nigeria economy started experiencing recession from early 1980s that led to depression in the mid-1980s. This depression continued until early 1990s without recovering from it. Government continually initiated policy measures that would tackle and overcome the dwindling economy. Drawing the experience of the great depression, government policy measures which was used to curb the depression was in the form of increase government spending (Nagayasu, 2003).

Okunroumu, (1993) the management of the Nigerian economy in order to achieve macroeconomic stability has been unproductive and negative because with evidence in the adverse inflationary trend, government fiscal policies, undulating foreign exchange rates. The fall and rise of gross domestic product, unfavourable balance of payments as well as increasingly unemployment rates are all symptoms of growing macroeconomic instability. As such, the Nicrian economic is unstable 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).

The aim of this work therefore is to assess the impact of fiscal policy on the macroeconomic stabilization of the Nigeria economy. To facilitate over task we divided this tudy into four sections. The next chapter represents the conceptual framework, while chapter 3 is the methodology, chapter four data analysis while chapter five concludes the study with appropriate recommendations.


1.2 Statement of the Problem

This study assesses the impact of policies on the level of economic activities in Nigeria. The choice of this topic is induced by the poverty situation in the country. The country has great potential for economic advancement based on its vast material and human resources, yet these are not utilized. As a result the country is caught up in poverty trap of low savings which is caused by low income and the low income is as a result of low productivity which is the result of deficiency of capital. The deficiency of capital is caused by low income resulting to low saving.

How can this chronic poverty cycle trap be broken so that the country will not remain in low equilibrium growth trap? This is the problem this study revolves around. This study advances that this poverty trapped can be broken using both fiscal policies of the government. Government policies will be improved so that it will be used to stimulate growth rate. All these will help remove the country from the chronic poverty condition.


1.3 Aims and Objectives of the Study

This study seeks to achieve the following objectives;

  1. The uses of fiscal policy in developing Nigeria economy
  2. To evaluate the impact of government recurrement expenditure on economic activities.
  3. To assess the impact of capital expenditure on the level of economic activities.
  4. To assess the impact of taxes on the level of economic activities.
  5. To assess the impact of regulation in managing economic development

1.4 Significant of the Study

The important of this study cannot be over emphasizes. It will serve as a useful material to the Fiscal authority, bank management and staff, worker, depositors, students and indeed the entire economy.

Never the less, it will add to the volume of studies on the regards. The report shall be useful in ensuring both Fiscal stability and a sound, safe and profitable banking environment which will facilitate the pace for the economic growth and development in Nigeria.


1.5 Research Question

The following needs is to be address for prepare analysis of data

  1. Does the government fiscal policy improve Nigeria’s economic growth?
  2. What incentive have the government offered to improve fiscal policy in Nigeria economy.
  3. What are the need of fiscal policy in Nigeria economic growth
  4. What makes fiscal polity a necessity in Economic development
  5. How came Nigeria economic be improve when apply fiscal policy

1.6 Hypothesis

The following hypothesis has been formulated as a guide to the conduct of the study. They should be tested based on the result obtained from the regression coordinated. The hypotheses are;

  • Ho: Government in Fiscal policy does not significantly improve economy growth.
  • H1: Government in Fiscal policy significantly improve economy growth

I.e.

Ho = Null Hypothesis

Hi = Alternative Hypothesis


1.7 Scope of the Study

Over the last decade, the growth impact of fiscal policy has generated large volume of both theoretical and empirical literature.

However, most of this study 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). There is a popular assertion in the empirical literature that public spending is negatively correlated with economic growth due to inefficiency of the public sector especially in the developing countries where large proportion of public spending is attributed to non-development expenditure like defence and interest payments on debits (Husnain, 2011) and Nigerian is not an exception.

However, current trends in fiscal administration has introduced various ways in view to reducing such expenditure that contributes little to the development goals of national economy. This thought is the adoption of MTEF (1998) as part of broad package of budget reforms to encourage cooperation across various government arms in planning and strategy form reducing wasteful expenditure.

fiscal policy has not been effective in the area of promoting sustainable economic growth in Nigeria. Although, the finding seems invalidating the Keynesian postulation of the need for an active policy to stimulate economic activities, however, factors such as policy inconsistencies, high level of corruption, wasteful spending, poor policy implementation and lack of feedback mechanism for implemented policies evident in Nigeria which are indeed capable of hampering the effectiveness of fiscal policy have made it impossible to come up with such a conclusion. To put the Nigerian economy, therefore, along the path of sustainable growth and development, the government must put a stop to the incessant unproductive foreign borrowing, wasteful spending and uncontrolled money supply and embark upon specific policies aimed at achieving increased and sustainable productivity in all sectors of the economy.


