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COMPARATIVE ANALYSIS OF THE EFFECT OF FISCAL DEFICIT FINANCING ON ECONOMIC GROWTH OF NIGERIA (1981- 2015)

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Abstract

This study examined the comparative analysis of the effect of fiscal deficit financing on economic growth of Nigeria for a period of 34 years (1981-2015) was examined using a time series data. In order to achieve the objective of the study, econometric model was estimated using Ordinary Least Square (OLS). In the model, Real Gross Domestic Product which was used as a proxy for economic growth was regressed against capital expenditure, recurrent expenditure and fiscal deficit. The study revealed that recurrent expenditure exerted a positive significant relationship on the economic growth of Nigeria for the period under study. The study also found out there exist a negative insignificant relationship between fiscal deficit and economic growth in Nigeria for the period under study. Finically, the study revealed that capital expenditure has a negative insignificant relationship on the economic growth of Nigeria for the period under study. Based on the findings of the study, the study reco

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Fiscal policy plays a key role in the sustenance of economic growth and macroeconomic stability. The magnitude of government fiscal surplus or deficit is probably one of the most important statistics used to measure the impact of government fiscal policy on the economy (Siegal, 1979; Tanzi and Blejer, 1984).

According to Maji and Achegbulu (2012), governments, whether military or civilian belief that one way of solving social problems is by increasing government spending. Government as an agent of the people requires revenue to provide education, employment, adequate health services, infrastructures and good roads but in the process of discharging this enormous responsibility, the revenue and/or spending requirements of the government may sometimes outstrips its availability, hence the recourse to deficit financing so as to fill the gap between expenditure needs and revenue availability. Technically, a deficit would arise whenever expenditure surpasses revenues.

Ola and Adeyemo (1998), while explaining the reasons for increasing public debt on the part of the Nigerian government said that government borrowed to finance emergencies such as natural disasters, economic depression, important capital projects such as water dams, agricultural development projects, river basin development projects and current expenditure in anticipation of reasonable revenue collection.

At a point in year 2003 it was estimated that Nigeria needed approximately US$3 billion yearly to fully service her external debt apart from her domestic debt and this is considered unthinkable to do as it will result in the economy getting almost grounded (Brauninger, 2002).

In addition, over the years, the ever increasing Nigerian population has put some pressure on the government to spend more on public goods and merit goods. The contribution or provision of infrastructural facilities which is termed total factor productivity and often the responsibility of the nation state has made borrowing on the part of government also inevitable.

Since most of these infrastructures cannot be left in the hands of the private sector judging from the experience of market failures in different countries where this has been experimented, the public sector is then seen as the one better at handling issues of social overheads or infrastructural facilities (Adam and Bevan, 2004)

Essentially, the argument for the public sector activity is not because of its ability to run systems assigned to it efficiently but that the social marginal benefit derivable from state functions usually far exceeds their social marginal cost even if the ventures are run at a commercial loss (Brauninger, 2012).

Solomon (2012) observed that the trend in government expenditure showed an increase over the years especially on the oil sector. Government’s intervention in such area as provision of good roads, electricity, housing accommodation, and telecommunication etc over the years has increased which are very important to create an Investment-friendly environment as well as also attract foreign direct investment thus increasing the country’s capital stock formation which is needed for economic growth and development. There has thus been an increased the public debt as well. The success and efficient management of these public debts to translate to national economic development is thus all that matters.Fiscal deficits in Nigeria were generally financed by the excessive borrowing from the banking sector and external sources (NCEMA, 2004). The Central Bank of Nigeria (CBN) accounted for a large proportion of the financing from the banking sector (CBN, 2004). For a period of over three and half decades (1970 – 2006), the fiscal operations of the Nigerian government resulted in surplus in only six (6) years. Specifically, these surpluses occurred in 1971, 1973, 1974, 1979, 1995 and 1996. As at 1986, the federal nominal fiscal deficit stood at N8.3billion or 11.3 per cent of GDP. The deficit/GDP ratio was 5.4 per cent in 1987, 8.4 per cent in 1988, and 6.7 per cent in 1989. The ratio jumped to 11.0 per cent in 1991 and 15.5 per cent in 1993. The fiscal deficit grew by 58 per cent between 1985 and 1986. Between 1991 and 1992, the deficit grew by 60.9 per cent, increasing to 86.2 per cent in 1998. Between 1999 and 2006, the deficit/GDP ratios were 8.4, 2.9, 4.7, 5.6, 2.9, 1.7, 1.1 and 0.6 per cent, respectively. In absolute terms, these percentages were N285.1billion, N103.6billion, N221.0billion, N201.4billion, N202.7billion, N172.6billion, N161.4billion and N101.3billion, respectively.

