ABSTRACT
The abstract presented a study that examined the response of the Capital Market to Public expenditure in Nigeria. The research aimed to investigate the relationship between the four major categories of public expenditure in Nigeria (Administration, Economic Services, Social and Community Services, and Transfer Payments) and the development of the capital market, as measured by the Market Capitalization index. Time series data spanning from 1999 to 2020, sourced from the Central Bank of Nigeria Statistical Bulletin, were utilized for the study. The stationarity of the variables was assessed using the Augmented Dickey-Fuller unit root test, while the existence of long-run and short-run equilibrium conditions was analyzed through the co-integration and Vector Error Correction Model (VECM). The empirical findings revealed a long-run equilibrium relationship between Public Expenditure and Capital market development in Nigeria during the period under study. Specifically, it was observed that public expenditure in Administration exhibited a significant and negative long-term relationship with Capital market growth in Nigeria. Conversely, Expenditure in Economic Services, Social and Community Services, and Public Transfer showed a significant but positive long-run relationship with stock market growth. In light of these findings, the study recommended an increase in government expenditure to stimulate Capital market growth in Nigeria and a reduction in borrowing to alleviate the burden of frequent debt servicing. Furthermore, it suggested reducing the importation of basic social amenities and equipment, instead focusing on funding local contractors and industries to execute major projects and thereby enhance investment in the Capital market, ultimately leading to economic growth. In conclusion, this study provided valuable insights into the relationship between public expenditure and the performance of the Capital Market in Nigeria. The findings have significant implications for policymakers, offering strategic directions to foster Capital market development and improve the overall economic landscape.
TABLE OF CONTENTS
Title
page i
Declarations ii
Certification iii
Dedication iv
Acknowledgements v
Table of
contents vi
List of
Tables ix
List of
Figures x
Abstract xi
CHAPTER 1: INTRODUCTION
1.1
Background to the Study 1
1.2
Statement of the Problem 4
1.3
Objectives of the Study 6
1.4
Research Questions 6
1.5
Hypotheses
1.6
Scope of the Study
1.7
Significance of the Study 7
1.8
Limitations of the Study
7
CHAPTER 2: REVIEW OF RELATED LITERATURE
2.1
Conceptual Review 9
2.1.1 Concept of government
expenditure 9
2.1.2 Capital expenditure 10
2.1.2.1 Importance of
Capital Expenditures 11
2.1.3 Recurrent expenditure 12
2.1.4 Transfer payments 13
2.1.5 The capital market 13
2.1.5.1 Market capitalization 15
2.1.6
Conceptual framework 16
2.2 Theoretial Framwork. 16
2.2.1 Keynesian economics 16
2.2.2 Wagner's law of
increasing state activity 18
2.2.3 Peacock-Wiseman
hypothesis or displacement effect 20
2.3
Empirical Review 21
2.4.1 Extract of empirical
review 35
2.4
Summary of Empirical Literature 38
2.5
Gap in Literature 38
CHAPTER 3: METHODOLOGY
3.1
Research Design 39
3.2
Area of Study 39
3.4
Method of Data Collection 39
3.5
Model Specification 40
3.6
Method of Data Analysis 40
3.7
Decision Rule 42
3.8
Diagnostic and Robustness Tests 42
3.9 Description
of Variables 43
3.9.1 Dependent variables 43
3.9.2 Independent variables 44
CHAPTER 4:
PRESENTATION OF DATA, ANALYSIS AND DISCUSSIONS
4.1
Presentation of Data 46
4.2
Descriptive Statistic 47
4.3 Test
for Stationarity 47
4.4 Lag
Selection 48
4.5 Test
for Long-run Equilibrium 49
4.6
Diagnostic tests 52
4.7 Post
Estimation Test 53
4.8 Test of Hypotheses 54
4.9
Discussion of Findings 56
CHAPTER 5: SUMMARY OF FINDINGS, CONCLUSION
AND RECOMMENDATIONS
5.1 Summary of Findings 59
5.2 Conclusion 59
5.3 Recommendations 59
5.4
Contribution to Knowledge 60
5.5 Areas
of further studies 60
References 61
Appendices 64
LIST OF TABLES
2.1 Webometric
Summary of Reviewed Empirical Studies 31
3.9.1 Summary of
Operational Definition of Research Variables 42
4.1 Data used for the Study 43
4.2.1 Descriptive statistic of data 44
4.3 Unit Root Test Results For Stationarity Of Data 45
4.4 Lag Length Selection 46
4.5 Johansen Co-integration
Rank Test (Trace) 46
4.5.1 Johanson co-integration rank test (Maximum Eigenvalue) 46
4.6 Normalized Coefficient Test Result 47
4.7 Long-run Relationship 47
4.8 Short
run Relationship 48
4.9 Summary of Diagnostic Test Result 49
LIST OF FIGURES
2.1 Conceptual Frame work 14
4.1 CUSUM Test 50
4.2 CUSUM of Squares 50
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
One of the most important weapons the government uses to
alter economic conditions is public spending. The government uses expansionary
and contractionary fiscal policies to improve the nation's economic situation
at all times. Government spending on health, education, agriculture,
