FISCAL POLICY TOOLS ON MANUFACTURING SECTOR PERFORMANCE IN NIGERIA

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Table of Contents


Chapter One: 

Introduction

1.1  Background of the Study                                                                                            1

1.2  Statement of problem                                                                                                 6

1.3  Research Question                                                                                                      11

1.4  Research Objectives                                                                                                   11

1.5  Research Hypothesis                                                                                                  11

1.6  Significance of the study                                                                                            12       

1.7  Scope of the Study                                                                                                      12

 

Chapter Two: 

Review of Related Literature

2.1 Conceptual Framework                                                                                                    13

2.1.1 Operation of Fiscal Policy and Economic Growth                                                        13

2.1.2 Progression of Manufacturing Sector                                                                            14

2.1.3 Factors that Contribute to Poor Performance of the Manufacturing sector in Nigeria         18

2.1.4 Nigeria Interest Rate Policy                                                                                          19

2.1.5 Government Expenditure                                                                                              20

2.1.6 Gross Capital Formation                                                                                               20

2.2 Theoretical Literature Review                                                                                          19

2.2.1 Keynesian Theory                                                                                                          21       

2.3 Empirical Literature Review                                                                                            22                                                                                           

2.4 Summary of Empirical Literature Reviewed                                                                   30                                                                                                                                                                                             

Chapter Three: 

Research Methodology                                                                                 

3.1 Research Design                                                                                                               46       

3.2 Methodology Framework                                                                                                 46

3.3  Description of Variables                                                                                             47

3.4  MODEL SPECIFICATION                                                                                       48

3.5  3.5 SOURCES OF DATA                                                                                          49

3.6.1 PRE-ESTIMATION TEST                                                                                           50

3.6.1.1 Stepwise Regression Analysis                                                                                    50

3.6.1.2 Normality Test                                                                                                           50

3.6.1.3 Unit Root Test                                                                                                            51

3.6.1.4.1 Autoregressive Distributed Lag Model (ARDL) Approach to Co-integration Testing or Bound Co-integration Testing Approach                                                                                51

3.6.1.4.2. Requirements for the Application of Autoregressive Distributed Lag Model (ARDL) Approach to Co-integration Testing                                                                                          52

3.6.2 POST-ESTIMATION TEST                                                                                         53

3.6.2.1. Error Correction Mechanism (ECM)                                                                        53

3.6.2.2 Toda and Yamamoto for Granger Causality Test                                                      53

3.6.2.3. Breusch–Godfrey Test for Autocorrelation                                                               53

3.6.4 Breusch–Pagan test for Heteroscadasticity                                                                   54

3.6.5 Stability Test                                                                                                                  55

3.6.5.1 Cumulative Sum and Cumulative Sum of Squares                                                    55

3.6.5.2 Ramsey Regression Equation Specification Error Test                                             55

Chapter Four

4.1 PRE-ESTIMATION TEST RESULT                                                                              56

4.1.1 Descriptive statistics                                                                                                      56

4.1.2 Unit Root Test                                                                                                                                                                           56

4.1.3 Vector Autoregressive Lag Length Criteria 58

4.1.4 Autoregressive distributed lag bounds test for co-integration                                       58

4.2 Dynamic ARDL Short Run Error Correction Model and Discussion for the analysis of fiscal policy and manufacturing sector performance in Nigeria.                                                           61

4.2.2 ARDL long run estimate for the analysis of fiscal policy and manufacturing sector in Nigeria                                                                                                                                             61

4.3 Diagnostic Test/Post Estimation Test                                                                              62

4.3.1 Test for autocorrelation                                                                                                 62

4.3.2 HeteroscedasticityTest                                                                                      62

4.3.4 Toda and Yamamoto Granger Causality Test                                                               64

Chapter Five

5.1 Summary of findings                                                                                                        69

5.2 Conclusion                                                                                                                        69

5.3  Policy Recommendation                                                                                            70

Reference 71








CHAPTER ONE

INTRODUCTION


          1.1           Background of the Study

The performance of any economy is determined to a large extent by the level of activities especially in the real sector of the economy (Industrial sector). The all-important role of fiscal policies in relation to the sustenance of vibrant and stable economy through real sector cannot be jettisoned.