Attaining macroeconomic balance has become a major goal to be pursued by most countries. While it is commonly agreed that persistently high deficits are bad for any economy (whether developed or not develop) there is little agreement as regards the precise effects of deficits on the various macroeconomic variables such as the domestic price level, domestic private consumption, domestic output, interest rate, capital formation, and the definite transmission mechanisms of the effect of deficits on the economy. This is notwithstanding the opposing view that government deficits have no effect on macro-economic variables of an economy. Deficit financing arises each time the government has budget deficit for the economy to grow as planned in a budget, shortage, of revenue resulting from excess expenditure has to be financed by raising fund from other sources available to the government Nwaotuka (2004) defines deficit financing as a planned excess expenditure over income, dictated by government policy, of creating fund to finance deficit by borrowing whether from local or foreign sources which must be repaid with interest within a specific period of time. Stiglitz (2005) see deficit financing as a situation in which the federal government excess fund of outlays over receipt of revenue for a given period is finance by borrowed fund from the public. Budget deficit as a way of financing was established after the two world wars, oil crises and current financial and economic crises. There are three ways to finance the deficit taxes, borrowing and monetization (inflation tax). The most popular model of deficit finance is borrowing which is usually done by issuing of government bonds (Stevan, 2010).

The various reasons for fiscal deficit are categorized as political consideration, economic issues and social factors (Gbosi, 2012). As we cannot separate politics from economics in both developed and developing nation today like Nigeria, political consideration now outweighs economic consideration in most government decisions. For instance, the aim of policy makers and political leaders to meet the needs of the citizens as well as delivering dividends of democracy has often driven up expenditure. And in the long run, this will result in deficits as the case of Nigeria in the recent time.

1.2 Statement of the Problem

Rapid and sustained output growth of the domestic economy of Nigeria has since the political independence in 1960 been of paramount importance to successive governments in the country. Consequently, governments have since implemented several national development plans and programmes aimed at boosting productivity, as well as, diversifying the domestic economic base.

The infrastructural and capital resources required for the attainment of these objectives have however been scarce. This has necessitated the interventions of the governments in the economy through the provision of the required huge capital outlay necessary for large-scale production in heavy industries and for the provision of other infrastructure. Government interventions were made possible by the oil boom of the early 1970s when Nigeria earned unprecedented amounts of foreign exchange from the export of crude oil (Sikkam, 1998). Government expenditures thus grew rapidly with a similar growth in the bureaucracy. But the oil glut that followed meant that government revenues declined significantly (Akor, 2001). As governments were reluctant in reducing the bloated expenditures that had resulted during the oil boom, they were forced to seek alternative means of financing their expenditures. Governments thus resorted to fiscal deficits.

Large fiscal deficits are common features in most developing countries, such as Nigeria. The economic consequences of such deficits are inflation, devaluation, deteriorating economic growth rate, fiscal adjustment, which constitute important elements of the economic agenda. Fiscal deficits are often attributed to and caused by rising public spending over and above public revenue. Government has at its disposal various modes of financing its spending. These include: taxation, borrowing from public, borrowing from the banking system (credit creation), printing of money, and loans and grants. Borrowing from public is not a major source of funding deficits in developing countries since personal incomes are generally low. Credit creation has often been used by developing countries as an alternative mode of financing.

