Simulating the macroeconomic impact of expansion in total government expenditure on the economy of Nigeria

Abstract

AbstractThis study examines the impact of further expansion in government spending in Nigeria for the period of 1970–2016. Using a simulation analysis, the model divides the economy into five blocks which corresponds with five key sectors: government, price, supply, external, and monetary/financial sectors of the economy. The simulation scenario involves the average annual increase in total government expenditure, based on the projections of the Economic Recovery and Growth Plan (ERGP) of the Federal Government of Nigeria. The results reveal positive and negative shocks across the sectors. Specifically, the results indicate that the policy fuels the growth of non‐oil output/export and real gross domestic product, suggesting the sensitivity of output to government expenditure. It further reveals a generally positive reaction from the monetary/financial sector variables, worsens inflationary pressure and exchange rate volatility crisis, while the manufacturing sector output also witnesses a significant fall. This study concludes that fiscal expansion in the form of public expenditure would yield a positive impact on the various sectors of the Nigerian economy, and that it would particularly serve as a veritable tool for achieving the diversification drive of the government. Overall, the study confirms the relative efficacy of fiscal policy in Nigeria. The study recommends sustained increase in government expenditure vis‐a‐vis fiscal discipline via the institutionalised regulatory framework. The economy should also be consciously diversified from oil to a non‐oil‐based economy.