A sectoral analysis of fiscal and monetary actions in Nigeria

Abstract

There is a unanimity among economists that fiscal and monetary actions are either individually or jointly affecting economic activities. However, the impacts of fiscal and monetary actions differs from country to country and from sector to sector. While there are a few studies which have examined the relative potency of monetary and fiscal policies in the Nigerian economy, no study has delved into the sectoral impacts of monetary and fiscal policies. Our approach is similar to the St. Louis equation based studies, in the sense that money supply and government spending are our explanatory variables. That is, we contribute to this literature with a different approach and infer the effect of fiscal and monetary policies on the sectors of the Nigerian economy. Using the VAR technique, therefore, we investigate whether government expenditure and money supply have impacts on the five sectors of the economy: agriculture, building, services, industry and wholesale. Using sectoral GDP rather than the national GDP has the advantage of a more direct measure of the usefulness of fiscal and monetary policy mix to the subunits of the economy. Compared to the other St. Louis equation based studies, our approach has the advantage that the VAR estimates are more narrowly focused on the sectors of the economy. The study shows that the elasticity of sectoral output with respect to monetary actions are significant for only three sectors of the Nigerian economy: agriculture, services and wholesale, though the significance differs from sector to sector, subject to the strength and the configurations of the institutional factors in each sector. Fiscal actions have no significant impact on any of the sectors. The proper response is not to try to reverse monetary and fiscal actions, which has conferred some benefits overall. Rather, the Nigerian government must continue to work with the financial institutions to advance financial practices and reinforce financial regulation, as well as macro-prudential oversight. The ultimate goal should be to consistently re-drive monetary and fiscal actions in ways that are both productive and conducive to sectoral growth in Nigeria.