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DEFICIT FINANCING AND ECONOMIC GROWTH IN THE DEVELOPING ECONOMIES (NIGERIA AS A CASE STUDY)

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[icon type=”icon-pencil”]: DEFICIT FINANCING AND ECONOMIC GROWTH IN THE DEVELOPING ECONOMIES (NIGERIA AS A CASE STUDY)
[icon type=”icon-book”]: Chapter 1 – 5
[icon type=”icon-book-open”]: 81 Pages
[icon type=”icon-basket”]: #3, 000
[icon type=”icon-doc-line”]: Ms Word format

This study, DEFICIT FINANCING AND ECONOMIC GROWTH IN THE DEVELOPING ECONOMIES (NIGERIA AS A CASE STUDY) contains concise information that will serve as a framework or guide for your project work. The project study is well-researched for academic purposes and are usually provided in complete chapters with adequate References.

Keywords: DEFICIT FINANCING AND ECONOMIC GROWTH IN THE DEVELOPING ECONOMIES (NIGERIA AS A CASE STUDY)


RESEARCH BODY

ABSTRACT

        This study examines the deficit financing and economic growth in the developing economies. The specific objectives of the study were to examine the trend of deficit financing and economic growth in the developing economies  how it affects economic growth and to examine various government policies towards correcting fiscal imbalance in the economy.

        The study makes use to secondary data which were sourced from the Statistical Bulletin of the Central Bank of Nigeria (CBN) Nigeria. The data were analyzed using the Ordinary Least Square (OLS) method.

        Findings from the analysis shows that the parameter of the estimates gives negative value for government budget deficits and broad money supply (M2) gives positive value (0.065260), this implies that increase in money supply will lead to proportionate increase economic growth. This is the co-efficient of determination of the regressed model R2 is 0.743127 (74%)  at approximately value which indicates that the explanatory variables account for about 74% of variables or changes in Real Gross Domestic Product (RGDP) are caused by changes in government fiscal deficit (GDEF) and broad Money Supply (M2) in Nigeria. The Durbin Watson statistics 2.410343 shows that autocorrelation exist within the estimated model.

            The researcher made some recommendation which includes : For achievement of sustainable economic growth through fiscal policy in Nigeria, there must be reduction in corruption, wasteful spending, improvement in policy implementation and functional feedback mechanism for the implemented policies, A stop must be put to unproductive foreign loans, wasteful spending and unregulated money supply with government putting into structure strategies designed to achieving increased and sustained productivity in economic sectors. The project suggests an interesting link between deposited monies and fiscal deficits. This relationship suggests that any improvement in fiscal deficits and broad money will enhance economic growth in Nigeria, Focus of government expenditure should be on manufacturing industries which include small, medium and large scale, agricultural sectors as well as encouraging indigenous production companies in Nigeria, Monetary policies should be analysed to create near perfect equilibrium such that the increase in money supply will not cause inflation rather than cushioning the extent of budget deficit in the economy

TABLE OF CONTENTS

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study

1.2 Statement of Problem

1.3 Objectives of the Study

1.4 Significance of the Study

1.5.Research Questions

1.6 Research Hypotheses

1.7 Research Methodology and Sources of Data

1.8 Scope of the Study

1.9 Organisation of the Study

CHAPTER TWO: LITERATURE REVIEW AND THEORETICAL FRAMEWORK

2.0 Introduction

2.1 Literature review

2.2 Theoretical Framework

2.3 Method of Financing Fiscal Deficit

2.4 Government Borrowing the Budget Deficit

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction

3.2 Restatement of Hypotheses

3.3 Model Specification

3.4 Method of Evaluation

3.4.1 Econometric Criteria

3.4.2 Statistical Criteria

3.5 Estimation Procedure

3.6 Justification of the Model

CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA

4.1 Data Presentation

4..1.1 Presentation of Data

4.2 Presentation of Regression Result

4.3 Interpretation of Result

4.3.1 Evaluation Based on Economic Criteria

4.3.2 The Student T-Test

4.3.3 F-Test

4.3.4 Coefficient of Multiple Determination R2

4.3.5 Econometric Test (Second Order Test)

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION,AND RECOMMENDATIONS

5.1 Summary

5.2 Conclusion

5.3 Recommendations

REFERENCES                                                                  

APPENDIX I                                                                    

APPENDIX II                 

CHAPTER ONE

INTRODUCTION

  • 1 BACKGROUND OF 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.

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.

Increasing public debt on the part of the Nigerian government came up with the following reasons:

  • Government borrowed to finance emergencies such as natural disasters and economic depression.
  • Government borrowed to finance important capital projects such as water dams, agricultural development projects, and river basin development projects.
  • Government borrowed to finance 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.

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.

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.

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.

  • 2 STATEMENT OF THE PROBLEM

Nigeria public expenditure accounts for over 20 percent of the Gross Domestic Product (GDP) (Adubi and Obioma 1999). Nigerian government was able to sustain these high levels of public expenditure in the 1970s and late 1980s because of the windfall gains from petroleum products which it enjoyed during the period. However, the enthusiasm which prompted the massive intervention of federal government in the 1970s began to fade in the 1980s when falling commodity prices in the world market resulted in drastic reduction in government earnings. The steady growth and several other socioeconomic objectives of government could not be achieved also because government expenditure was channeled into projects that were neither properly conceived nor properly managed.