administration, defense, and the security of citizens' lives and property are
all considered public expenditures. The portion of government spending known as
capital expenditures includes initiatives like building roads, bridges, dams,
schools, and other infrastructure. (Omodero, 2016). Therefore, Public
expenditure is very necessary for the maintenance of macroeconomic stability
because it is an important fiscal tool frequently deployedto maneuver or manage the economy. The
performance and expansion of the economy, in accordance with Keynesian
economics, are fueled by aggregate demand, or consumer spending. From a
Keynesian perspective, public spending encourages economic expansion by
supplying growth-driven facilities, specifically, economic and social
infrastructure, such as the provision of power and water, as well as
transportation, education, and health. Most often, this is referred to as a
capital expense. The amount and composition of expenditures affect the rate of
increase in the economy's output, according to Taiwo and Abayomi (2011).
Over the years, public spending in Nigeria has increased,
primarily due to higher outlays for administrative procurement, debt service,
high national security expenditures, infrastructure construction, and other
capital development in the nation. The
aggregate federal government spending increased by 21.0 percent to N7, 813.7
billion in 2018, according to the CBN Report (2018). It increased from 5.7
percent in the fiscal 2017 year to 6.1 percent as a percentage of GDP. It was
N9,714.8 billion as of 2019, an increase of another 24.3 percent. Recurrent
spending, which in 2017 was N5,675.2
billion or 4.4 percent of GDP, increased by 18.7 percent to N6,997.39 billion in 2019. This represented
a large increase in human costs and made up 72.6% of the total. Compared to
2017, when it made up 21.5% of overall spending, capital expenditure increased
by 35.4% to N1,682.1 billion, reaching N 2,289.00 billion in 2019. Due to the
high rate of capital releases over the periods compared with 2017, there was a
considerable rise in capital spending. Capital spending increased from 1.1
percent in 2017 to 1.3 percent in 2018, as a percentage of GDP. The economic
and administrative sectors accounted for N753.5
billion and N446.2 billion, or 44.8 and
26.5 percent of the total, respectively, according to an analysis of capital
spending by function, up from 43.6 and 26.5 percent in 2017. Construction of
roads, agriculture, and natural resources made up 36.0 and 17.0 percent of the
economy's total, respectively.
According to the analysis of the 2020 approved budget, the
federal government's recurrent obligations were expected to account for a total
of 4.84 trillion dollars, or about 45.7% of the total budget, while total
capital expenditures totaled 2.78 trillion dollars, or 26.2% of the total
expenditure amount. The noticeable increase in the recurrent expenditure cost,
which was reported and is about 10% higher than the 2019 figure, the federal
government claims, reflects the increase in salaries and pensions, including
the provision for implementing the recently enacted minimum wage for public
servants and workers. It was estimated that total capital expenditure,
including capital components of statutory transfers, capital expenditure at
government-owned firms, and capital expenditure on project-related loans, would
be in the neighborhood of N2.78 trillion. The sum is 12.6% less than what was
anticipated for the 2019 fiscal year. According to the National Assembly, the
projected total capital expenditures for 2019 were 3.18 trillion dollars
(BudgiT, 2020). It is envisaged that this sporadic growth has every tendency to
transcend into significant growth in the Nigerian capital market, with
concomitant effect on the development of the economy.
Soludo (2005) affirmed that the Nigerian capital market has
become, increasingly, recognized as a viable and efficient tool for economic
growth in every economy. The stock market is a segment of the financial market
where medium- to long-term financial instruments are generated and traded to
meet the long-term funding needs of economic agents (Nyong, 2005). Many
economies adopt laws to strengthen their operations because they understand
that the capital market is a crucial source of long-term funding. Firms can
access long-term financing for investments through the stock market. The market
carries out the intermediation process by combining funds from various
individuals who want to spend their extra money in non-traditional investment
opportunities. Before making an investment, investors closely monitor the
performance of the stock markets by keeping an eye on the composite market
index. The market index serves as a benchmark for evaluating the effectiveness
of individual portfolios, past stock market performance, and also gives
investors the necessary information to predict market movements in the future.
