FISCAL DEFICIT AND ECONOMIC PERFORMANCE IN DEVELOPING COUNTRIES
CHAPTER ONE
INTRODUCTION
1.1.THE STUDY’S BACKGROUND
The management of the fiscal deficit is one of the most important aspects of fiscal policy; the fiscal deficit refers to the excess of public sector spending over revenue; the fiscal deficit has been at the forefront of macroeconomic adjustment. During the 1980s, however, fiscal adjustment was recommended to developing countries [including all African countries] as a way out of their economic problems.
It is widely acknowledged that the fiscal deficit – a key fiscal indicator – has an impact on economic growth. Good fiscal management preserves access to foreign lending and avoids crowding out private investment, while economic growth stabilizes the budget and improves the countries’ fiscal position. One of the strongest arguments for a low-deficit policy is the virtuous circle of growth and good fiscal management.
In most economic development histories, the 1960s and 1970s are referred to as the “Golden Years” for developing countries. This is because these countries’ growth rates were not only high, but mostly generated internally, increasing their investment with little reliance on external sources. From the 1970s to the early 1980s, the majority of less developed countries’ economic growth was debt-laden, as they gradually maintained current account deficits [World Bank 1999].
To accelerate economic growth in Nigeria following an international oil glut, the government spent more of its revenue. As a result, the country has joined the ranks of other countries with fiscal deficits, such as Columbia and Ghana.
According to Anyanwu [1997], the Nigeria deficit was contracted for a variety of reasons, including trade financing, project execution, and meeting citizens’ social and economic needs, such as infrastructure, education, and health care.
Taxation, oil, and other sources of revenue have been the primary sources of revenue. However, the experiences of countries such as Mexico in 1982 and Nigeria since 1981 have marked the end of an era of belief in the non-detrimental nature of an unrelieved current account deficit. Slow growth in Sub-Saharan Africa in general, and Nigeria in particular, has been blamed on a variety of factors, including constantly deteriorating trade terms, high inflation, poor investment, ineffective domestic policies, and subsequent credit rationing [Mankin and Ball, 1998].
Several attempts have been made to halt this deteriorating trend, which has resulted in the implementation of various domestic economic policies and fiscal management practices by Nigeria. The International Monetary Fund and the World Bank have launched a number of programs, including the Structural Adjustment Programme [SAP]. Despite these efforts, the Nigerian economy has continued to overheat due to the expansion of the fiscal deficit.
1.2 PROBLEM STATEMENTS
In the case of Nigeria, it is clear that a lack of fiscal discipline is the bane of the economy, as realized revenues are frequently higher than budgetary estimates, and extra-budgetary expenditure has been rising rapidly, resulting in a large fiscal deficit. The bad situation is largely attributed to the massive debt service duty, expenditures such as the financing of ECOMOG in Liberia and Sierra Leone, and so on.
Such a fiscal deficit is no longer sustainable. There is growing concern about the negative. There is growing concern about the negative impact of persistent and large government deficits on the productive capital stock, which has invariably resulted in 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 on itself, because the government borrows from itself to finance the interest payments, and debt eventually becomes excessive in relation to macroeconomic variables.
Unsustainability has become a major issue as the deficit continues to grow as a result of debt accumulation. Because of the political economy in place, the government is prone to overspending, making sustainability an issue.
There is also the issue of unpleasant fiscal arithmetic used by the federal ministry of finance to manipulate fiscal operations since 1995. This is done to improve the fiscal surplus and persuade international financial institutions that the country’s fiscal position is sound.
According to the CBN [1995], “in arriving at the N1, 100.0m budget surplus in 1995, as announced in the 1996 budget statement, the Federal Government used its statutory share of N38, 000.00M in AFEM International profits to offset part of its indebtedness to the CBN, despite the fact that no such mandate was issued.” The N38, 000.00M, on the other hand, was N1010.00M less than the net credit from the banking system to the government.
External financing totaled N5 682.6 million [US $258.3 million]. The federal government’s overall deficit would be N6, 752.6 million. In 1995, this corresponded to a crop deficit ratio of -0.5. Following a public reprimand from the Federal Ministry of Finance, the CBN reversed its position in its 1996 annual report, reporting a fiscal surplus of N1,000 million, or 0.1 percent of GDP.
In 1996, the fiscal manipulation surplus was N37, 049 million, or 1.6 percent of GDP. This consists of an operational surplus of N11 billion and unutilized excess crude oil sales over the budgeted price of N2 billion. In its 1997 budget, the government went on to explain that the operational surplus was arrived at after taking into account extra-budgeting expenditure, despite a N15 billion shortfall in Federal Government independent revenue and an increase of N8 billion in domestic debt charge [see Anyanwu 1997].
As a result, the question of how much fiscal deficit negatively affects Nigeria’s economy, or rather, what is the impact of fiscal deficit on the economy, arises. What effect have fiscal policies had on the economy? These are some of the questions that this research seeks to answer.
1.3.THE STUDY’S OBJECTIVE
The primary goal of this research is to critically examine the impact of Nigeria’s fiscal deficit on economic growth.
The specific goals are as follows:
1. To provide a long-term solution to the government’s extra-budgetary spending problems.
2. Determine the impact of Nigeria’s fiscal deficit on economic development and performance.
3. To investigate the effectiveness of various fiscal deficit strategies and policies.
4. To assess the impact of the fiscal deficit on various sectors of the economy.
1.4.HYPOTHESIS
This study’s hypothesis is written to help with the research and to serve as a foundation for the research.
As a result, the null hypothesis includes:
1. Any developing country, including Nigeria, suffers from a fiscal deficit that has a significant impact on economic growth and performance.
2. Fiscal deficit management strategies used in developing countries, including Nigeria, have failed to solve the country’s current deficit problems.
The alternative hypotheses are as follows:
1. Fiscal deficit has no negative impact on economic growth, and the performance of any developing country, including Nigeria, has been effective in addressing the country’s current account deficit.
2. Fiscal deficit management in developing countries, including Nigeria, has been effective in addressing the country’s current account deficit.
1.5.IMPORTANCE OF THE STUDY
This study will shed more light on the fact that fiscal deficits divert funds away from private-sector investment, slowing growth and, ultimately, lowering living standards. Fiscal deficits also impose potentially significant burdens on future generations, as workers may be replaced by a rapidly growing elderly population. As highly indebted countries become more vulnerable to global market forces, fiscal deficits can cause disruptive movement in interest rates and exchange rates.
1.6.OBJECTIVES OF THE STUDY
The study will span the years 1990-2009 [both for developing countries] and will focus on Nigeria in particular.
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FISCAL DEFICIT AND ECONOMIC PERFORMANCE IN DEVELOPING COUNTRIES