CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labor market, national ownership, and many other areas of government interventions into the economy.

Most factors of economic policy can be divided into either fiscal policy, which deals with government actions regarding taxation and spending, or monetary policy, which deals with central banking actions regarding the money supply and interest rates.

Such policies are often influenced by international institutions like the International Monetary Fund or World Bank as well as political beliefs and the consequent policies of parties.

Recently, government policies began to show more concern on the management and improvement of the economy. Government over the years have embarked on various macroeconomic policy options to grow the economy in terms of growth and development and the policy option employed is that of fiscal policy (Peter and Simeon, 2011). Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and government expenditure. It can also be seen as government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy.

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 socioeconomic 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.

Based on the nature and importance of the relationship between fiscal policy and manufacturing sector, the study becomes necessary in Nigeria, where output and capacity utilization of manufacturing sector have suffered rapid fluctuations in recent years. Since government desires to increase total spending in the economy with fiscal policy which can either increase its spending or reduce taxes in maintaining manufacturing sector stability, it is therefore the researcher’s interest to investigate the impact of fiscal policy on the manufacturing sector of Nigerian economy. Thus, this is the focus of this project.

1.2   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).

This study is specifically interested in examining the level of significant fiscal policy has on manufacturing sector output in Nigeria due to its low contribution to the growth of the economy. Most studies on fiscal policy dwelt on the determinants, its impact on economic growth, its impact on capital formation, its impact on capital stock, deficit and macroeconomics variables, while studies on manufacturing sector focuses on its productivity, bank lending, economic growth, global economic downturn, monetary policy, banking sector reform, and its performance. However, in Nigeria, both variables have valuable significant effect on economic growth and stabilization, but study about their relationship has research gap, as there seems to be little or no attention on the impact of fiscal policy on manufacturing sector in Nigeria. This study seeks to fill this research gap.

1.3 OBJECTIVES OF THE STUDY

The broad objective of the study is to ascertain the role of economic policy in the diversity of Nigeria economics. The study has the following specific objectives:

To determine the impact of government expenditure on manufacturing sector output in Nigeria. To ascertain the effect of tax revenue on manufacturing sector output in Nigeria.

1.4 SIGNIFICANCE OF THE STUDY

The study will contribute immensely in aiding the government, policy makers, economic planners, researchers and the academia generally. This will provide an insight and understanding to the government on how to be prudent in spending public funds that would bring about economic growth and development. It is also of immense help in providing an insight and knowledge to the general public, policy makers, economic planners, and manufacturing sector regulatory authorities on the impact of fiscal policy on the manufacturing sector in Nigeria.

To the academia, the findings of the study will contribute to the available literature on the current scenario of manufacturing sector in Nigeria and its level of contribution to the GDP.

Based on our empirical findings and analysis, the result of the study will be of immense benefit to researchers who will rely on their contributions to existing knowledge for further research.

The findings of this research will assist monetary authorities in assessing the performance of the fiscal policy in Nigeria particularly in terms of their impact on the output of manufacturing sector. This work is also of immense benefit to the policy makers and economic planners in terms of using its findings in formulating and implementing appropriate policy measures towards accelerating economic growth through the manufacturing sector.

1.5 LIMITATIONS OF THE STUDY

The main constraints encountered in carrying out this research work, this includes;

Time Factor

This research work was conducted simultaneously with normal academic work within a short period of time in which some valuable information could be obtained.

Financial Difficulty

In an effort to have a sufficient research material to be able to write extensively on the subject matter, the researcher was faced with some financial predicament considering high cost of not only education materials coupled with the high transport fare.