The extent of the market's contribution to the process of economic development
is frequently determined by how effective and efficient it is (Adedipe, 2004).
Equity market indicators for the first half of 2019 showed a
bearish trend, according to the Central Bank of Nigeria (2020). The Market
Capitalization (MCAP) fell by 13.98 percent to ₦11.59 trillion from ₦13.21
trillion at the start of 2019, while the All-Share Index (ASI) of the Nigerian
Stock Exchange (NSE) fell by 3.55 percent to 29,966.87 at the end of June 2019
from 31,070.06 at the start of the year. Comparing the review period to the
equivalent period in 2018, the overall volume, value of shares traded, and the
number of deals all fell. Investor caution in response to the intensification
of political activity leading up to the 2019 general elections and worries
about the world economy slowing down were the main causes of the market index
fall.
From 26,867.79 points at the start of the year to 24,479.22
points at the end of June 2020, the All-Share Index (ASI) of the Nigerian Stock
Exchange (NSE) fell by 8.89%, and the Market Capitalization (MCAP) fell by
1.54% to $12.77 trillion from $12.97 trillion. Comparing the review period to
the 17 Classified as Confidential similar period of 2019, both the total volume
and value of shares traded fell. The COVID-19 pandemic outbreak, which had a
catastrophic impact on businesses and financial markets, contributed
significantly to the decrease in market indices and led to a flight to safety
and an unforeseeable economic crisis. However, a jump in the trading of
financial services shares and falling yields on fixed-income assets in the
first half of 2020 led to an increase in the number of trades. This prevised
dwindling relationship between capital market development and public
expenditure in recent times calls for a careful investigation.
There is no doubt that government plays a significant role in
the development of the economy because, through its public sector expenditure,
it exercises control over the economy and channels resources to the desired
direction of economic development. According to Razin (2007), government
spending has an impact on the decisions and actions of the private enterprises
and people that benefit from it, which in turn impacts the development of the
capital market. The Nigerian capital market had been growing steadily before
the global recession, necessitating the various sub-national governments to
undertake fiscal policy interventions to stabilize and grow their
sub-economies. This is hinged on the fact that fiscal policy is a vital
instrument for macroeconomic management and a rewarding stabilizing instrument.
When the government issues a contract to a firm, the turnover of those
companies may increase, which could result in increased profitability and
eye-catching dividends for the enterprises' shareholders. Increased demand for
listed companies on the trading floor is caused by improved profitability and
impressive dividends, which make them more appealing. Given that the market is
functioning and efficient, this raises the stock price and market value of the
company, and as a result, the market capitalization of the entire capital
market. The transmission of government workers' and contractors' income (wages,
salaries, debt payments, etc.) into savings and investments is another way that
public sector spending can impact the growth of the stock market. Government
personnel and contractors are permitted to invest a portion of their earned
income in securities on the capital markets. This flow, however, depends on
their Perception of the market – its stability returns on investment therefrom
as compared to alternative investments.
If these beneficiaries believe that the capital market will
perform as expected and in a positive manner, this may encourage them to
participate in the market, ceteris paribus, increasing the volume of stock
market transactions (Edore, 2014). As a result, several policies have been
developed by the appropriate authorities to promote the growth of the Nigerian
capital market by enticing recipients of public sector spending to make
investments in the capital market.
1.2 STATEMENT OF THE PROBLEM
There is little doubt that the capital market is crucial to
the economic growth of any nation since strong capital market performance tends
to impact company investment activities, which in turn affect household wealth
and consumption.
Even though Nigeria's public sector spending has dramatically
increased over the past few decades, the connection between this and the
expansion of the capital market seems not to have been studied. The impact of
macroeconomic indicators on the capital market has been the subject of numerous
studies, with varying degrees of success. For instance, Pasquale and Oreste
(2016) examined the impact of taxation and spending on stock market indices in
11 Eurozone members and discovered a negative correlation between these two
variables. In a different study, Eneje, Obidike, Ani, Jakpuno (2019), carried
out a study on the Response of Stock Market Growth to Fiscal Policy in Nigeria
and reported that stock market indicators had positive impact on fiscal policy
indicators of which public expenditure is among. Similarly, Adedoyin, Russell,
Abiola, and Nwanjiac, (2017) studied the effect of fiscal and monetary policies
interaction on stock market performance in Nigeria and identified a significant
influence of these policies on the stock market. These studies focused on the
stock market which is just an integral part of the capital market.
