Impact Of Fiscal Policy On The Manufacturing Sector Of Nigerian Economy
Abstract
The study examined Empirical Review of the Impact of Fiscal Policy on the Manufacturing sector of the Nigerian Economy from 1980 to 2017. The main objective of the study is to examine the impact of fiscal policy on the manufacturing sector of the Nigerian economy. The model for the study comprises of Index of Manufacturing Sector as endogenous variable and proxy by IMS and exogenous variables were; Government Expenditure (GEXP), Company Income Tax rate (CITR) and Federal Government Domestic debt Outstanding (FDDO). Annual time series data were gathered from the Central Bank of Nigeria Statistical Bulletins from 1980 to 2017. The techniques used for analysis are the Ordinary Least Square Techniques tested at the 5% level of significance. The econometric techniques of Ordinary Least Squares (OLS) results reveals that the Government Expenditure (GEX) and Company Income Tax Rate (CITR) have positive relationship with the Index of Manufacturing Sector (IMS) while Federal Government Domestic Debt Outstanding (FDDO) has negative linear relationship with the Index of Manufacturing Sector (IMS). The study concludes that Government Expenditure and Company Income Tax do not have significant impact on the manufacturing output, while the Federal Government Domestic Debt Outstanding showed a negative and statistically significant impact on the manufacturing sector. The study recommends amongst others that Government should channel its expenditure into the provision of direct physical structures that will be able to stand the competitive nature of both domestic and global markets as well as draw a policy plan that will subsidize company income tax for the manufacturing sub-sector rather than increase it.
CHAPTER ONE
INTRODUCTION
- Background to the Study
There has been a growing concern over the role of fiscal policy on the impact on the manufacturing industry in the economic growth of Nigeria, despite the fact that the government had embarked on several policies aimed at improving the growth of Nigerian economy. Libanio (2006) through the use of Kaldor’s first law defined manufacturing sector as the engine of growth of the economy.
Manufacturing involves the conversion of raw material into finished consumer goods or intermediate goods.
Manufacturing sector refers to those industries which are involved in the manufacturing and processing of items and indulge in either creation of new commodities or in value addition (Adebayo, 2010).
To Dickson (2010), manufacturing sector accounts for a significant share of the industrial sector in developed countries. The final products can either serve as finished goods for sale to customers or as intermediate goods used in the production process.
Manufacturing sector as seen by (Loto, 2012) refers to an avenue for increasing productivity in relation to import replacement and export expansion, creating foreign exchange earning capacity, raising employment and per capital income which causes unrepeatable consumption pattern.
Mbele (2012) opined that manufacturing sector is involved in the process of adding value to raw materials by turning them into product.
Thus, manufacturing industries is the key variable in an economy and motivates conversion of raw material into finished goods.
Manufacturing industries create employment which helps to boost agriculture and diversify the economy while helping the nation to increase its foreign exchange earnings, and enabling local labour to acquire skills.
From the on-going, one can rightly say that, manufacturing is the process of transforming raw materials into usable forms either for direct consumption or further production.
The history of manufacturing in Nigeria can be traced to pre-colonial times. In village based societies of the Hausa, Bini and Yoruba among others, small scale manufacturing of goods for trade, social and other purposes prevailed.
The manufacturing industry in Nigeria is believed to be the main instrument of rapid growth, structural change and self-sufficiency. Therefore, it represents a major plank in government plan to restructure the economy and diversify its productive base (ukwu, 1994).
Though the high cost conditions in the country occasioned by poor and inadequate infrastructural support services and other policy induced costs pose a serious threat, not only for output growth in the manufacturing sector but also for competitiveness. Bogunijoko (2004) argued that the continued harassment of the companies by some state and local governments over unauthorized multiple levies and charges in spite of the clear position of the law, is a significant deviation from the characteristics requirement for a conducive business environment that the real sector needs to perform its role as the engine of growth.
The limitations imposed by infrastructural constraint due to outright shutdown of activities by local supplying industries, especially by state owned enterprises explain the less than expected performance in the manufacturing sector. Also, the drive to enhance local sourcing has continued to be constrained by inadequate technical facilities to process raw materials of the right technical specifications and quality including uncertainty of supplies arising from irregular production and supply schedules. The relative exorbitant process of some local raw materials compared with the imported counterparts occasioned essentially by high cost condition has compounded the problems of local sourcing of raw materials, Bogunijoko (2004).
The lack of a level ground for local industries to compete with cheap imports; owing to premature and uncoordinated pursuit of import liberalization, dumping and inconsistency in government policy has compounded the problem of unplanned inventories in the economy. The incidence of dumping and under invoicing of imports especially from Asian countries is threatening the survival of local industries.