The achievement of macroeconomic goals, namely full employment, price stability, sustainabile economic growth and external balance via real sector economy, has always attracted priority attention of the government. Almost all economies of the world, irrespective of the state of the economy (developing or developed), the government intervenes in undertaking fundamental roles of allocation, stabilization, distribution, and regulation especially when the market proves inefficient. The government particularly pursues key macroeconomic objectives such as economic growth and development, full employment, price stability, and poverty reduction by applying several policies to rejuvenate the real sector of the economy. (Richard, Nwite, Ndubuisi, Onwe, Okereke Ogiji, 2019).

Fiscal policy is vital to every economy even to the less developed countries (LDCs) as a main tool for steadying the development of the economy. Fiscal policy in other words could be said to be governments' actions affecting its receipts (revenue) and expenditure which is taken as ordinarily a measure by the government's net receipts, its surplus or deficit. To offset unwanted variations in private consumption and investment government adopts anti-cyclical disparity of public expenditure and tax revenue.

The government as the case maybe, may offset undesirable variations in private consumption and investment by anti-cyclical variation of public expenditure and tax revenue. Furthermore, when the government uses inflow and outflow policies to regulate and stabilize the economy toward development, such action is referred as fiscal policy. Therefore fiscal policy serves as an economy’s shockabsorber in specific areas of development. Therefore fiscal policy serves as an economy's shock absorber in specific areas of development.

Peter and Simeon (2011), opine that the two key instruments of fiscal policy are government taxation and government expenditure. It can also be seen as government spending policies that impact macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. Government over the years has carried out various macroeconomic policy options to nurture the economy in terms of growth and development and the policy option employed is that of fiscal policy.

Oke (2013), observed that the intentions of fiscal policy is to rouse economic and social development by pursuing a policy stance that ensures a sense of balance between taxation, spending and borrowing that is consistent with sustainable growth. Macroeconomic policies (fiscal and monetary) are vital tools that can be used to lessen short-run vacillations in output and employment.

Arikpo, Ogar, Cornelius (2017), 'suggests that the need to achieve improved balance of payments position, balanced industrial development, high employment level, increased productivity, equitable income distribution, high revenue sources, price stability and economic growth has necessitated the development of various macroeconomic policies'.

'Fiscal policy over time has proven to be compelling apparatus in the hands of policy makers for handling macroeconomic issues like high unemployment, insufficient national savings, excessive budget deficit, and large public debt burden

The application of fiscal policy is essentially routed through government's budget. Budget as a fiscal policy tool could be considered as a structure that balances the changes in government revenue against expenditure over a period of time. It is a all-inclusive financial plan, setting forth the expected route for achieving the financial and operational goals of a country' (Meigs & Meigs,2004).

The importance of financial policy on the productivity and capacity utilization of the manufacturing sector cannot be overemphasized. Fiscal policy drives the market for the manufacturing sector through the purposeful manipulation of government revenue and expenditure. When government pursues an expansionary policy, the policy implication is that it reduces taxation and increases expenditure and the purchasing power of the economic units which in turns expands the market for manufactured products. This sends a signal to the manufacturers to increase their productive capacity to take opportunity of the increase market demand. The reverse holds when a contractionary policy is being pursued.

In the works of Libanio (2006) through the use of Kaldor’s first law, defined manufacturing sector as the engine of growth of the economy. To Adebayo 2010, the manufacturing sector are 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.

The final products of the manufacturing industries are usually categorized as finished goods which are presented to the public for sale or intermediate products used in other forms productions processes. The manufacturing sector is the key variable in an economy and motivates conversion of raw material into finished goods.

Adofu and Tijani (2017) viewed manufacturing as the production of goods for sale or use through application of tools, machine, labour, chemical and biological formulation. It comprises both handiwork of human activities and high tech by changing of unfinished goods to finished goods. In modern economy today, the growth of industries is widely built on
technological development of productive strategies.

The importance of manufacturing sector, according to Charles (2012), involves the creation of employment which helps to boost agriculture and diversify the economy on the process of helping the nation to increase its foreign exchange earnings. The need to attainb         etter balance of payments position, balanced industrial development, high level of employment, increased productivity, equitable income distribution, high revenue sources, price stability and economic growth has necessitated the development of various macroeconomic policies.

Furthermore, the manufacturing sector provides avenue for production of goods and services, assist in jobs creation, and also earn the economic agents’ handsome rewards.

Afolabi and Laseinde (2019), outlines that manufacturing sector is the fastest channel by which rapid sustainable growth and development is achieved in any economy.

Therefore, the level of responsiveness given to the manufacturing sector is negligible and might not have produced much output as expected considering its economic level of significance.

