INVESTIGATING THE IMPACT OF ECONOMIC GROWTH ON PORTFOLIO PERFORMANCE IN NIGERIA
ABSTRACT
This study seeks to empirically examine the effect of government investment portfolio on economic growth of Nigeria from the period 1980-2023. The objective was set to find out if government investment portfolio significantly affects economic growth in Nigeria; determine the causality direction between government investment portfolio and economic growth in Nigeria; show the trend of government investment portfolio over the years and ascertain if government focuses more on current spending or capital spending and its effect on growth. The variable included in this model are based on data collected from a period of (1980-2023) through which the impact of government investment portfolio and other variables like money supply, inflation and foreign debt was explained. The necessary information needed to explore this economic phenomenon can be illustrated in a functional relationship. To evaluate the regression result in this research model, it was on the basis of the economic a priori expectation of the parameters and statistical test. A secondary data was employed in this study. The data was gotten from major sources like the Central bank of Nigeria statistical bulletin, CBN annual report, Economic journals and textbooks. From the empirical result, it was found out that government investment portfolio has a positive impact on the economic from the period covered (1980- 2023). Therefore government was advised to encourage the federal government investment portfolio through various policy measures like granting of subsidies, increasing sectorial allocation to the sector, investment portfolio on education, health infrastructures, industries and other project to facilitate the productive base of the economy. On the other hand, it was seen that inflation rate, foreign debt, have no significant impact on economic growth. This showed that government have not provided all the needed measures to check price stability, excess money supply, low industrialization, subsistence agriculture and other sources of inflation rate, foreign debt in the country. To proffer solutions to the problem, policies were recommended to tackle the setbacks to economic growth.
TABLE OF CONTENTS
Cover Page - - - - - - - i
Title Page - - - - - - - ii
Certification - - - - - - - iii
Dedication - - - - - - - iv
Acknowledgements - - - - - - v
Table of Contents - - - - - - vi-vii
Abstract - - - - - - - - viii
CHAPTER ONE: Introduction
1.1 Background of the study - - - - 1
1.2 Statement of the problem - - - - 5
1.3 Objectives of the study - - - - - 7
1.4 Research Hypothesis - - - - - 7
1.5 Scope of the study - - - - - 8
CHAPTER TWO: Literature Review
2.0 Introduction - - - - - - 9
2.1 Conceptual/Theoritical Literature - - - 9
2.2 Empirical Review - - - - - 13
2.3 Theories of Government Expenditure - - - 21
CHAPTER THREE: Research Methodology
3.1 Theoritical Framework - - - - - 24
3.1.1 Nature and Sources of Data - - - - 24
3.2 Model Specification - - - - - 25
3.3 Method of Estimation - - - - - 25
3.4 Economic Apriori Expectation - - - - 26
3.5 Sources of Data - - - - - - 27
CHAPTER FOUR: Data Presentation and Analysis of Result
4.1 Introduction - - - - - - 28
4.1.1 Data Presentation - - - - - - 28
4.1.2 Unit Root Test for Stationarity - - - - 29
4.1.3 Cointegration Test - - - - - 30
CHAPTER FIVE: Summary, Conclusion and Recommendations
5.1 Summary - - - - - - - 33
5.2 Conclusion - - - - - - - 33
5.3 Recommendations - - - - - 34
References - - - - - - - 35
Appendix - - - - - - - 38-47
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The role of capital formation, financial development and financial sector in economic development of countries has been established in the literature. Sources of capital formation could either be internal or external, debt or equity. Foreign capital which could be in the form of foreign direct investment or foreign portfolio investment, have been found to play a significant role in the development of economies of emerging countries.
Finance is a function in business (private/public) that acquires funds for the organization and manages those funds within the organization. These activities include preparing of budgets; doing cash flow analysis; and planning for the investment portfolio of funds assets (Musgrave, et. al. 2018).
