Background of Study


Fiscal policy is concerned with the overall levels and broad composition of taxes, government spending and borrowing and their effects on the aggregate economy. It is one of the macroeconomic policy instruments that can be used to avoid or minimize short-term volatility in production, income, and employment in order to shift an economy to its long- term steady-state growth (Alesina and Ardagna, 2013).

The specific fiscal problems facing oil-producing countries like Nigeria stem from the fact that oil revenues are exhaustible, unpredictable, unstable, and predominantly global. The unpredictability of oil revenues complicates macroeconomic management and fiscal planning, with the challenge being to avoid transmitting the oil price volatility, which is outside the control of policy makers into the macroeconomy. The reliance of government revenue on uncertain, unpredictable, and exhaustible oil revenues poses great concerns related to fiscal management and sustainability in the short and long term (Barnett and Ossowski, 2002).

The Nigerian economy is overwhelmed by structural deficiencies that restrict its ability to sustain growth, create jobs and reduce extreme poverty (Udoma, 2016).

Buoyant oil revenues in the 1970s provided a basis for considerable yet unsustainable revenues and increased government spending. At the time, expansionary monetary and fiscal policies helped to increase government participation in economic activities. As a result, the economy became heavily reliant on crude oil for commercial, fiscal revenues and foreign exchange operations, neglecting the agricultural and solid mineral sectors that would have expanded the tax base of the country (Ogunjimi,

2019). Productivity in the non-oil sector of the economy was adversely affected.

Conventional wisdom suggests that the symptoms of Dutch disease syndrome are

manifest in the Nigeria economy given the combination of its resource abundance and low economic performance in the decades after the discovery of oil (Oriakhi & Iyoha, 2013).

A key item of the natural wealth of Nigeria is crude oil, which is simultaneously the country’s main export commodity. The average annual price of oil per barrel has been growing since 1970. Nigeria reached a very high growth performance during the 1970s when the country experienced its first oil boom. The global oil market glut at the beginning of the 1980s exposed the vulnerability of the Nigerian economy to global oil market calamity and the unpreparedness to withstand a sustained period of low world oil prices (Saibu and Apanisile 2013). The economy was again associated with solid growth at an average of around 6 to 7 percent for about a decade and half of the new millennium. Then came 2014-2015, when the country witnessed collapsing growth because of exogenous shocks of oil price collapse. In 2014-2015, the price of crude oil rapidly declined from 108.8 USD per barrel in September 2013 to 29.8 USD per barrel in January 2016. It caused a dramatic drop in GDP per capita by 17.06 percent between years 2014 and 2015. This revealed that the effects of commodity booms can quickly wear off (Adela, 2017).

The manifestations of the resource curse syndrome have exposed the Nigerian

economy to the short-run movement of prices, exchange rate and even economic growth. High volatility of these indicators makes the decisions of public authorities more difficult and raises an uncertainty for private entities (Ploeg and Poelhekke, 2009). In Nigeria, ethnic groups have been fighting over the control of natural

economic sectors have decline significantly over the past few decades. There is also a low level of environmental protection while public authorities do not invest enough resources in the education sector (Odhiambo and Olushola. 2018). Advocates of the resource curse syndrome further argue that revenues from natural resources are positively associated with authoritarianism.

The reason is that revenues from natural resources exempts the government from the need to raise revenue through an efficient domestic tax administration and collection system. This explanation is associated with rent seeking which distorts resource allocation, reduce economic efficiency, leads to a higher level of corruption, and weaken the efficiency of fiscal policy (Saibu and Apanisile 2013). In general, a sudden resource bonanza tends to erode critical faculties of politicians and induce a false sense of security. This encourages them to invest in projects that are unnecessary, keep bad policies in force, and dress up the welfare state so that it is impossible to finance once natural resource revenues dry up. Politicians are likely to lose sight of growth-promoting policies, free trade, and value for money management. In addition, politicians are also prone to increases in public spending during period of resource boom (Ploeg, 2011).

Of importance to Nigeria is the unpredictable nature of oil prices in the world market. There is considerable uncertainty facing the government of an oil exporting country concerning its export earnings and fiscal revenues. The non-sustainability of revenue paths for oil exporting countries makes government planning extremely inefficient for growth and development. Okonjo-Iweala (2005) observed that there are two channels through which volatility can be transmitted domestically to the Nigerian economy through the oil market. First, negative oil price shocks by reducing government revenue essentially decreases government spending efficiency. Second,

oil price instability creates an atmosphere of uncertainty, repelling private investment.

This instability has adversely affected Nigeria's historic growth record, as well as fiscal management and efficiency over the years. To this end, Ofoegbu et al (2016) admonished governments to seek for more reliable ways to generate revenue to prevaricate the economy from repeated shocks on the oil market.

Taxes are one of the major sources of revenue for funding government spending worldwide. Government collect taxes to carry out various activities that would improve their citizens' livelihoods through long-term economic growth (Raifu and Raheem, 2018). Sustainable economic growth would remain a mirage in any economy without a robust tax system. Besides that, taxation also influences economic agents’ choices on savings and investments, production, aggregate demand, and labour supply. Many of these decisions depend not only on the tax rates but also on the mix of various fiscal instruments adopted for revenue generation (Gbato, 2017). Thus, any shock to taxes would likely upset government revenue and therefore adversely affect national productivity.