Charles (2012) noted that the ‘importance of manufacturing sector involves the creation of employment which helps to boost agriculture and expand the economy on the process of helping the nation to increase the size of its foreign exchange earnings’. In order to attain improved balance of payments position, balanced industrial development, high employment level, increased productivity, unbiased income distribution, high revenue sources, price stability and economic growth has given rise the need for the development of various macroeconomic policies.

Additionally, the manufacturing sector provides channels to produce goods and services, facilitate good jobs, and also earn the economic agents’ handsome rewards.

Afolabi and Laseinde (2019), states that manufacturing sector is the fastest channel by which speedymaintainable growth and development are accomplished in any economy.

Holis and Bacheney (1999) suggest that the manufacturing is the key expectation of most countries trying to upsurge their level of income. Manufacturing in Nigeria has the idea of transformingthe idle workers of Nigeria into full time or part time industrial workers and on the other hand, it will alter the structure of the Nigerian economy. The standard of living of the people in the economy will be improved and economic growth would be stimulated.

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

The performance of the Nigerian manufacturing sector since independence has been unimpressive. The scenario has been a mixture of initial mild growth and subsequent retrogression.

 The economy suffered series of problems ranging from excessive dependence on imports for consumption and input materials, socio-economic infrastructure decay, and capacity under-utilization in the industrial sector, poor management strategies and institutional framework, and agricultural sector neglect that used to be the economic base of the Nigerian economy.

As observed by Tomola, Adebisi and Olawale (2012), some manufacturing industries in Nigeria have been attributed by falling productivity rate, by extension employment generation, which is caused largely by insufficient electricity supply, bringing in secretly of foreign products into the country, trade liberalization, globalization, high exchange rate, and low-slung government expenditure. Therefore, the sluggish performance of manufacturing sector in Nigeria is primarily due to enormous importation of finished goods, insufficient financial funding including other exogenous variables which has resulted in the drastic reduction in capacity operation and productivity of the manufacturing sector of the economy.

 

1.2 Statement of the Problem

From independence till date, the industrial sector manufacturing sector has lived below its expectation. The departure of certain production companies proved that the Nigeria policies (that is from the Structural Adjustment Program (SAP) to the indigenous policies) have not favored the manufacturing sector. The location of crude oil which has become the primary export commodity and foreign exchange earner has to a large extent worsened the situation of the manufacturing sector leading to the neglect of the sector.

The low level of performance of the production companies in Nigeria will be majorly attributed to the poor performance of the Nigeria national budgets and its implementation as well as the poor implementation of the government expenditure. The manufacturing sector often tagged as engine of any economy has not received the required attention and commitment by the federal government despite its sensitivity hence staging the economy as an import based economy.


Figure 1: Trend Movement of Manufacturing sector performance percentage contribution to GDP

Source: Researcher’s compilation

 

It has been argued that industrial capacity, technological innovation, and business development, rather than enormous human resources and a high level of endowed material resources, are the quickest ways for any economy to achieve rapid, sustainable growth and development (Olamide, Oyebisi and Olabode, 2014).

According to Afolabi and Laseinde (2019) modern manufacturing processes lead to the implementation of management and business skills, as well as high-tech developments that often result in increased productivity and better living conditions on a large scale. But in Nigeria, instead of the manufacturing sector productivity to be increasing and translating to positive shocks to economic growth, it declines consequent upon dependence in oil sector and negligence of the sector. Despite the country's abundant natural resources, the World Bank reports that a larger proportion of Nigerians live in abject poverty, earning less than $2 per day as Nigeria isranked 161th out of 186 countries in the Human Development Index, among the poorest economy. The nation's economy is plagued by the nature of its economic system, which is based on a monoculture economy and gross underutilization of natural resources. The economy has been plagued by a slew of issues, including excessive reliance on imports for consumption and input materials, deterioration of socioeconomic infrastructure, capacity underutilization in the industrial sector, weak managerial strategies and institutional background, and neglect of the agricultural sector, which was once the mainstay of the Nigerian economy.

As observed from the graph in fig 1, from 1981 to 1994, there was a steady intercept movement of the percentageimpact of the industrial sector to economic growthgoing by the 20.26 percent to 20.92 percent which showed a significant contribution to GDP where this steady growth was met with a sharp intercept downtrend movement from 1995 to dateshowing evidence of the poor performance of the manufacturing sector contribution to GDP of Nigeria.