While the best quality imports from advanced economies cut the fancy of the upper echelon of income group, those low priced substandard quality products from East Asian countries attracted the low income group whose purchasing power has been weakened by the massive depreciation of the naira value. This has not helped in improving the job creation posture of the government which is one of the critical success factors in ensuring a stable democracy.
Risikat. O (2016) observed that unemployment in Nigeria, which at the present is at an unacceptable level, poses a great threat to the political, economic and social stability of the nation, as crime, destitution, social exclusion and similar vices become prevalent. As a result of all these, the government has embarked upon various policies to address these issues.
The role of fiscal policy on the output and capacity utilization of the industry is inevitable. Fiscal policy drives the market for the manufacturing sector through the purposeful manipulation of government revenue and expenditure. When government is pursuing an expansionary policy, it reduces taxation and increases expenditure and the purchasing power of the economic unit which in turn expands the market for manufactured products. The role of fiscal policy on the output and capacity utilization of manufacturing industry in Nigeria has been a growing concern, despite the fact that the government had embarked on several policies aimed at improving the growth of the Nigerian economy through the contribution of manufacturing industry to the economy and capacity utilization of the sector (Adebayo, 2010; Peter and Simeon, 2011 and Loto, 2012). Libanio (2006) through the use of Kaldor’s first law defined manufacturing sector as the engine of growth of the economy.
Manufacturing sector refers to 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 (Adebayo, 2010). To Dickson (2010), manufacturing sector accounts for a significant share of the industrial sector in developed countries. The final products can either serve as finished goods for sale to customers or as intermediate goods used in the production process. Loto, (2012) refers to manufacturing sector as an avenue for increasing productivity in relation to import replacement and export expansion, creating foreign exchange earning capacity, raising employment and per capita income which causes unrepeatable consumption pattern. Mbelede (2012) opined that manufacturing sector is involved in the process of adding value to raw materials by turning them into products.
Thus, manufacturing industries is the key variable in an economy and motivates conversion of raw material into finished goods. In the work of Charles (2012), manufacturing industries creates employment which helps to boost agriculture and diversify the economy on the process of helping the nation to increase its foreign exchange earnings.
Manufacturing industries came into being with the occurrence of technological and socio- economic transformations in the Western countries in the 18th-19th centuries. This period was widely known as industrial revolution. It all began in Britain and replaced the labour intensive textile production with mechanization and use of fuels. Manufacturing sector are categorized into engineering sector, construction sector, electronics sector, chemical sector, energy sector, textile sector, food and beverage sector, metal-working sector, plastic sector, transport and telecommunication sector (CBN, 2012).
In recent times, some manufacturing industries in Nigeria have been characterized by declining productivity rate, by extension employment generation, which is caused largely by inadequate electricity supply, smuggling of foreign products into the country, trade liberalisation, globalisation, high exchange rate, and low government expenditure. Therefore, the slow performance of manufacturing sector in Nigeria is mainly due to massive importation of finished goods, inadequate financial support and other exogenous variables which has resulted in the reduction in capacity utilization and output of the manufacturing sector of the economy (Tomola, Adebisi and Olawale, 2012). Looking at the manufacturing sector share in the GDP in recent years (1990-2010), it has not been relatively stable. In 1990, it was about 5.5% while it dropped to 2.22% in 2010. Also at the same period, the overall manufacturing capacity utilization grew from 40.3% in 1990 to 58.92% in 2010 (CBN, 2011). This may be attributed to the increase in government expenditure in recent times.
Furthermore, in Nigeria, the level of growth in manufacturing sector has been affected negatively because of high interest rate on lending and this high lending rate is responsible for high cost of production in the country’s manufacturing sector (Adebiyi, 2001; Adebiyi and Babatope, 2004; Rasheed, 2010). Okafor (2012) further observed that the level of Nigerian manufacturing industries’ performance will continue to decline because of low implementation of government budget and difficulties in assessing raw materials.
These changes in the manufacturing share of the GDP and capacity utilization shows that firms that are efficient can contribute to job creation, technology promotion and as well ensure equitable distribution of economic opportunities and the macroeconomic stability of the country.
The implementation of fiscal policy is especially routed through government budget.
Budget as a fiscal policy tool could be conceived as a structure that balances the changes in government revenue and expenditure over a period of time. It is a comprehensive financial plan, setting forth the expected route for achieving the financial and operational goals of a country (Meigs and Meigs, 2004). Literature regarding fiscal policy and economic growth can be discussed in two main streams. The first is the Neo Classical growth models of Solow (1956) and Swan (1956) which believed that, in the long run, it is the technological progress and population growth that determine economic growth. They are of the view that growth can influence some basic economic variables like; population growth rate, saving rate and index in human and physical capital investment through its different policies.