Fiscal deficits, a situation where current expenditure exceeds current expected income, have become a recurring feature of public sector financing in Nigeria.

It is for this reason that this work has attempted to assess the effectiveness of fiscal deficits as a tool for the acceleration of economic growth in the Nigerian economy from 1980 to 2015, which covers a period of 35 years. However, focus has been on the effects of deficit financing on economic growth in Nigeria. Limited empirical studies have been devoted to determining the implications of deficit financing on Economic Growth. Very few researchers have been able to explore the implications of Fiscal Deficit financing on Economic Growth.

Consequently, this study is designed and intends to fill this knowledge gap by exploring the implications of Fiscal Deficit Financing on Economic Growth in Nigeria.

1.3 Objectives of the Study

The general objective of this study is to empirically investigate the effect of Fiscal Deficit Financing on Economic growth in Nigeria over the period of 1980 to 2015. The specific objectives are;

1. To establish the effects of government deficit financing on real Gross Domestic Product.
2. To determine if there existany relationship between government expenditure and economic growth.

• To establish if there exists a long run relationship between government deficit financing and economic growth.

1.4 Research Questions

In line with the above stated specific objectives, this study will provide answers to the following questions;

1. What are the effects of government deficit financing on real Gross Domestic Product?
2. Is there any relationship between government expenditure and economic growth?

• Is there any long run relationship between government deficit financing and economic growth?

1.5 Research Hypotheses

This study will empirically test the following hypotheses;

H

01

: There is no significant impact of government deficit financing on Economic Growth in NigeriaHo

2: 

There is no significant relationship between government expenditure and economic growthHo

3

: There is no long run relationship between government deficit financing and Economic Growth in Nigeria

 

1.6 Significance of the Study

The Long run implication of Fiscal deficit financing on Economic Growth in Nigeria is very important for policy decisions especially in achieving the Goals of Nigerian transformation agenda and the Millennium Development Goals (MDGs) so that the economy will be managed effectively to enable wealth creation for the benefit of all Nigerians.

Fiscal deficit financing has deleterious effects on the economy and macro-economic variables, for instance, financing of deficit through borrowing. If government borrows domestically, it will lead to higher interest rates. If the central bank monetizes the debts, it will lead to increased inflation. If government borrows abroad, through issuance of securities, it will weaken the export markets; if it increases tax, the economy damaging consequences are obvious in some combinations once there are fiscal deficits. Manifestations are obvious in one or more types of macroeconomic imbalance which includes serious debt burden, inflation, foreign exchange scarcity, and crowding out of the private sector.

This research work, apart from achieving its main objectives, will contribute immensely in the following ways;

It will serve as a useful platform or tool for policy making.

It can be used by policy makers in developing the analysis of the implication of budget deficit financing on macro-economic variables.

It will provide an insight to the policy makers, in making policies that are related to budget deficit and entire economy.

1.7 Scope of the Study

The study covers the fiscal deficit financing and economic growth in Nigeria granger causality approach in the course of the analysis, effort would be made to evaluate the effect of fiscal deficit financing on the Nigerian economic growth. More so, effort would be made to review on the theories of deficit financing. Its importance to economy shall be evaluated. The research analysis shall cover the period from 1981-2015. The justification of the period under the study is based on the researcher’s preference on the introduction of structural adjustment programme (SAP) in the year; 1980.

However, the study would be limited by the data range covering 1980-2015 due to the available latest bulletin of CBN statistical report as the time of the research proposal. More so, the study is limited from the researcher’s preference as scope of the data ranger started from 1980. Data transformation could as well influence the findings thereby serving as one of the limitations of the study. However, the model for the study shall be constrained by the variable adopted for the model estimation.

1.8 Organization of the Study

This study is organized in five chapters. Chapter one is introduction, background of the study, statement of the problem, objective of the study, research question, research hypotheses, significance of the study, scope of the study and organization of the study. Chapter two is review of related literature, theoretical and empirical. Chapter three is research methodology and analysis. Chapter four is presentation of data, discussion of result and chapter five is summary, conclusion and recommendations.