Secondly, the studies modeled both public expenditures
alongside other fiscal policy instruments (Revenue & Debt) which do not
make room for a true reflection of the responsiveness of the capital market to
variations in components of public expenditure, which the current study is set
to investigate. Thirdly, majority of these studies were conducted in developing
nations like Europe and Indonesia.
It is generally accepted that macroeconomic issues have a
substantial impact on the capital market's performance in a developing country
like Nigeria, albeit it is unclear in which direction this influence lies. The
studies of Ibor Eba, Emori, and Enya (2018), which looked at the impact of
Public Sector Expenditure on the Development of the Nigerian Capital Market,
reported a positive impact of public sector expenditure on Nigerian capital
market, in contrast to Ogbulu, Torbira, and Umezinwa (2015)'s assessment of the
impact of fiscal policy operations on stock price performance in Nigeria.
Apart from the empirical research of Ibor et al.
(2018) to the best of my knowledge, no empirical research exists on the impact
of public sector expenditure on Nigeria Capital Market. In addition, this study
seeks to further highlight the effect of the individual components of
government expenditure of the capital market which most researchers have not
paid attention to.
Again, the capital market is a good empirical laboratory for
this study since stock market players/participants alway look forward to the
passage and implementation of the annual budget to stimulate the market and
boost activities therein. Therefore, the study is set to examined the impact
and direction of the relationship between public expenditure and capital market
development in Nigeria.
1.3
OBJECTIVES OF THE STUDY
The broad objective of this study is to investigate the
responsiveness of the Nigerian Capital market to public sector expenditure in
Nigeria. The study specifically entails investigating the responsiveness of:
1. Market
Capitalization to Public administrative expenditure.
2. Market
Capitalization to Public Expenditure on Economic Services.
3. Market
Capitalization to Public Expenditure on Social Services.
4. Market
Capitalization to Public Transfers in Nigeria.
1.4 RESEARCH QUESTIONS
The following research questions guided this study:
1. How
did Market Capitalization respond to Changes in Government Administrative
Expenditure Nigeria?
2. To
what extent had Public Expenditure on Economic Services affected market
capitalization in Nigeria?
3. To
what extent did Government Expenditure on Social Community Service affected
Market Capitalization in Nigeria?
4. To
what extent did public transfers influenced Market Capitalization in Nigeria?
1.5 HYPOTHESES
The study tested the four hypotheses stated in null form
Ho1:
Public Expenditure on Administration had no significant effect on the Market
Capitalization of Nigerian Capital Market
Ho2: Public
Economic services expenditure did not have a significant effect on market
capitalization in Nigeria
Ho3:
Government Expenditure on Social
Community Services had no significant influence on Market Capitalization in
Nigeria
Ho4:
Government transfers had no
significant influence on Market Capitalization in Nigeria
1.6 SCOPE OF THE STUDY
The study focused on the public expenditure of Nigeria and
the overall capital market of the financial system due to the researcher's
interest. All components of public expenditure were studied ranging from the
aggregate of capital, recurrent, and transfer. The activities of the selected
sectors studied were for a period of 21 years with data spanning from 1999 to
2020. The 1999 base year was chosen to capture the effect of Government
expenditure of Stock Market Growth since the inception of the civilian
democratic system of government, that is the Fourth Republic, in Nigeria.
1.7 SIGNIFICANCE OF THE STUDY
This study
is of great significance to several stakeholders which include:
Fiscal
Policy Makers: This study will enlighten Policymakers who are seeking a better
understanding of ways to enhance the Nigerian Economy to make appropriate
contractionary and expansionary policies to regulate the system.
Capital
Market Potential Investors: This study shall be of great importance to
individuals who desire to invest or perform any transaction in the capital
market. With the clearer view of the direction of impact of expenditure on
capital market, investors can have knowledge of the area to invest as soon as
the government roles of the budget for each fiscal year.
Researchers
and students: This study will be a source of reference material for many
students, researchers, and academicians who would have the interest to delve
into related fields in the course of their study.
Financial
Analyst: A financial analyst studies market activity and issues affecting
financial market participants. The results of this research will help them have
reliable information to help them make informed decisions and give appropriate
advice to investors to make the right investment decisions.
Click “DOWNLOAD NOW” below to get the complete Projects
FOR QUICK HELP CHAT WITH US NOW!
+(234) 0814 780 1594
Login To Comment