EFFECT OF FISCAL POLICY ON THE PRODUCTIVITY OF QUOTED MANUFACTURING COMPANIES IN NIGERIA (A STUDY OF CHAMPION BREWERIES PLC, GUINNESS NIGERIA PLC, NIGERIAN BREWERIES PLC)

CHAPTER ONE

INTRODUCTION

1.1      Background of the study

 The Nigerian economy has been plagued with several challenges over the years. In spite of many, and frequently changing, fiscal, monetary and other macro-economic policies, Nigeria has not been able to harness her economic potentials for rapid economic development (Ogbole, 2010). According to Adeoye (2006), the debate on the effectiveness of fiscal policy as a tool for promoting growth and development remains inconclusive, given the conflicting results of current studies.

Recently, government policies began to show more concern on the management and improvement of the economy. Government over the years have embarked on various macroeconomic policy options to grow the economy in terms of growth and development and the policy option employed is that of fiscal policy (Peter and Simeon, 2011). Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and government expenditure. It can also be seen as government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. The role of fiscal policy on the output and capacity utilization of manufacturing industry in Nigeria has been a growing concern, despite the fact that the government had embarked on several policies aimed at improving the growth of the Nigerian economy through the contribution of manufacturing industry to the economy and capacity utilization of the sector (Adebayo, 2010; Peter and Simeon, 2011 and Loto, 2012). Libanio (2006) through the use of Kaldor's first law defined manufacturing sector as the engine of growth of the economy.

Manufacturing sector refers to those industries which are involved in the manufacturing and processing of items and indulge or give free rein in either the creation of new commodities or in value addition (Adebayo, 2010). To Dickson (2010), manufacturing sector accounts for a significant share of the industrial sector in developed countries. The final products can either serve as finished goods for sale to customers or as intermediate goods used in the production process. Loto, (2012) refers to manufacturing sector as an avenue for increasing productivity in relation to import replacement and export expansion, creating foreign exchange earning capacity, raising employment and per capita income which causes unrepeatable consumption pattern. Mbelede (2012) opined that manufacturing sector is involved in the process of adding value to raw materials by turning them into products.

Thus, manufacturing industries is the key variable in an economy and motivates conversion of raw material into finished goods. In the work of Charles (2012), manufacturing industries creates employment which helps to boost agriculture and diversify the economy on the process of helping the nation to increase its foreign exchange earnings.

Manufacturing industries came into being with the occurrence of technological and socio¬economic transformations in the Western countries in the 18th-19th centuries. This period was widely known as industrial revolution. It all began in Britain and replaced the labour intensive textile production with mechanization and use of fuels. Manufacturing sector are categorized into engineering sector, construction sector, electronics sector, chemical sector, energy sector, textile sector, food and beverage sector, metal-working sector, plastic sector, transport and telecommunication sector (CBN, 2012).

In recent times, some manufacturing industries in Nigeria have been characterized by declining productivity rate, by extension employment generation, which is caused largely by inadequate electricity supply, smuggling of foreign products into the country, trade liberalisation, globalisation, high exchange rate, and low government expenditure. Therefore, the slow performance of manufacturing sector in Nigeria is mainly due to massive importation of finished goods, inadequate financial support and other exogenous variables which has resulted in the reduction in capacity utilization and output of the manufacturing sector of the economy (Tomola, Adebisi and Olawale, 2012). Looking at the manufacturing sector share in the GDP in recent years (1990-2010), it has not been relatively stable. In 1990, it was about 5.5% while it dropped to 2.22% in 2010. Also at the same period, the overall manufacturing capacity utilization grew from 40.3% in 1990 to 58.92% in 2010 (CBN, 2011)

Over the last decade, the growth impact of fiscal policy has generated large volume of both theoretical and empirical literature. However, most of these studies paid more attention to developed economies and the inclusion of developing countries in case of cross-country studies were mainly to generate enough degrees of freedom in the course of statistical analysis (Aregbeyen, 2007).

Fiscal and monetary policies are inextricably linked in macro-economic management; developments in one sector directly affect developments in the other. Undoubtedly, fiscal policy is central to the health of any economy, as government’s power to tax and to spend affects the disposable income of citizens and corporations, as well as the general business climate.

Monetarist strongly believes that monetary policy exact greater impact on economic activity as unanticipated change in the stock of money affects output and growth i.e., the stock of money must increase unexpectedly for central bank to promote economic growth. In fact, they are of opinion that an increase in government spending would crowd out private sector and such can outweigh any short-term benefits of an expansionary fiscal policy (Adefeso and Mobolaji, 2011). On the other hand, the concept of liquidity trap which is a situation in which real interest rates cannot be reduced by any action of the monetary authorities was introduced by Keynesian economics. Hence, at liquidity trap an increase in the money supply would not stimulate economic growth because of the downward pressure of investment owing to insensitivity of interest rate to money supply. John Maynard Keynes recommends fiscal policy by stimulating aggregate demand in order to curtail unemployment and reducing it in order to control inflation. While there are several studies on this debates between Keynesian and Monetarist in the developed countries, only fragmented evidence have been provided on this issues in the case of Nigeria (Adefeso and Mobolaji, 2011).

