CHAPTER ONE
The
growth and development of the Nigerian economy has 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 (Siyan and Adebayo, 2009). 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.
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(Okunrounmu, 2003). 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 (Okunrounmu,
2003). 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
(Odedokun, 2008). This may include either an increase or a decrease in taxes as
well as government expenditures which constitute thebedrock of fiscal policy
but in reality, government policy requires a mixture of both fiscal and
International Review of Social Sciences and Humanities, 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 form early 1980s that leads 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
the experience of the great depression, government policy measure to curb the
depression was in the form of increase government spending (Nagayasu, 2003).
According to Okunroumu, (2003), the management of the Nigerian economy in order
to achieve macroeconomic stability has been unproductive and negative hence one
cannot say the Nigeria economy is performing. This is 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 increasing unemployment rates are all symptoms of growing
macroeconomic instability. As such, the Nigeria 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 (Anyanwu, 2007).
In any
economic system, there is always the need for government to undertake very
useful measures aimed at shaping various developmental aspirations. One of such
measures is fiscal/budget deficit. The relationship between fiscal
deficits and macroeconomic variables (such as growth, interest rates, trade
deficit, exchange rate, among others) represents one of the most widely debated
topics among economists and policy makers in both developed and developing
countries (Obinna, 2000). This relationship can either be negative, positive or
a no positive or negative relationship. The differences on the nature of the
relationship between budget deficits and these macroeconomic variables as found
in economic literatures according to Egwaikhide (2002), could be explained by
the methodology the country and the nature of the data used by the different
researchers.
There
is a sharp divergence of views on how fiscal deficit affects the economy. The
conventional view, embodied in the Washington Consensus and held by the
international financial institutions (IFIs), is that fiscal deficit,
particularly in the context of developing countries, represents the most
important policy variable affecting the rest of the economy.
According
to this view, the relationship between fiscal
deficit and other macroeconomic variables is set to depend on how the
deficit is financed. It stipulates that money creation leads to inflation,
government borrowing crowds out private investment and external debt leads to
balance of payments crises (Easterly and Schmidt, 1993).
On the
contrary, many economists question the validity of the view that budgets should
always be balanced. James Tobin is of the view that what is really important is
appropriate fiscal policy which may or may not balance the budget. He argues
that there are built-in stabilizers in the fiscal system and that deficit
performs a useful function in absorbing savings that would otherwise be wasted
in unemployment, excess capacity or lower output. This view is shared by Saleh
(2003), who maintains that even in the long- run equilibrium; zero is not a
uniquely interesting figure for the budget deficit. Fiscal deficit could be
seeing from many angles. It is the gap between the government’s total spending
and the sum of its revenue receipts and non-debts capital receipts, (Easterly
and Rebelo, 2003).It represents the total amount of borrowed funds required by
the government to completely meet its expenditure. It could also be defined as
the excess of total expenditure including loans net of payments over revenue
receipts and non-debt capital receipts. It also indicates the total borrowing
of the government, and the increment to its outstanding debt.
Despite
the fact that realized revenues are often above budgeted estimates, extra
budgetary expenditures have been rising so fast and result in fiscal deficit,
Anyanwu (2007), and Robini(2001), shows that budget deficit in developing
countries are heavily influenced by the degree of political instability as well
as public finance considerations with no apparent direct effect of elections.
Investigations show that Nigeria was caught in the deficit trap since early
1980s when the world oil market collapsed. Since then, there have been frantic
efforts to exit the deficit trap but all to no avail instead, the mode of
financing the deficit has been the major factor including rapid monetary
growth, exchange rate depreciation and rising inflation.
1.2. Statement
of Problem
In
spite of government efforts at devising policy measures aimed at overcoming
fiscal deficit, fiscal deficit has persisted in the Nation’s economy which its
adverse effect is being perceived on key macro-economic variable. In less developed
nations, borrowing from international financial institutions and Central Bank
to finance sizeable portion of the deficits contribute to liquidity and
inflation (Egwaikhide, 2002).
This is
because rather than spending the borrowed money on capital expenditure such as
building roads and dams improving agricultural sector, etc which may improve
standard of living of the people, and hence, their productivity which in turn,
may improve the country’s economic growth, this borrowed money is spent on
pension and transfer payment. This has led to situations where expenditure
could not be curtailed, resources could not be raised for fear of adverse
effects, and greater deficits fuelled further inflation.
The
impact of fiscal deficit on the development of the Nigerian Economy depends on
the financing techniques(Inflation tax or bond financed deficit). Money
creation to finance deficit often leads to inflation while domestic borrowing
inevitably leads to a credit squeeze through higher interest rates or through credit
allocation (Easterly and Robello 2004, Sowa, 2004). It is pertinent to note
that Nigeria has relied very much on inflation tax (about 70%) and the
non-banking holding about15-20% in government bond, (Diamond and Ogundare,
2002). The exact quantitative impact of such mix of deficit financing can
better be X-rayed by the impulse response function. Some researcher believe
that fiscal deficit has a positive relationship (without put growth while
others state that deficits are negatively with output growth accumulation and
hence negatively with output growth (Egwaikhide 2005, Soludo 2008).
It is
therefore a core research issue and this is the pivot of this study. To
critically look at the impact of fiscal deficit on the development of the
Nigeria Economy in Nigeria. Currently, there is no consensus on the matter. The
level of economic development and the fiscal structure of Nigeria compound this
problem. Besides, previous studies have advanced in characterising the
implications of alternative sources and composition of deficits spending
without investigating whether fiscal deficit lead to economic growth.
1.3. Objectives
of the Study
The
broad objective of the study is to determine the relationship between fiscal
deficit and macroeconomic performance in Nigeria. Specifically, the study
will:
i.
Determine the impact of fiscal
deficits on macroeconomic aggregates in Nigeria.
ii.
Examine whether fiscal deficit leads to economic development in Nigeria.
iii.
Examine the nature of relationship between fiscal
deficits and macroeconomic aggregates in Nigeria.
1.4. Research
Hypotheses
H0:
There is significant relationship between fiscal deficit and inflation,
government taxes in Nigeria
H0:
There is no significant relationship between government deficit and government
expenditure in Nigeria
H0:
There is significant relationship between Fiscal deficits and unemployment,
economic growth in Nigeria
1.5. Scope of
the Study
The
study is on “fiscal deficit and development of Nigeria economy”. Hence, it entails
the use of macroeconomic variables such as Gross Domestic product (GDP) a proxy
for economic growth, government expenditure (GEXP), Inflation rate (INF),
government deficit (GDEF),government taxes (GTAX), and unemployment (UNEMP) and
also the long-run relationship between fiscal
deficit and macro-economic variables like exchange rate, interest rate. The
data on the above variables will cover the period of 1984-2014. The choice of
this period is based on data availability.
1.6 Organization of the Study
This
study is divided into five sections. The first section is the introduction. In
section two, relevant theoretical and empirical literatures are reviewed.
Section
three is the methodology. The model used is stated. The sources of the data and
their description, the estimation procedure are all stated. Section four shows
the presentation, analysis and interpretation of results. The fifth section is
the concluding part of the work, the summary of findings and policy
recommendations.