In Nigeria, tax is adopted as one of the reliable instruments or tools to ensure economic growth and development owing to its reliability and predictability.  Tax is been the primary source of government revenue besides oil has posed a lot of problem of the development of the industrial sector. As the government taxes earnings from investment, it becomes a problem for the firm to raise adequate resources in the capital market. When retained profits are taxed, firms fail to depend on their internal resources for expansion, but resort to borrowing if they can obtain such loans. Thus, the total capacity to invest is likely to decrease.

Thus, the total capacity to invest is likely to decrease. In pursuit of the achievement of economic goal set, government introduces a number of incentives in the annual budget such as the investment in certain preferred sector of the economy to attract foreign exchange earnings in order to compliment domestic production to enhance speedy economic growth and development. Through tax holidays and concessions, government encourages these.


Figure 2: Trend Movement of Tax Revenue in Nigeria

Source: Researcher’s Compilation 2021


Figure 3: Trend Movement of Company Income Tax in Nigeria

Source: Researcher’s Compilation 2021

 

Taxation as the key tool of financial policy is a big player and determinants for the growth and performance of the industrial sector due to increased company income tax that can be generated from Small and Medium Scale Enterprises (SMES) which can boost the performance of the sector or induce decline in their productive capacities. Taxation as a the main source of government income forms the part of government expenditure on public goods such as adequate infrastructure such as construction of roads, steady power supply,  public parks, hospitals and good telecommunication together with other basic social amenities which in turn creates a good investment atmosphere for the manufacturing sector.

Increased taxes implies increase tax revenue, whereby when the tax payers pays their taxes, government revenue increases which in turn ceteris paribus should translates to increase in government spending in strategic pillar of the economy which brings about economic prosperity. Take for instance, figures 2 and 3 above, it is unfortunate that the increase in Company Income Tax (CIT) which bring about 30% increase in total revenue over the years, has not translated into any meaningful progress in the manufacturing which can be attributed to mismanagement and corruption. For instance from 1994 to present, CIT and Tax Revenue has been on steady increase whereby the SMES contributed as much as 46.2 billion naira in 1999, 68.1 billion naira in 2001, 1229.02 billion in 2015 and rising to its peak in 2019 with an absolute value of 1517.51 billion naira whereby this increase reflected in the Tax Revenue values for instance also, in 1999, tax revenue averaged around 949.19 billion naira, 2,231.60 billion in 2001, 6,915.50 billion in 2015 and 10.262.30 billion in 2019, all values in Nigerian naira respectively. As a result, the possibly negative economic implications of high taxes on SMEs, as well as gradual instability in the country's economic activities, would lead to periodic increases in unemployment and inflation rates, as well as global economic instabilities; and these factors are highly asserted as being able to take a strong stance against any developing economy (Ogu, 2020). Consequent upon the identified problems, it is essential to examine investigation on the effect of fiscal policy on manufacturing firms output in Nigeria.


1.3 Research Questions

This study will be answering the following research questions:

1. What is the effect of government expenditure on manufacturing sector performance in Nigeria?

2. What is the effect of tax revenue on manufacturing sector performance in Nigeria?


1.4 Objectives of the Study

The broad objective of the study is to empirically examine the effect of fiscal policy on the manufacturing sector productivity in Nigeria. The specifically objectives are:

1.     To ascertain the effect of government expenditures on the manufacturing performance in Nigeria

2.     To evaluate the effect of tax revenue on the manufacturing sectorperformance in Nigeria.


1.5 Research Hypotheses

The hypotheses are in null form as shown below: Fiscal policy has no significant effect on the Manufacturing sector performance.

The specific null hypotheses for the study are stated as follows;

Ho1:Government expenditure has no significant effect on manufacturing sector performance in Nigeria.

Ho2:Tax revenue has no significant effect on manufacturing sector performance in Nigeria.

 

1.6 Significance of the study

The purpose of this study is targeted at the government, policy maker, economic planners, researchers and the academia which is posed to provide insight to the government on how to be judicious in its spending of public funds on the manufacturing sector, reduction of tax especially on growing industries as well as keep the general public informed on the operations and impart of fiscal policy. This study will further assist the nation’s economic planners in their policy planning. Specifically, the outcome of this study would provide a basic understanding of the dynamics of operation of monetary policy and the key macroeconomic variables in the development of the manufacturing sector.

 

1.7 Scope of the Study

The study will cover the period 1981to 2019 as its time frame. Data used for the study focuses on the Performance and impact of the production sector. The study also focuses only on some fiscal policy instruments which aid the entire economy’s manufacturing development process.

 

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