1.2Â Â Â Â Statement of the Problem
Upon several government policies on the stability of Nigerian economy through manufacturing industry, there have been a lot of challenges facing the growth of Nigerian manufacturing industry as identified by researchers. These challenges include: corruption and ineffective economic policies (Gbosi, 2007); inappropriate and ineffective policies (Anyanwu, 2007); lack of integration of macroeconomic plans and the absence of harmonization and coordination of fiscal policy (Onoh, 2007); gross mismanagement/misappropriations of public funds (Okemini and Uranta, 2008); and lack of economic potential for rapid economic growth and development (Ogbole, 2010). 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 (GDP).
Over the years, the performance of the manufacturing sector of the Nigerian economy has not been a satisfying one. From statistical reports, the contribution of the manufacturing sector to the growth of the Nigerian economy was relatively high in the period, 1966-75 at an annual average of 12.9 percent. This reflected the importance which the government attached to manufacturing activities and the adoption of import substitution, industrialization strategy which resulted in the establishment of many consumer goods industries, including soft drinks, cement, paints, soaps and detergents. Between 1976 and 1985, the growth rate in the sector expanded with the establishment of more import substitution industries with an annual average growth of 18.5 percent.
However, the collapse of the world crude oil market from the early 1980’s drastically reduced foreign exchange earnings, and this negatively affected the sector that it could no longer able to import needed inputs. Hence, manufacturing output growth fell drastically to an annual average of about 2.6 percent during the period 1986-78 even with the introduction of SAP in 1986 up till 1993 growth in the sector was negative (Anyanwu, 2004).
From the work of Adebiy and Babatope Obasa (2004), it was found that the manufacturing sector in Nigeria has been experiencing a stunted growth and its contribution to gross domestic product has remained low. For instance, the manufacturing sector as a whole remains small, accounting for only 6.6 percent of GDP in 2006 and 12 percent of employment (World Bank,2008). The production indices also indicated that while agriculture and services experienced modest growth from103.5 and 101.5 to 133.6 and 297.0 between 2000 and 2001 respectively. Manufacturing sector recorded a decline from 109.4 92.3 in the same period. It is also sad to mention that capacity utilization in the manufacturing sector declined from about 70.1 percent in 2000 to 44.3 in 2012 (CBN,2002) as cited by (Adebiyi & Babatope- Obasa, 2004).
From statistical report, it has been observed that the contribution of manufacturing to GDP has not been encouraging in spite of the several policies put in place to encourage production for export. For instance, the manufacturing output in 1981 was 1558.70 #billion and its contribution to GDP was 10.23 and capacity utilization was 73.3. In 2015, its contribution to GDP was 9.54 and capacity utilization was 59.9 percent (CBN, 2015) Statistical Bulletin
It is evident that manufacturing sub-sector of the Nigerian economy has not reached a desired stable level to perform its function as an engine of growth.
This shows that there is gross underutilization of resources. This might not be unconnected to factors such as poor macroeconomic performance of the economy, lack of adequate finance to purchase factory input, poor infrastructure and weak aggregate demand for manufactured exports, high price of products which is partly caused by high energy cost, inefficient and old equipment and poor infrastructure among others, Adejugbe, (1984) cited in Aregbeyen, (2016).
Therefore, the major concern of this study is to determine if expansionary fiscal policy will influence the performance of the Nigerian manufacturing sub-sector as its role of growth demand.
1.3Â Â Â Â Objectives of the Study
The main objective of this study is to examine the impact of fiscal policy on the performance of the Nigerian manufacturing sector. Other specific objectives are:
- To determine the impact of Company Income Tax Rate on the growth of the Nigerian manufacturing
- To examine the significance of government expenditure on the growth of the Nigerian manufacturing
- To examine the relationship existing between Federal Government Domestic Debt and Nigerian Manufacturing
- To recommend policy options based on the results or findings of this
1.4Â Â Â Â Statement of Hypotheses
In the course of this study, some hypotheses would be tested, which would either be validated or rejected by the result. These includes
- Ho1: There is no significant relationship between company income tax rate and the manufacturing sector of the Nigerian
- Ho2: Government expenditure does not have significant impact on the growth of the manufacturing sector of the Nigerian
- H03: Federal Government Domestic Debt Outstanding does not have significant impact on the manufacturing sector of the Nigerian
1.5Â Â Â Â Scope of the Study
This study focuses primarily on Nigerian economy spanning over a period of thirty-seven years, from 1980-2017. It exclusively deals with the fiscal policy implemented in Nigeria and structure of the manufacturing sub-
sector throughout the period under review.
1.6Â Â Â Â Structure of the Study
The study is classified into five chapters. Chapter one is the general introduction, chapter two examines the related literature on the topic.
Chapter three will show the theoretical framework and methodology, while chapter four will delve into the presentation of empirical analysis of results.
Summary, recommendations and conclusion are presented in chapter five.
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