The Impact of Government Expenditure on Inflation in Nigeria
CHAPTER ONE
Objectives of the Study
The main objective of the study will be to examine the impact of government expenditure on inflation in Nigeria. The specific objectives of the study are:
- To evaluate the impact of government capital expenditure on inflation in Nigeria.
- To assess the effect of government recurrent expenditure on inflation in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
The problem of inflation is not peculiar to Nigeria alone. It is a general economic phenomenon facing many countries both developed and less developed countries alike. Many factors have been identified to be responsible for generating inflationary pressure in Nigeria. In a conference organized jointly by the Central Bank (CBN) and Nigerian Institute of Social and Economic Research at Ibadan in 1974 on “inflation in Nigeria” most participants stressed on money supply, government expenditure, limitation in real output and the existence of structural rigidities and bottlenecks in the economy as the major causes of inflation in the Nigerian economy. Studies by Akinnifesi (1977, 1984), Adeyeye and Fakiyesi (1980) and Osake (1983), failed to produce a consensus on the role of monetary growth in explaining inflation in the economy. However, they recognized the importance of non-monetary variable in explaining inflationary tendencies in Nigeria and this has been particularly the case following the introduction of SAP (Asogu, 1991).
The Nigerian economy presently is characterized by stagflation, a situation of high level of unemployment and inflation existing at the same time. To curb inflation, successive Nigerian governments have adopted various stabilization measures. It is against this background that we want to look into inflationary pressures and the Nigerian economy to see if we can identify the forces accounting for this pressure.
In line with the above, the Nigerian government needs to spend in order to ensure stability of the economy, stimulate or enhance productivity or investment through direct public spending and investment according to the Keynesian view (Olayungbo, 2013). Consequently, there has been a continuous increase in government expenditure in Nigeria, like in most developing countries, over the years, both in the recurrent and the capital expenditure. This could be attributed to huge receipts from the production and sale of crude oil and the increased demand for public goods like roads, education and health facilities, external and internal security given an ever increasing population.
Available statistics shows that total government expenditure increased from 11188.42 billion naira in 1981-1985 to 33457.68 billion naira in 1986-1990 to 152054.40 billion naira in 19911995 to 580259.12 billion naira in 1996-2000 to 1302089.46 billion naira in 2001-2005 to 3055457.22 billion naira to 5363112.32 billion naira. With the same period inflation rate has been on double digit and has moved up and down, it increased from 15.39 percent in 19811985 to 25.87 percent in 1986-1990 to 48.93 percent in 1991-1995, dropped to 12.29 percent in 1996-2000 and later moved to 15.73 percent in 2001-2005, fell again to 10.09 percent in 2006-2010 and by 2011-2017 the value had reached 11.82 percent (CBN, 2017).
Also, empirical studies on the effect of government expenditure or public spending on inflation have provided mixed results. Scholars such as Nyambe and Kanyeumbo (2015), Egbulonu and Wobilor (2016), Mehrara, Soufiani and Rezaei (2016) and more have found that public spending positively impacts on inflation while Olayungbo (2013), Peter (2015) and more have found that public spending negatively impact on inflation. Yet, Ogbonna (2014), Ojarikre, Ezie and Torka (2015), Ogbole and Momodu (2015) and more did not find any relationship.
Conceptual Issues
Concept of Government Expenditure
Government expenditures are the costs that are usually incurred by the government for the provision and maintenance of itself as an institution, the economy and society. Government expenditures usually tend to increase with time as the economy becomes large and more developed or as a result of increase in its scope of activities.Ogboru (2010) identified recurrent and capital budget as one of the major types of budget in an economy. It is sometimes referred to as revenue budget and it covers recurrent items or expenditure. The capital budget has to do with expenditures necessary to procure capital assets.
CHAPTER THREE
METHODOLOGY
Model Specification
The model specification of this study is in line with the work of Ojarikre, Ezie and Torka (2015) with further modification. Ojarikre, Ezie and Torka (2015) used only public capital and recurrent expenditure to examine its effect on inflation between 1981 and 2012 but this study used public capital, recurrent expenditure, money supply and exchange rate on inflation from 1981 to 2017. Thus, the model is specified as:
INF = F (GCE, GRE, MSS, EXR) (1)
Where;
INF = Inflation
GCE = Public capital spending
GRE = Public recurrent spending
MSS = Money supply
EXR = Exchange rate
Econometrically, equation (1) is specified as:
INF = β0 + β1GCE + β2GRE + β3MSS+ β4EXR+ µ (2)
Thus, a priori expectations are β1< 0; β2,β3, and β4> 0
CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION OF RESULTS
The empirical analysis of data in this paper was conducted in five phases. It begins with the descriptive statistics analysis of the data and thereafter conducted the unit test. Furthermore, Bound test for co-integration, the short run and long run estimation of the ARDL and diagnostic tests were conducted.
CHAPTER FIVE
CONCLUSION AND POLICY RECOMMENDATION
This study empirically investigated the effect of government expenditure on inflation in Nigeria between 1981 and 2017 by employing the Auto Regressive Distributed Lag (ARDL) approach. Data for the empirical analysis were sourced from secondary source like the Central Bank of Nigeria Statistical Bulletin (Various- Issues). The results of the analysis revealed that government capital spending impacts negatively on inflation; government recurrent spending has a negative and an insignificant impact on inflation. Also, money supply has both a positive and negative impact on inflation while exchange rate has a positive and an insignificant impact on inflation. Based on these findings, the paper therefore recommends that government needs to ensure appropriate channeling of its expenditure to infrastructural development in order to stimulate investment and production thereby stabilizing price. Also, there is need for the government to efficiently engage monetary policy instruments that are adequate in ensuring a given level of money supply that stabilizes prices.
References
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