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PROJECT TOPIC AND MATERIAL ON Budget Deficit And Current Account Balance In Nigeria
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- Name: Budget Deficit And Current Account Balance In Nigeria
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The policy of deficit budgeting had grown tremendously in Nigeria between 1985 and 2015.The essence was to help accelerate the growth of capital in Nigeria using the policy of deficit budgeting as formulated by Keynes. This work is centered on budget deficit and current account balance in Nigeria. Between the period of 1985-2015 and secondary data obtain from the CBN statistical bulletin and the Federal of Bureau of Statistics and Bureau of labor statistics USA were used. The statement of problem and the broad objective of this study is to determine the effect, relationship and causal relationship between budget deficit and current account balance in Nigeria. And the current account balance (CB) was used as the dependent variable while producer price for home and rest of the world (HPP,WPP ), real gross domestic product for home and rest of the world (RGDP,WDGP), exchange rate (EXCH), and budget deficit (BD) were the dependent variables employed. And also E-view package was used in running the regression the various tests were conducted for stationarity, long-run and short-run equilibrium and casualty and this test include the Unit root test, co-integration test and the granger casualty test. And the result showed that there is an inelastic relationship between current account balances, budget deficit, exchange rate and the real gross domestic product. And also budget deficit have a negative effect on the current account balance.
1.1 Background of the Study
Deficit budgeting appeared justified during the immediate post-independence era, largely because of the need then to expand the economy. This culture however became seemingly entrenched over time. Up till 1970, the country ran fiscal deficits and sustained public sector spending boom. The fiscal deficits of the 1970 were justified on the grounds that it was largely for war reconstruction. Backed with huge wealth from oil Nigeria embarked on wasteful spending, the mismanagement of the oil boom of the early 1970s led to the return to deficits in 1975. From 1982 the continuing decline in crude oil export earnings in 1981, once again, led to the resumption of fiscal deficits which were financed through heavy borrowing after reducing the nation’s reserves. The trend now continued unabated till 1995, but resumed immediately from 1996 to date (Isenmila and Okolie 2008, Oluba 2008).
The emergence of any macroeconomic instability depends on the way and how budget deficits are financed. There are several options of the budget deficits financing:
– Government bonds selling
– Borrowing from abroad
– Selling go state assets
The bond selling at the home financial market leads to increase in demand for private funds in the economy. The excess demand for money will invoke rise in interest. However, interest rates according to the theory stimulate private sector and households to increase savings and shift some investments towards the future, In this case, public crowds out private investment.On the contrary, external borrowing usually causes appreciation of real exchange rate, deepening current account deficit, increases of foreign debt and loss of foreign reserves. Extreme and very serious result of this foreign borrowing can be currency crises, for which this scenario is very common (Hakio, 1996). Monetisation causes hyperinflation and that’s why this method of budget deficit financing is forbidden in many industrial and some developing countries.
The impact of budget deficit onto macroeconomic stability is also influenced by absorption ability of a particularly economy. In general, it can be said that long-term budget deficits are much more easily absorbed by countries with high level of private savings and full developed financial markets. Since less developed countries possess less private savings, and not fully developed financial markets and regulated prices, they should try to reduce budget deficits and thus, avoid possible macroeconomic problems.
If there is a negative budget balance (deficit), it is necessary to cover it. The government has several options, how to settle. This deficit provided that deficit will be covered by issuing bonds. There are also several subject to whom these bonds can be sold:
– Foreign subjects (Private and public)
– Households and firms
– Domestic banking system
– Central bank
Especially, the developing countries buy the greater proportion of governmental bonds through central Bank because of insufficient financial capacity of private domestic subjects and usually government doesn’t have to pay any interest to Central bank, if there are some problems, when the government owe Central Bank, it’s only a shift of public debt from one public organization to another, because the Central Bank usually owns the government.
Current account balance is the sum of net export goods and services, net income and net current transfers. Current account balance consists of transactions relation to trade in goods and services and unilateral transfers. Secondly, current account balance is the different between the total receipts from export of goods and services and grants of transfer payment abroad. Current account balance tells us if a country has a deficit or supplies budget.
The current account is in surplus when absorption is less than income and in deficit when absorption exceeds income. Government expenditure is an important component of aggregate demand. An increase in government outlay that is not met the available revenue usually trigger a series of development in the economy due to the budget deficit.