Public finance on the other hand refers to all activities of government in generating and allocating (spending) revenue towards ensuring efficiency of the state and the general well-being of the people, that is, financial operation of public treasury and its implication. Dalton (2021) affirmed that public finance is concerned with income and investment portfolio measures of the public budget authorities together with the adjustment of one to the other. The management of public finance would bring about control and co-ordination of the funds to achieve viability of projects and programmes in the public sector (Shirras, 2019).
In most economies today, government intervenes in fundamental roles of allocation, stabilization, distribution and regulation, especially where or when market proves inefficient or fails in resource allocation. Government also intervenes, particularly in developing economies to achieve macroeconomics objective such as economic growth and development, full employment, price stability and poverty reduction. (Asian Economic and Social Society Publication (AESS), 2011).
It is a fact that no society thoughout history has ever attained a high level of economic affluence without a government. Where government do not exist anarchy reigned and little wealth accumulated by productive economy activity. After government took hold, the rule of law and the establishment of private property right often contributed and it has similarly impacted on their societies as well. Economic growth represents the expansion of a country’s GDP or outputs. Growth means an increase in economic activities (Hymann, 2017).
Todaro (2021) Citing Kuznets defined a country’s economic growth as a long term rise in capacity to supply increasing diverse economic goods to is population, this growth capacity based on advancing technology and the institutional and ideological adjustment that is demanded. The experience of the old Soviet Union is revealing as well the comparison of east and West Germany during the cold war era or of north and South Korea today.
In the Nigeria context, the public sectors consist of the federal government, state government and local government. For example, Wagner’s Law predicts that the development of an industrial economy would be accompanied by an increased share of public investment portfolio in gross national product (GDP). This is not an exception in Nigeria, as a developing nation, trying to expand its industrial base – manufacturing, agriculture, mining, extractive industry etc. The scope of government investment portfolio has obeyed this law since the economic base and government investment portfolio has been expanding over the years. Furthermore, Wagner’s law suggests that a welfare state evolves from free market capitalism due to the population voting themselves ever increasing social services. Neo-Keynesians and socialists often urge governments to emulate modern welfare states like Sweden, which Nigeria is taking a cue from. As progressive nations industrialize, the share of the public sector in the national economy grows continually. The increase in state investment portfolio is indeed due to three reasons as identified by Adolf Wagner (German economist, 1835 – 1917), namely:
• Social activities of the State,
• Administrative and Protective Actions and
• Welfare functions.
The material below is an apparently much more generous interpretation of Wagner’s original premise.
• Socio-political, i.e., the state social functions expand over time; retirement insurance, natural disaster aid (either internal or external), environmental protection programmes.
• Economic: advance in science and technology, given room to an increase of state assignment into the sciences, technology and various investment projects.
• Historical: the state resorts to government loans for covering contingencies and thus the sum of government debts and interests amounts grow. What this is means is that it is an increase in debt service expenditure.
This principle applies to Nigeria as it increases her economic and capital bases socially and politically. As explained, there are two broad parts of government expenditures, namely: the recurrent and capital expenditures.
a. Recurrent expenditure-the financial outlay daily running of government business, Final consumption of government expenditure. For that of Federal Government, it is divided into three main parts which are personnel emoluments, other charges and special.
Personnel emoluments are wages and salaries of government workers the allowances accruing to them. Other charges are maintenance expenditure, travel, stationery, and consolidated charges Consolidated charges include emolument for judges and settlements government debts. Special investment portfolio - to acquire durable equipment, machines, motor vehicles, furniture etc. At times they are more of capital than running costs. Capital expenditure-investment outlays that increase the asset of government. It depends not only on the size of revenue but on the amount used annually by government.
Generally, government investment portfolio has been on the increase with increase in the Gross Domestic Product (GDP). That is the marginal propensity to spend in the public sector is high (the increase in current investment portfolio as a percentage of the increase in the GDP).This is as the need of the society increases. As government revenue increased, government decided on the provision of a number of social services as a means of spreading oil wealth such as free education etc. As a matter of necessity, government can embark on the provision of public capital goods. Hence overhead capital like roads etc. with heavy operating and maintenance investment portfolio Relatively, cost of public services is higher than private owing bureaucracy in government administration resulting in red-tape in the system.