There is a division among policymakers as to whether fiscal deficit as a result of increase in government expenditure hinders or promotes economic growth. Advocates of increase in government expenditure argue that government programmes provide valuable “public goods” such as education and infrastructure. They also claim that increased government expenditure can encourage economic growth by putting money into people’s pockets while proponents of decrease in government expenditure argue that government is too big and that higher spending undermines growth by transferring additional resources from the productive sector of the economy to government, which uses them less efficiently. They also warn that an expanding public sector complicates the efforts of implementing pro-growth policies.

            The relationship between government expenditure, fiscal deficit and economic growth is especially important for developing countries like Nigeria, most of which have experienced increasing levels of government expenditure over time. There is evidence that, unlike in the case of developed countries, consumption is not negatively related with economic growth. The study aims at empirically investigating this relationship in Nigeria, with a view of explaining the reason behind the observed causality between them and this has provoked the following questions:

  • What is the impact of fiscal deficit on economic growth in Nigeria?
  • How do shocks transmit between government expenditure, fiscal deficit and economic growth?
  • What constraints are limiting the effectiveness of government expenditure as an engine of economic growth and development?

3 OBJECTIVES OF THE STUDY

The general objective of this research work is to examine the impact of Nigeria’s domestic debt on its economic development. Other specific objectives are:

  1. To examine the cause and trend of fiscal deficit in Nigeria.
  2. To determine the impact of fiscal deficit on Nigeria’s economic growth.
  • To examine determinants of fiscal deficit in the economy

4 SIGNIFICANCE OF THE STUDY 

Fiscal deficit arise because public spending rises while revenue remain unchanged, or tax revenue falls while public spending rises. A commonly observed phenomenon in most developing countries is that the public sector plays a dominant role in initiating and financing economic growth (Adigun, 2007). The macroeconomic theory concerning fiscal deficit has undergone considerable transformation since the Keynesian revolution. Although fiscal deficit were common before emergence of the Keynesian theories, the pre-Keynesian presumption was that in peace time the budget should generally be balanced or even in surplus to pay off the government debt generated by war time deficit (Fisher and Easterly, 1990).

Keynes (1983) provided a frame work on how fiscal deficit behavior should be analyzed. His earlier emphasis was on fiscal policy and deficit as component of aggregate demand. From this perspective, the Keynesians found no need to balance the budget during periods of recession. Instead, the notion of cyclical balance budget during the period of recession, that is, the budget should be in balance or on the averaged over the business cycle – in surplus during booms, and in deficit during recession – was developed as a norm for fiscal behavior. Following the recession of the threat of widespread postwar unemployment, however, the emphasis shifted from the effect of fiscal policy on aggregate demand to its effect on the components of demand (Fisher and Easterly, 1990).

Some of these studied, such as Prechand (1993), Miller (1983) asserts that financing the budget deficit by borrowing from public implies an increase in the supply of government bonds. In order to improve the attractiveness of the bonds the government offers them at lower price, which lead to higher interest rates. The increase in interest rate discourages the issue of private investment, and private spending. Miller (1983) argues that government deficits are necessarily inflationary irrespective of whether the deficits are monetized or not.

However, the issue of debt management in Nigeria has continued to produce intense debate over the years. This study undertakes extensive public debt profile of the Nigerian government to the understanding of the public and the reader. The government will find thus study useful as findings will allow them assess their performance in the use of public debt to improve the welfare of its citizens. Successful completion of the work will serve as reference materials and contribute to existing works.

  • 5 RESEARCH QUESTIONS

The following questions have been raised to guide the study.

  • What are the cause and trend of fiscal deficit in Nigeria?
  • To what extent has fiscal deficit incurred by the government impacted on Nigeria’s economic growth?

 

  • 6 RESEARCH HYPOTHESES

Hypothesis is a reasonable guess or intellectual guess or suggestion based in facts and assumptions stand to be rendered valid or invalid. The following hypothesis has been drawn by the purpose of the study:

H0: Government’s fiscal deficit debt has no significant impact on Nigeria’s economic growth.

H1: Government deficit financing has significant effect on Nigeria’s economy

1.7       RESEARCH METHODOLOGY AND SOURCES OF DATA

The data to be used in this study shall be secondary in nature. The data shall be sourced from the Statistical Bulletin of Central Bank of Nigeria 2013 edition. The effect of privatization and commercialization on economic growth and development in Nigeria will be assessed using regression analysis; the method adopted by the work is the multiple regressions with OLS technique of estimation.

  • SCOPE OF THE STUDY

Fiscal policy is targeted at raising the welfare of the citizens by raising revenue and expending such revenue for providing various infrastructures and payment for such services recorded. However, fiscal deficit in Nigeria has been a recurring event with the fear that it’s a major factor responsible for poor economic growth in Nigeria.  This study will assess the impact of fiscal deficit on Nigeria’s economic growth working on a time frame of 1986 – 2012.  Secondary source will form the basic data while regression analysis will be used on data. The methodology to be adopted in this research is the linear regression with the application of ordinary least square (OLS) technique.

However, a major limitation constraining this study is in the area of data gathering and collection of data for the entire variable to be introduced within this study. This is because our findings in this research work will largely be based on the analysis carried with these data and given the nature of secondary data in Nigeria; they are highly inconsistent when used for time series data analysis of economic research.

Keywords: DEFICIT FINANCING AND ECONOMIC GROWTH IN THE DEVELOPING ECONOMIES (NIGERIA AS A CASE STUDY)



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