THE IMPACT OF FISCAL DEFICIT ON ECONOMIC PERFORMANCE IN DEVELOPING COUNTRIES, A CASE STUDY ON NIGERIA
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THE IMPACT OF FISCAL
DEFICIT ON ECONOMIC PERFORMANCE IN DEVELOPING COUNTRIES, A CASE STUDY ON
NIGERIA
ABSTRACT
Fiscal
Deficit has being found to be one of the most important aspects of fiscal
policy management. The main focus of this study is to analyze the effects of
fiscal deficit on economic development in Nigeria using simple percentage to
analyze the variables.
This simple tables was used to determine the effect of fiscal deficit on the
growth rate of the Nigeria economy, money supply, inflation and fiscal deficit.
It was therefore recommended that fiscal deficit should be reduced effectively
so that the Nigeria economy can develop to very high standard. Hence fiscal
reforms will need to be decisive, transparent and equitable if they are to
receive public support if they are to be successful.
TABLE OF CONTENT
Title page
Abstract
CHAPTER ONE; INTRODUCTION
1.1.
Background of the study
1.2.
Problem statements
1.3.
Objectives of the study
1.4.
Hypothesis
1.5.
Significance of the study
1.6.
Scope of the study
1.7.
Limitation of study
CHAPTER TWO
2.1.
Literature Review
2.2.
Introduction
2.3.
Macroeconomic Framework of Fiscal deficits
2.4.
Fiscal deficit and inflation
2.5.
Overview of Nigeria’s fiscal performance
2.6.
Towards sustainability of deficits an macroeconomic stability in Nigeria.
CHAPTER THREE
3.1.
Methodology
3.2.
Population of the study
3.3.
Sample size of the study
3.4.
Sources of data
3.5.
Method of data collection
3.6.
Method of data analysis
CHAPTER FOUR
4.1.
Data presentation
4.2.
Data analysis
CHAPTER FIVE
5.1.
Summary of findings
5.2.
Recommendations
5.3.
Conclusions
BIBLIOGRAPHY
APPENDIX
CHAPTER ONE
INTRODUCTION
1.1.
BACKGROUND OF THE STUDY
One of the most
important aspects of fiscal policy is the management of fiscal deficit, such
fiscal deficit refers to the excess of the public sector spending over its
revenue; such fiscal deficit has been at the forefront of macroeconomic
adjustment. However, fiscal adjustment was recommended to developing countries
[including all African countries] during the 1980’s, as being able to lead them
out of their economic problems. It is broadly noted that fiscal deficit – a key
fiscal indicator influences economic growth. Good fiscal management preserves
access to foreign lending and avoids the crowding out of private investment
while economic growth stabilizes the budget and improved the fiscal state of
the countries. The virtuous circle of growth and good fiscal management is one
of the strongest argument for a policy of low fiscal deficit.
The decade of the 1960’s and 1970’s are often called “Golden years” for
developing countries in most economic development history. This is because of
the fact that the growth rate of these countries was not only high, but was
internally generated mostly and it increased their investment with least
reliance on external sources. From 1970s and early 1980s most of the economic
growth of less developed nations was debt laden as they gradually maintained
current account deficit [World Bank 1999].
In Nigeria, to speed up economic growth after experiencing internationally oil
glut, made government to spend more of it revenue. This made the country to
join other countries like Columbia and Ghana, which also experience fiscal
deficit.
According to Anyanwu [1997], the Nigeria deficit was contracted for different
reasons, such as financing of trade, execution of projects and provision of
social and economic needs of the citizens including infrastructure, education
and health facilities.
The major source of revenue has been through taxation, oil and other sources of
revenue. The experiences of the countries like Mexico in 1982 and Nigeria since
1981 have however marked the end of an era of belief in the non-detrimental
nature of an unrelieved current account deficit has assumed critical dimension.
Slow growth in sub-Sahara Africa in general and Nigeria in particular has been
blamed on a number of factors including constantly deteriorating terms of
trade, high rate of inflation, poor investment, inappropriate domestic policies
as well as subsequent credit rationing [Mankin and Ball, 1998].
Several attempts have been made to reserve this deteriorating trend, this has
led to the introduction of various domestic economic policies and management of
fiscal policy applied by Nigeria. Various programmes has been initiated by the
International Monetary Fund and the World Bank eg. Structural Adjustment
programme [SAP]. Despite all these attempts, the Nigeria economy has continue
to experience over heating from the growth of fiscal deficit.
1.2.
