Nigeria is currently undergoing substantial structural and macroeconomic changes. How the size and composition of government spending influences these changes are not particularly clear. Thus, it is important to monitor trends in the levels and composition of government expenditures, and to assess the causes of change over time. It is even more important to analyze the relative contribution of various expenditures to production growth and poverty reduction, as this will provide important information for more efficient targeting of these limited and often declining financial resources in the future. For the purpose of our study, we will endeavor to empirically examine the relationship between both the recurrent and capital expenditure and growth in the different sectors of the economy.
Over the past two decades, government expenditure in Nigeria has continued to increase rapidly, with the structure now skewed in favor of recurrent expenditure. Between 1997 and 2012, consolidated government (Federal, States & Local government) expenditure rose from N551bn to N9.5tn, a massive 683% jump in 15 years, increasing at an annual average rate of 22%. Recurrent expenditure grew by 742% during this period, while capital spend grew by 586%. Save for 2009, when government spending dropped marginally by 0.05%, every other year has been characterized by increase. There appears to be no obvious adverse impact of macroeconomic adjustments on government spending for Nigeria as a whole.
Total government expenditure as a percentage of GDP measures the amount a country spends relative to the size of its economy. For Nigeria, the percentage declined from about 19% in 1990 to 13.4% in 2012. This, however, masks the fact that in-between the two periods, government spending as a proportion of GDP hit 37%, and stayed above 20% till 2009. Equally important is the composition of government expenditures, which reflects government spending priorities. The top three expenditures for Nigeria in 2013 were education, defense, and police formations and command. It is noteworthy that among the top ten priority spending list, security related departments appear 3 times.
Agriculture, which is the largest sector in Nigeria, comes in at a distant 12th. Asides being the largest sector in the economy, more importantly, majority of Nigeria’s poor still live in rural areas and are primarily engaged in agriculture. It is well documented that agricultural expenditure is one of the most important government instruments for promoting economic growth and alleviating poverty in rural areas of developing countries. Agriculture expenditures dropped by 37% between 2009 and 2013, with capital expenditure allocation dropping by 53%.
Agriculture expenditure as a percentage of agriculture GDP measures government spending on agriculture relative to the size of the sector. Compared to developed countries, agricultural spending as a percentage of agricultural GDP is extremely low in Nigeria. The former usually boast more than 20%, while the latter averages less than 3% percent.
Understanding why certain countries spend more on one sector than others will help Nigeria reallocate government resources to the most productive sector by focusing on major forces behind existing patterns. For this exercise, the composition of government spending is modeled together with the growth in their respective sectors.
Our results show that among all types of government expenditures, agriculture, health, education, and transportation had positive impact on aggregate growth, and growth in their respective sectors. Agricultural spending, education, and transport contributed strongly to growth. Disaggregating total agricultural expenditures into recurrent and capital spending reveals that capital spending had a larger productivity enhancing impact than recurrent spending.
Several lessons can be drawn from this study. It was established that various types of government spending have differential impacts on economic growth, implying greater potential to improve efficiency of government spending by reallocation among sectors. Furthermore, governments should reduce their spending in unproductive sectors such as defense (results show defense spending does not impact growth), and curtail excessive spending in those areas that do not provoke economic chain reaction in the aggregate economy. Lastly, Nigeria should increase spending in agriculture, particularly on production-enhancing investments such as agricultural enhancing research and equipment. This type of spending will not only yield high returns to agricultural production, but will also have a large impact on poverty reduction since most of the poor still reside in rural areas and their main source of livelihood is agriculture.
Olugbenga A. Olufeagba