During the first nation rolling plan (1989-1991), government aimed at effort to combat inflation, hence large budgetary deficits were to be avoided. Government expenditures were to be made more cost effective and kept at level that were consistent with the nations resources realistic growth target and general economic stability. The major instruments by which the government can ensure an effective growth in economic activities are;
i. investment portfolio that induce the firm or workers to produce certain goods and services.
ii. Taxes that reduce private consumption or investment and thereby free resource for public expenditure.
iii. Regulation and controls that direct people performance and so on.
These objectives are summarized as;
a. Provision of infrastructural facilities such as good roads, light, water, transport and communication facilities etc. in both urban and rural area with the view to adequate support to the productive sector and enhancing private sector participation on the various sectors of the economy.
b. Streamlining public investment portfolio to give priority to the completion of the initial ongoing viable project.
Direct investment portfolio is that incurred in an establishment of economically viable commercial enterprises such as iron and steel complex, oil and gas refineries etc.
The Nigerian capital market’s total value of transaction (VTRAN) is singled out for investigation in terms of its role in economic growth in that it represents a more active and realistic measure of contribution to growth. VTRAN represents currently actively traded securities unlike market capitalization which is a blanket for both active and non-active listed shares on the capital market. Figures from Central Bank of Nigeria [CBN](1981)’s statistical bulletin have shown that the total value of long term investment portfolio (represented by total value of transaction at the Nigerian Stock exchange) as at 1981 stood at N0.30billion with an average of N4.07 billion between 1981 to 2022. The value of total long term investment portfolio became N0.23billion in the year 2022. Beginning from 1991, a slight rise occurs to VTRAN to record N0.24billion in that year. Between 1991 and 2000, the average VTRAN stood at N77.46billion against the N4.07billion average of the 80s. In year 2000, the value was N28.5billion. Further statistics shows that N57.68billion and N799.91billion are the value of long term investment portfolio in years 2001 and 2010 respectively but the average over the period stood as N5437.29billion. From 2011 (with year’s value standing as N638.93billion) to 2020 (with year’s value standing as N1,086.18billion), the average value of capital market transactions (long term portfolio) over the last decade of this study was N10992.79billion.
In the same vein, statistics (CBN,1981) on real gross domestic product (RGDP) of Nigeria indicates the 1981 figure to be N19,549.56billion but it reached N21,462.73billion in 2022 with period’s average standing at N181,106.78billion. From 1991 through 2000, the average RGDP was N228,259.00billion with the associated 1991’s and 2000’s RGDP standing at N21,539.61billion and N25,169.54billion respectively. However, between 2001 and 2010, there was an average RGDP in Nigeria standing at N399,909.34billion; with respective year’s RGDP of N26,658.62billion and N54,612.26billion for years 2001 and 2010. Furthermore, N57,511.04billion and N70,014.37billion are the Nigeria’s RGDP for 2011 and 2020 respectively. In the last decade of this study, (2011-2020), the Nigeria’s RGDP average figure stood at N664,460.73billion.
The upward trend of the both RGDP and long term investment portfolio, as indicated by the decades’ average values, indicate a tentative/perceived association between the two variables. What is probing here is: to what extent does the value of transactions at the Nigerian Stock Exchange (NSE) (a proxy for long term portfolio in this study) contributes to the productive capacity of the country in form of economic growth? Or can the concurrent upward trends be a mere statistically display of association and of no economic and financial implications?
In an attempt to establish empirical link between investment portfolio and economic growth, extant studies (such as Baghebo and Apere (2014), Acha and Essien (2018), Ekine, Ewubare and Ajie (2019)) focused squarely of foreign portfolio investment, without attention to long term investment portfolio, as represented by portfolio of capital market investments. In fact, most past studies found evidence of a positive significant connection between foreign capital inflows and economic growth of recipient countries (Baghebo and Apere (2014), Okonkwo (2016), Suhadak and Nuzula (2016), Acha and Essien (2018), Ekine, Ewubare and Ajie (2019), Ezeanyeji and Maureen (2019)). Moreover, without specificity of portfolio, most other past studies had also emphasized the role of capital market on economic growth (Donwa and Odia (2010); Kolapo and Adaramola (2012), Yadirichukwu and Chigbu (2014), Obubu et al. (2016), Inimino, Bosco and Abuo (2018), Babarinde, Gidigbi and Abdulamjeed (2020)).
