Fiscal Policy and Balance of Payments in Nigeria

Abstract

The paper examined the impact of fiscal policy on balance of payments in Nigeria. The objectives of the study were to; examine the impact of government capital expenditure, corporate tax and external debt on BOPs. Time series data from 1980 to 2015 was collected from CBN statistical bulletin. The applied the techniques of ADF unit root test, co-integration and vector error correction model. The results of the estimated model showed that all the time series were stationary at order one. Also, the dynamic model depicted by the co-integration result showed that there is a long run equilibrium relationship among the variables. Similarly, the vector error correction result showed that the coefficient of ECM has the hypothesized negative sign and statistically significant at 5% level. The current year’s value of government capital expenditure showed that a percentage increase in government capital expenditure causes a favorable balance in BOPs by 65.5%. Moreover, the current year’s value of corporate tax showed that a percentage increase in corporate tax decreases the balance in BOPs by 164.4%. The estimated VECM result further showed that a percentage increase in government external debt causes an increase in BOPs by 77.1%. From the discussion so far, it is obvious that fiscal policy measures are effective in achieving a favorable balance of payments in Nigeria. Based on these findings, the following recommendations amongst others were made; Expansionary policies on fiscal policy measures especially in government capital spending and corporate tax policy should be encouraged as they play vital role in the growth of industrial production and help to improve the BOPs in Nigeria. Also, government should avoid superfluous and uncreative borrowing that will serve as a leakage to the economy.