Today, monetary and fiscal policies are both commonly accorded prominent roles in the pursuit of macroeconomic stabilization in developing countries, but the relative importance of these policies has been a serious debate between the Keynesians and the monetarists. The monetarists believe that monetary policy exert greater impact on economic activity while the Keynesian believe that fiscal policy rather than the monetary policy exert greater influence on economic activity. Despite their demonstrated efficacy in other economies as policies that exert influence on economic activities, both policies have not been sufficiently or adequately used in Nigeria (Ajisafe and Folorunsho, 2002). The objective of this research work is to  examine the effect of central bank of Nigeria monetary and fiscal policies on the growth of Nigeria economy.

Based on the nature and importance of the relationship between fiscal policy and manufacturing sector, the study becomes necessary in Nigeria, where output and capacity utilization of manufacturing sector have suffered rapid fluctuations in recent years. Since government desires to increase total spending in the economy with fiscal policy which can either increase its spending or reduce taxes in maintaining manufacturing sector stability, it is therefore the researcher's interest to investigate the impact of fiscal policy on the manufacturing sector of Nigerian economy. Thus, this is the focus of this seminar paper.

1.2 Statement of the Problem

Upon several government policies on the stability of Nigerian economy through manufacturing industry, there have been a lot of challenges facing the growth of Nigerian manufacturing industry as identified by researchers. These challenges include: corruption and ineffective economic policies (Gbosi, 2007); inappropriate and ineffective policies (Anyanwu, 2007); lack of integration of macroeconomic plans and the absence of harmonization and coordination of fiscal policy (Onoh, 2007); gross mismanagement/misappropriations of public funds (Okemini and Uranta, 2008); and lack of economic potential for rapid economic growth and development (Ogbole, 2010). Despite the emphasis placed on fiscal policy in the management of the economy, the manufacturing sector inclusive, Nigerian economy is yet to come on the path of sound growth and development because of low output in the manufacturing sector to the economy (GDP).

This study is specifically interested in examining the level of significant fiscal policy has on manufacturing sector output in Nigeria due to its low contribution to the growth of the economy. Most studies on fiscal policy dwelt on the determinants, its impact on economic growth, its impact on capital formation, its impact on capital stock, deficit and macroeconomics variables, while studies on manufacturing sector focuses on its productivity, bank lending, economic growth, global economic downturn, monetary policy, banking sector reform, and its performance. However, in Nigeria, both variables have valuable significant effect on economic growth and stabilization, but study about their relationship has research gap, as there seems to be little or no attention on the impact of fiscal policy on manufacturing sector in Nigeria. This study seeks to fill this research gap.

1.3 Objective of the study

The aim of this research work is to examine the effect of fiscal policy on the productivity of quoted manufacturing companies in Nigeria with particular reference to Nigerian Breweries Plc. The general objective of this project work includes the following;

1.  To evaluate the effect of Federal government capital expenditure on the productivity of manufacturing companies.

2.  To examine the effect of interest rates on the productivity of manufacturing companies.

3.  To examine the effect of taxes on the productivity of manufacturing companies.

1.4 Research Questions

Based on the research objective above, the researcher developed the following question;

1       To what extent does f Federal government capital expenditure influence the productivity of manufacturing companies?

2       What is the extent of influence which interest rates exert on the productivity of manufacturing companies?

3       To what extent does taxes influence/ affect the productivity of manufacturing companies.

1.5 Research Hypotheses

Ho: Federal government capital expenditure does not have significant influence on the productivity of manufacturing companies.

H1: Federal government capital expenditure has significant influence on the productivity of manufacturing companies.

Ho: Interest rate does not have significant influence on the productivity of manufacturing companies.

H1: Interest rate has significant influence on the productivity of manufacturing companies.

Ho: Taxes does not have significant influence on the productivity of manufacturing companies.

H1: Taxes has significant influence on the productivity of manufacturing companies.

1.6   SIGNIFICANCE OF THE STUDY

As a result of unequal importance of a stable and unstable economy to both the public and private sectors, this research work will be of benefit to;

a.    The manufacturing companies, the study will be of immense help to manufacturing companies operating in Nigeria as at the time of this research work as if they recommendations it will help them to increase their productivity as they will equally contribute to the development of Nigerian economy.

b.   Government for better planning of all policies related to their responsibilities to the economy in particular and the country as a whole.

c.    The professional – who analyze the economic system and whom this study will give an insight into further research and application in their academic fields.

d.   Students – as part of their academic pursuit.

e.    The entrepreneurs and Business men who also need to understand the implications and effects of certain fiscal policies that can have on their fortunes directly or indirectly.

1.7           Scope And Limitation Of The Study

        The study is to examine the effect of fiscal policy on the productivity of quoted manufacturing companies in Nigeria with particular reference to Nigerian Breweries Plc, how it is used to fight inflation, unemployment, encourage, investment/production of goods and services and generally encourage private participation in economy building.

        This study further highlights the relevance of fiscal policies in the Nigeria economy. Its emphasis, encompasses the component of fiscal policies. Its relationship with other disciplines, how it is used in the economy. It does not however include comparison with other countries since economic structure and system differ and therefore would amount to unfair comparison. Constraints faced during this research work include.