1.2 Statement of Problem
Theoretically, investment capital available through the capital market is expected to increase the financial resources available to firms that will help them expand business operations and as well eventually contribute to the productive capacity of the entire economy. However, empirical link between investment portfolio and economic growth is still largely unexplored by researchers, most especially in developing country such as Nigeria.
The size of government investment portfolio and its effects on long-run economic growth and vice versa has been as issued of sustained interest for decades. Policy makers are divided as to whether government expansion helps or hinders economic growth. Advocates of bigger government argue that government programs provide value “pubic goods” such as education and infrastructure they also claim that increases in government spending can boost economic growth by putting money into people’s pocket. Proponents of smaller government have the opposite view. They explain that government is too big and that higher spending undermines economic growth by transferring additional from the productive sector of the economy to government, which uses them less efficiently. They also warn that expanding public investment portfolio leads to complication in implementing pre-growth policies, Such as fundamental tax reform and personal retirement accounts. This is because critics can use the existence of budget deficit as a reason to opposite policies that would strengthen the growth of the economy.
A major concern about the Keynesian school of thought is that; if government interference is an effective remedy for recession and has no side effect, why do so many oppose the policy of budgetary expansion? Firstly, a large public sector diminishes the business sector in personal and the sources of investment. It may be maintained that in time of recession, much of the workforce is not employed at all, and therefore, employment in the public sector does not come at the expense of the public sector. Furthermore, in any growing economy, Government spending can be curtailed, the government can revert to a lower level of spending and personnel can be redirected to the business sector. However, while budgetary expansion is easy in recession, cut-backs during economic high are very difficult. No minister or director of a public institution relinquishes authority and budget easily. The result is an inflated and inefficient public sector even after the recession is over, and also a lower rate of growth in the private sector than its potential would indicate.
The relationship between public investment portfolio and growth is important especially for developing countries (Nigeria inclusive), most of which have experienced increasing level of public investment portfolio over time. There is evidence that, unlike in the case if developed countries, consumption is not negatively related with economic growth. This study shall empirical investigate this relationship in the case of Nigeria, with a view of explaining the reason behind the observed causality between them.
1.3 Objectives of the Study
The main objective of the study is to empirically ascertain the investigating the impact of economic growth on portfolio performance in Nigeria. Specifically it seeks to;
1. Find out if government investment portfolio significantly affects economic growth in Nigeria.
2. Determine the direction of causality between government investment portfolio and economic growth in Nigeria.
3. Ascertain if government focuses more on current spending or capital spending and its effect on growth.
1.4 Research Question
1. To find out the extent government investment portfolio significantly affects economic growth in Nigeria?
2. To determine the direction of causality between government investment portfolio and economic growth in Nigeria?
3. To ascertain if government focuses more on current spending or capital spending and its effect on growth?
1.5 Research Hypothesis
The hypothesis for this study is stated thus;
1. H0: Government capital investment portfolio and Government recurrent investment portfolio has no significant impact on the Nigerian economy.
2. H0: There is no causality between economic growth and government expenditure.
3. H0: Total government investment portfolio has no significant effect on economic growth.
1.6 Scope of the Study
For the purpose of this study, Nigeria government investment portfolio will be critically examined. The study will span from 1980 – 2023. Government investment portfolio will be splitted into recurement and capital expenditure.
1.7 Justification of the Study
There was a need for this study because of the need delineated the relationship between government expedition and economic growth in Nigeria which can only be assessed along selected components as a process of development to the county, participation in budgeting making process, availability expedition, equipment and facilities. However, both assertions go to suggest that man has numerous desires, which he constantly seeks to satisfy.
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