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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.

CHAPTER ONE

INTRODUCTION

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.

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.

OBJECTIVES 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.

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. 

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. 

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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