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Chapter one


1.1 Background of the Study

Economic policy refers to the acts that governments conduct in the economic realm. It addresses the processes for determining tax rates, government budgets, the money supply, and interest rates, as well as the labour market, national ownership, and a variety of other government economic actions.

The majority of economic policy elements can be classified into two categories: fiscal policy, which deals with government taxation and spending, and monetary policy, which deals with central bank operations concerning the money supply and interest rates.

International institutions such as the International Monetary Fund and the World Bank frequently influence such programmes, as do political ideas and party objectives.

Recently, government policies have become more concerned with the management and improvement of the economy. Over the years, the government has pursued a variety of macroeconomic policy alternatives to boost economic growth and development, with fiscal policy being one of them. Fiscal policy is the employment of government revenue collection (taxation) and expenditure (spending) to shape the economy.

The two primary instruments of fiscal policy are government taxes and government spending. It can also be interpreted as government spending policies that affect macroeconomic conditions. These policies influence tax rates, interest rates, and government expenditure in an attempt to manage the economy.

The role of fiscal policy in the output and capacity utilisation of Nigeria’s manufacturing industry has been a growing concern, despite the fact that the government has implemented several policies aimed at improving the Nigerian economy’s growth through the contribution of the manufacturing industry to the economy and capacity utilisation of the sector. Libanio (2006), using Kaldor’s first law, described the industrial sector as the engine of economic growth.

The manufacturing sector refers to industries that manufacture and process goods and engage in or allow for the creation of new commodities or value addition (Adebayo, 2010).

According to Dickson (2010), the manufacturing sector accounts for a considerable portion of the industrial sector in industrialised countries.

The end products might either be finished goods for sale to customers or intermediate goods employed in the manufacturing process. Loto (2012) identifies the manufacturing sector as a means of enhancing productivity.

in relation to import substitution and export expansion, producing foreign exchange earning capacity, increasing employment and per capita income, resulting in an unpredictable spending pattern.

Mbelede (2012) believes that the manufacturing sector is involved in the process of adding value to raw resources by converting them into products.

Thus, manufacturing sectors are the fundamental variable in an economy that drives the conversion of raw materials into completed commodities. According to Charles (2012), manufacturing businesses generate employment, which serves to improve agriculture and diversify the economy, hence assisting the nation in increasing its foreign exchange profits.

Manufacturing sectors emerged as a result of technological and socioeconomic revolutions in Western countries between the 18th and 19th century. This period was widely referred to as the Industrial Revolution. It all began in Britain, where labour-intensive textile production was replaced by mechanisation and the usage of hydrocarbons.

The manufacturing industry is divided into the following categories: engineering, construction, electronics, chemical, energy, textile, food and beverage, metal-working, plastic, transportation, and telecommunications (CBN, 2012).

In recent years, some manufacturing industries in Nigeria have experienced declining productivity rates and, as a result, job creation, which is largely due to insufficient electricity supply, smuggling of foreign products into the country, trade liberalisation, globalisation, a high exchange rate, and low government spending.

As a result, the slow performance of Nigeria’s manufacturing sector is primarily due to massive importation of finished goods, insufficient financial support, and other exogenous variables that have resulted in a reduction in capacity utilisation and output of the manufacturing sector of the economy (Tomola, Adebisi, and Olawale, 2012).

Looking at the manufacturing sector’s share of GDP from 1990 to 2010, it has not been reasonably steady. It was at 5.5% in 1990, but had declined to 2.22% by 2010.

At the same time, overall manufacturing capacity utilisation increased from 40.3% in 1990 to 58.92% in 2010 (CBN, 2011). This may be due to recent increases in government spending.

Furthermore, in Nigeria, the level of growth in the manufacturing sector has been negatively impacted by high lending interest rates, which are responsible for the country’s high production costs (Adebiyi, 2001; Adebiyi and Babatope, 2004; Rasheed, 2010).

Okafor (2012) also stated that the performance of Nigeria’s manufacturing industry will continue to deteriorate due to poor government budget implementation and difficulty in analysing raw materials.

These variations in manufacturing’s proportion of GDP and capacity utilisation demonstrate that efficient enterprises can contribute to job creation, technology development, equal distribution of economic opportunities, and the country’s macroeconomic stability.

Based on the nature and relevance of the interaction between fiscal policy and the manufacturing sector, the study is particularly important in Nigeria, where production and capacity utilisation in the manufacturing sector have fluctuated dramatically in recent years.

Since the government desires to increase total spending in the economy through fiscal policy, which can either increase spending or reduce taxes in order to maintain manufacturing sector stability

it is in the researcher’s interest to investigate the impact of fiscal policy on the Nigerian manufacturing sector. As a result, this is the project’s primary objective.

1.2 Statement of the Problem

Several government policies aimed at ensuring the stability of the Nigerian economy through the manufacturing business have resulted in numerous difficulties to the expansion of the Nigerian manufacturing industry, according to researchers.

These challenges include: corruption and ineffective economic policies (Gbosi, 2007); inappropriate and ineffective policies (Anyanwu, 2007); lack of integration of macroeconomic plans and fiscal policy harmonisation and coordination (Onoh, 2007); gross mismanagement/misappropriation of public funds (Okemini and Uranta, 2008); and a lack of economic potential for rapid economic growth and development (Ogbole, 2010).

Despite the emphasis on fiscal policy in economic management, including the manufacturing sector, the Nigerian economy has struggled to achieve sustainable growth and development due to low output in the manufacturing sector to the economy (GDP).

This study is primarily interested in studying the impact of major fiscal policy on manufacturing sector production in Nigeria, which contributes little to economic growth.

The majority of studies on fiscal policy focused on the determinants, its impact on economic growth, capital formation, capital stock, deficit, and macroeconomic variables, whereas studies on the manufacturing sector focused on productivity, bank lending, economic growth, global economic downturn, monetary policy, banking sector reform, and performance.

However, in Nigeria, both variables have a substantial impact on economic growth and stabilisation, but research on their relationship is lacking, since there appears to be little or no attention paid to the impact of fiscal policy on the manufacturing sector in Nigeria. This work aims to address this research gap.

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