1.8 Limitation of the Study

It is quite believed that the study of nature needs sufficient time, finance and materials. The inadequacy of those factors poses enough limitations to this study. The limitations in general include;

  1. Financial and Fiscal constraint
  2. Material constraint
  3. Time constraint
  4. Physical and Geographical constraint

1.9 Definition of Terms

1.9.1 Banking Industry

These refers to the total number of banks and other financial institution who performs banking function such as acceptance of deposits,. Issuing of credits/loan and keeping of valuables. Such banks include; Merchant Banks and Development Banks etc. The banking industry also consists of the Fiscal authorities such as Central Bank of Nigeria and other federal bodies whose duty includes the regulation of the economy.

1.9.2 Fiscal Policy

Is the use of government revenue collection (taxation) and expenditure spending to influence the economy. The two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors. These changes affect the following macroeconomic variables in an economy. Aggregate demand and the level of economic activity, the distribution of income.The pattern of resources allocation within the government sector and relative to private sector.

1.9.3 Monetary Policy

This is the process by which the monetary authority of a country controls the supply of money, often target a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary economics provides insight into how to craft optimal monetary policy.

1.9.4 Economic Growth

Is the increase of the 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. One of more importance is the growth of the ratio of GDP to population (DGP per capital), which is also called per capita income.

1.9.5 Insurance Bank

This implies those banks whose risks are insured with Nigeria Deposit Insurance Commission (NDIC)

1.9.6 Bank Distress

This is the period in the banking industry when they cannot be able to meet up its target such as; objectives, dividends, staff remuneration in the economy as a whole.


Chapter Five


5.0 Summary, Conclusion and Recommendation

5.1 Summary and Conclusion

The study sets out to survey the role of fiscal policy in the Nigeria economic growth. The model was estimated by the system of error correction Model (ECM) and the stability test was conducted using the method of recursive least square by putting the recursive residual about the zero line. According to Siyan et al (2004) and Audu (2008), the issue of the stability of fiscal policy is critical in assessing the monetary aggregates M1, M2, usefulness for the formulation of fiscal policy.

However, the econometric evidence obtained from the period of study revealed that all the variables were insignificant. This not withstanding, money supply and export variable do influence fiscal policy positively. Therefore, monetary authorities should focus on these variables in the choice of policy instruments in Nigeria. Similarly, the fiscal deficit variable does influence gross domestic negatively by – 0.2%. The evidence from out study shows the stability of the model and equally observed that the fiscal deficit variable was highly insignificant with a low value of -0.002 which indicate that the Nigeria economy does not depend on fiscal deficit budget.

We also submit that monetary manager, scholar and researchers, etc should design policy measures that are aimed encouraging the diversification of financial instruments through the development of a solid and sound money and capital market in Nigeria. We therefore conclude that a further research on his paper will increase our source of knowledge about the effectiveness of fiscal policy in the country.


5.2 Recommendations

In view of the aforementioned problems of the Nigeria fiscal policy, I recommend that Public Sector Development Programmes should guide our national economic agenda. This economic agenda should have as its objectives, the improvement of the general well being of the entire citizenry. The following policy measures should be adopted: Diversification of the economy, Government should continue to modify the policy instruments and ensure the maintenance of financial stability, the CBN should be granted autonomy to operate in line with current global trend, Government should examine the interest rate policy necessary to improve the allocation of credit and development of the informal financial market and Exchange rate reform to enhance monetary policy management should be adopted.

In conclusion, to revive the growth of the Nigerian economy, deeper reforms of budgetary planning, expenditure control and transparency would be needed to address the structural weaknesses in public resource management, expenditure priorities formulated should not only appear on paper, they should be adequately implemented.
It is my candid opinion that if the above recommendations are strictly adhered to and public officers can discourage corrupt practices to the barest minimum, the Nigerian economy could witness growth, rapid development and better standard of living for the teeming population and serve as a model in Africa.


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