PROBLEM STATEMENTS
In the case of
Nigeria, it is clear that lack of fiscal discipline is the bane of the economy
with the fact that realized revenues are often above budgetary estimate,
extra-budgetary expenditure has been rising so fats and resulting to large
fiscal deficit. The unhealthy situation is attributed largely to the huge debt
service duty, expenditures including the financing of ECOMOG in Liberia and
Sierra Leon etc.
Such fiscal deficit has become unsustainable. There is an increasing concern
about the unfavourable. There is an increasing concern about the unfavourable
effect on the productive capital stock of persistent and large government
deficits, which has invariably led to increased government debt as a ratio of
GDP and total private wealth. Indeed it is feared that an increase in public
debt will continue to feed upon itself since the government borrows the
government to finance the interest payment incurred and debt eventually becomes
excessive relative to macro-economic variables.
Unsustainability has become a very important problem as deficit continue to
increase due to debt accumulation. The government is biased towards
overspending due to the political economy in existence which makes
sustainability an issue.
There is also the problem of unpleasant fiscal arithmetic being used by the
federal ministry of finance since 1995, to manipulate fiscal operation. This is
to ameliorate fiscal surplus and convince the International Finance
Institutions that its fiscal position is healthy. According to CBN [1995], “iin
arriving at N1, 100.0m budget surplus in 1995 as announced in the 1996 budget
statement, the Federal Government utilized its statutory share of N38, 000.00M in
the AFEM International profits to offset part of its indebtedness to the CBN,
although no such mandate was issued. However, the N38, 000.00M was N1010.00M
lower that net credit from the banking system to government.
When added to N5, 682.6m [US $258.3M] external financing. The overall deficit
of the Federal Government would add up to N6, 752.6M. This represent a deficit
crop ratio of –0.5 in 1995. However, given public reprimand from the Federal
Ministry of Finance, The CBN in its 1996 annual report reversed itself and gave
a fiscal surplus of N1, 000M or 0.1% GDP. Also, in 1996 a fiscal manipulation
surplus as N37, 049M or 1.6% of GDP. This is made up of operational surplus of
N11 billion and retained unutilized excess crude oil sales over the budgeted
price amounting to N2 billion. The government went further, in its 1997 budget,
to explain that the operational surplus was arrived at after taking into
consideration on extra-budgeting expenditure, in spite also of N15 billion
short fall in Federal Government independent revenue and an increase of N8
billion in respect of domestic debt charge [see Anyanwu 1997].
Therefore, the question of exactly how much fiscal deficit negatively affects
the economy of Nigeria or rather, what is the impact of fiscal deficit on the
economy. What impact has fiscal management policies made to the economy? These
are some of the questions this study attempts to answer.
1.3.
OBJECTIVE OF THE STUDY
The main objective of
this study is to critically analyze the impact of fiscal deficit on economic
growth in Nigeria.
The specific objectives are as follows:
1.
To provide solution to the government’s extra-budgetary spending problems over
the years.
2.
To identify the impact of fiscal deficit on economic development and
performance in Nigeria.
3.
To examine various strategies and policies in relation to fiscal deficit and
their effectiveness.
4.
To determine the effects of fiscal deficit on various sectors of the economy.
1.4.
HYPOTHESIS
The hypothesis of
this study is formulated to facilitate the study and also to form a foundation
on which the study is based.
The null hypothesis therefore includes:
1.
Fiscal deficit has a significant effect on economic growth and performance of
any developing country even including Nigeria.
2.
The fiscal deficit management strategies adopted in developing countries
including Nigeria have not been effective in solving the country’s current
deficit problems.
The alternative hypotheses are:
1.
Fiscal deficit does not have adverse effect on economic growth and performance
of any developing countries including Nigeria have been effective in solving
the country’s current account deficit problem.
2.
The fiscal deficit management adopted in developing countries including Nigeria
have been effective in solving the country’s current account deficit problem.
1.5.
SIGNIFICANCE OF THE STUDY
This study will throw
more light into the fact that fiscal deficit siphon funds from the private
sector investment retarding growth and ultimately reducing the standards of
living. Fiscal deficits also create potentially large burdens on future
generations, as workers may be rapidly expanding elderly population. Fiscal
deficit can trigger disruptive movement in interest rates and exchange rates,
as highly indebted countries become increasingly vulnerable to global market
forces.
1.6.
SCOPE OF THE STUDY
The study will cover
the period of 1990-2009 [both for the developing countries] and Nigeria in
particular.
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