THE EFFECT OF MONETARY AND FISCAL POLICIES ON THE GROWTH OF NIGERIA ECONOMY

CHAPTER ONE

INTRODUCTION

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.

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.

1.2 Statement of the problem

The quest for and the challenges of economic development across the world increase on daily basis. In many countries of the world, the level of income disparity, inflation, unemployment and poverty is astronomically high such that the standard of living of an average person remains completely low. The situation state above is more popular in developing and less developed countries of the world. Governments and policy makers in these nations seek policies and strategies to “push” their economies out of the low socioeconomic ebb Robbins (2006).

As noted above, countries seek ways and means of advancing themselves technologically, industrially and economically in order to minimize the level of inequality, illiteracy and poverty. One of the basic measures used is the formulation and implementation of macroeconomic policies such as monetary and fiscal policies Ekpo (2004).

In principle fiscal dominance occurs when fiscal policy is set exogenously to monetary policy in an environment where there is a limit to the amount of government debt that can be held by the public. Hence if the inter-temporal budget constraint must be satisfied, fiscal deficits would have to be magnetized, sooner or later. In fact when the size of the financial system is small relative to the size of the fiscal deficits, a central bank may have no choice but to magnetize the deficits. Thus… in countries with shallow financial systems, monetary policy is the reverse side of the coin of fiscal policy and can only play an accommodative role.

In such low income countries, government securities markets are underdeveloped and central banks do not hold sufficient amounts of tangible securities and the central bank’s lack of suitable and adequate instruments of monetary control constitutes one of the factors that induce fiscal dominance…. Where fiscal dominance applies, the country’s economic policy is only as good as its fiscal policy and institutionalized central bank independence may not necessarily bring about an independent monetary policy (Oyejide, 2003).

1.3 Objective of the study

The aim of this research work is to examine the effect of central bank of Nigeria monetary and fiscal policies on the growth of Nigeria economy. The general objective of this project work includes the following;

1. To evaluate the effect of Federal government capital expenditure on the growth of Nigeria economy.
2. To examine the effect of interest rates on economic growth of Nigeria.
3. To examine the effect of taxes on the growth and development of Nigeria economy.

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 growth of Nigeria economy?
2. What is the extent of influence which interest rates exert on economic growth of Nigeria?
3. To what extent does taxes influence/ affect economic growth of Nigeria.

1.5 Research Hypotheses

Ho: Federal government capital expenditure does not have significant influence on the growth of Nigeria economy.

H1: Federal government capital expenditure has significant influence on the growth of Nigeria economy.

Ho: Interest rate does not have significant influence on economic growth of Nigeria.

H1: Interest rate has significant influence on economic growth of Nigeria.

Ho: Taxes does not have significant influence on economic growth of Nigeria.

H1: Taxes has significant influence on economic growth of Nigeria.

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

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

c.    Students – as part of their academic pursuit.

d.   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 central bank of Nigeria monetary and fiscal policies on the growth of Nigeria economy, 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.

a.   Limitation of cost and time

b.  Restricted access to some classified document.