As in the case of budget deficit, there are also some negative effects on the current account balance; when a country experiences deficit, its deficit will cause increase in imports of goods and services and also affect adversely the domestic industry and this indirect effect on employment and income in the country. A striking feature of Nigeria’s fiscal operation since the second halve of the 1970s is persistent and rising budget deficits. Nigeria has recorded deficit and current account balance thereby experienced twin deficit. From the 2008 annual report of the Central bank of Nigeria (CBN), article 5.3 page71, it states that there was a notional deficit of 47.4billion Naira or 0.2% of GDP compared with the deficit of 117.2 billion naira or 0.6 GDP in 2007. Evidences suggests that government deficit, notably in last 15 years has been financed largely through money creation by the central bank. Consequently, monetary policy has been vastly expansionary with direct implication for price inflation and exchange rate. Finding from various comprehensive studies have generally indicated that country with successful trade reforms tend to pursue tight monetary and fiscal policies
- Statement Of The Problem
Oluba (2008) asserted that the Nigerian government has been addicted to fiscal deficits since the early days of independence. Nigeria’s overall fiscal balance has been in deficit. Some of the years actually declared as surplus were years of fiscal deficits, which were so converted through arithmetical manipulations by the Ministry of Finance. In some years budgeted deficits when exhausted, are supplemented with another round of financial injection: a practice that was rampant during the period administration. The addiction has equally not abated as is evident in the 2008 deficit budget proposal. Some economists have awarded some pass mark to the budget saying that its size has been significantly reduced to comply with the deficit benchmarked specified by the World Bank. This position is very deceptive and tends to sweep the consequences of chronic deficit budgeting underneath. When the GDP is used as a denominator to the amount of fiscal deficit, the true size of the deficit is cloaked and makes to look comparatively smaller than it really is. The tendency is often to assume that the effects will be minimal and non-destabilizing whereas the adverse consequences arising from it does not in any way depend on such comparative size but on the volume of paper income or money that will be pumped into the system when it is been financed. The culture of extra-budgetary spending in Nigeria is as entrenched as the culture of deficit budget itself.
The high budget deficits are considered as the causes of macroeconomic problems. Among these problems in many cases are:
1· High level of inflation
2· Current account deficits
3· High indebted economy
Given the above identified problems existing in an economy running a deficit and considering the nature of budget deficit in the face of macroeconomic activities in an economy, this research will attempt to answer the following questions:
1· what is the nature of the relationship between budget deficit and current account balance in Nigeria?
2· what is the causal relationship between budget deficit and current account balance in Nigeria?
1.3 Research Questions
The following research question will guide the study.
1.) Is there any relationship between budget deficit and current account balance in Nigeria?
2.) What are the causes of budget deficit and fluctuating current account balance in Nigeria?
3.) What are effects of budget deficit on current account in Nigeria?
4.) What are the measures to control budget deficit and improve current account balance in Nigeria.
1.4 Objectives Of The Study
The main objective of this research work is to analyse budget deficit and economic growth in Nigeria. However, the sub objectives of this work include:
i.)To determine the causal relationship between budget deficit and current account balance in Nigeria.
i.) To identify the effects of budget deficit on current account balance in Nigeria
1.5 Research Hypothesis
Research hypothesis is proposition stated in a testable form to predict particular relationships between two or more variables. The hypotheses of this research are hereby stated in null form as follows:
1.) H01:There is no significant causal relationship between budget deficit and Current account balance in Nigeria.
2) H02: There is no significant effect of budget deficit on the current account balance in Nigeria.
1.6 Significance of the Study
Budget deficit and current account balance is a concept that needs to be thoroughly dealt with an attempt to achieve economic growth. Therefore, this study shall be of immense benefit to government, private individuals, students of Economics Department and other related disciplines, policy makers, tax payers, international agencies and the society as a whole.
Precisely, the government of this country will understand the effects of budget deficit and current account balance in Nigeria and strengthen out parts or areas in their administration that will improve the economy. The private individuals will get a clear understanding of the concept of budget deficit and its impact in economic growth in Nigeria. The students of Economics department and other related discipline who wish to further their research on this topic will use this work as their baseline study and subsequently work on them for better results. Policy markets also having studied this work will be in a better position to make policies that will yield the best result for Nigeria. Tax payers on their own part will clearly under the circumstance surrounding the nature of the tax system in Nigerian and how far their fulfilled tax obligations are being harnessed. On the part of international agencies, this study will give them an understanding of what consists budget deficit and current account balance in Nigeria which will enable them know when to engage in business with Nigeria and the benefits that accrues to such investment. In addition to the above importance, the society as a whole will understand what makes for budget deficit in a country and how to work for the achievement of economic growth in Nigeria and other developing nations of the world.
1.7 Scope/Limitation Of The Study
This research work will cover the period of 1985 to 2015 following the limited scope of this research work, data will be sourced from secondary data.
The limited scope of this research work is necessitated by the changes posed by the problem of limited time frame stipulated for this research work, shortage of fund and high cost involvement in sourcing data on some of the variables required as a result of problem of limited statistical materials. Effort will be made to find out the relationship of budget deficit and current account balance within this period.
Despite all this impediments, this research work will be relevant in serving the purpose of which is intended.
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