Over the years, Nigeria’s low tax contribution to GDP has influenced government objectives of promoting private sector investment and accelerating economic growth (Ofurun et al., 2018). Tax collections in Nigeria are comparatively poor compared to other African countries. While other African countries have a large share of tax in their government revenues and GDP, Nigeria has held one of the lowest tax-to-GDP ratios in the world thus unable to maximise the benefits of using taxes as the cheapest, most reliable and predictable source of government revenues to finance inclusive economic growth (See Table 1.1).

Table 1.1

Tax Revenue as a percentage of GDP of Selected African Countries.

Countries 2010 2011 2012 2013 2014 2015 2016 2017 Average Algeria 35.1 34.4 37.2 17.4 16.1 21.8 18.2 34.4 26.8 Botswana 23.6 23.7 27.1 25.6 25.8 24.7 20.9 22.1 24.2 Cote

d’Ivoire 14.3 16.9 14.4 14.5 14.0 11.2 11.6 12.0 13.6

Kenya 20.1 21.1 22.1 25.9 16.9 16.3 16.2 15.6 19.3

Mauritius 18.0 18.0 18.6 18.4 18.5 19.0 18.1 18.6 18.4 Morocco 22.8 23.3 23.9 22.4 22.0 21.2 21.5 21.8 22.4

Nigeria 5.5 5.1 4.3 4.1 5.2 4.8 6.1 7.0 5.3


Africa 25.0 25.2 25.6 26.0 26.5 27.3 27.1 26.9 26.2 Source: Author’s Compilation from World Bank Statistical Database.

In seven African countries namely Algeria, Botswana, Cote d’Ivoire, Kenya, Mauritius, Morocco and South Africa, the tax-to-GDP ratios range from 12.0 percent to 34.4 percent in 2017 from table 1.1. However, tax revenue as a percentage of GDP in Nigeria was approximately 7 percent in the same year and consistently below the World Bank threshold of 15 percent necessary to achieve sustainable economic growth (Gaspar and Philippe, 2016). This is likely to be insufficient for the government to sustainably grow the economy without improving the ratio. During the period 2010-2017, Nigeria had an average tax as a proportion of GDP ratio of 5.3 with the corresponding figures for Algeria, Botswana, Morocco, and South Africa being 26.8, 24.2, 22.4 and 26.2 percent respectively. Although the tax-to-GDP ratio has increased marginally in recent years, more efforts are needed to raise revenues in Nigeria to support the mobilisation of domestic capital that will allow for higher spending on infrastructure, healthcare, and education. Effectively applied and properly graded taxation enables a country to be better empowered in its efforts to generate the necessary revenue to take care of its expenses, meet citizens' needs and participate

effectively in world economy (Nimenibo et al, 2018). The low tax to GDP ratio in Nigeria indicates the presence of idle fiscal space or unexploited mobilisation potential for government revenue generation (Revenue Statistics in Africa, 2016).

Nigeria’s oil revenues are clearly no longer able to support its development objectives (Arowoshegbe et al., 2017). The low performance of the non-oil tax revenue has great potential of creating substantial macroeconomic instability and consequently impacting growth negatively. (Oriakhi and Iyoha, 2013). This underscores the government's determination to strengthen its fiscal framework, reduce expenditure and revive its tax system by boosting revenue from non-oil sources. This will encourage growth and job creation while maintaining debt sustainability and enhancing resilience (Lagarde, 2015). Not only is Nigerian economy unpredictable, it ranks among the world’s most volatile economies (World Bank, 2014). This is true for many macroeconomic measures and does not merely represent the numerous shocks experienced over the past years in the global oil markets (Umar and Abdulhakeem, 2010). This uncertainty, when combined with poor fiscal discipline, results in a propensity to diverge from budgetary allocations and make certain decisions on government expenditure as if revenues received in one year were approximately the same as in the previous years. Compared to a constant expenditure profile, this pro-cyclical behaviour appears to increase the fiscal deficit volatility (Blanchard and Perotti, 2002).

It is equally important for policymakers in developing countries like Nigeria to be able to determine how private investment reacts to changes in government policy—

not only in the design of long-term growth policies, but also in the implementation of shorter-term stabilisation programmes. Investment plays a key role in growing

transfer, stimulating innovation and job creation, making it an important tool for economic growth (Babu et al, 2020). Investment also plays a vital role in making the process of growth more economically and geographically inclusive, increasing opportunities for disadvantaged people to participate and to benefit from growth. Over time, developing countries have recognised the vital role that private investment plays in fostering economic growth. Effective mobilization of private investment is therefore increasingly important for creating jobs, increasing growth rates, and reducing poverty. Given the central role of private investment in growing the economy, the trends in private investment in Nigeria have generally not been impressive (Babalola and Onikosi-Alliyu, 2020)

Nigeria has tremendous potential for investment and growth with its vast wealth of oil and gas, fertile and expansive farmland, solid minerals, and large human capital. Despite its rich resource endowments, the overall economic performance of the country over the past few decades has been decidedly unimpressive while economic growth has barely kept pace with population growth. The Nigerian economy has continued to face turbulent times with fragile GDP growth rate, poor revenue growth, increasing government expenditure and escalating debt burden. There is a pressing need to sustainably strengthen the economy, increase private sector investment, build infrastructure, reduce poverty and most of all create jobs using appropriate fiscal instruments (Rafindadi and Aliyu, 2017). Without a major structural policy reform and a revenue-driven fiscal consolidation, there would be limited resources to fund the budget and provide those infrastructural facilities essential to stimulate investment and engender growth in Nigeria.