GOVERNMENT EXPENDITURE AND ENERGY CONSUMPTION IN NIGERIA

ABSTRACT

Government expenditure is a very important fiscal tool used by policy makers to stimulate the economy. Therefore, the study of its determinants has led us to include energy consumption in this study. The study therefore, investigated the nexus between government expenditure and energy consumption  in Nigeria covering  a period of  1981-2013 under the frameworks  of ARDL and VECM. Findings show that there is a long-run relationship among the variables. In addition to this, results of the long-run coefficients show that oil consumption is significant and  negatively   related   to   government   expenditure.   Also  in  the  long-run,   electricity consumption  is  significant and  positively  related  to  government  expenditure  just  as gas consumption and GDP are significant and positively related to government expenditure. The results of  the short-run  analyses  reveal that oil consumption  is significant  and positively related to government expenditure. However, both lag one and two of electricity consumption are significant but negatively related to government expenditure. Also, both gas consumption and GDP are not significant and also negatively  related to  government  expenditure.  The results of the Granger causality show that there is a long-run causality running from other explanatory variables to government expenditure. For short-run causality, results show that there  is  a  uni-directional  causality  flowing  from  electricity  consumption  to  government expenditure.  The study also found that there is bi-directional  causality between electricity consumption  and  gas  consumption.  Evidence  also  shows  that  there  is  a  uni-directional causality running from oil  consumption  to government  expenditure,  just as causality runs from gas consumption to government expenditure as well as from gas consumption to GDP. On  the  strength  of the  above  findings,  the  study  recommended  that  government  should formulate polices that will boost energy consumption in the economy.

CHAPTER ONE

INTRODUCTION

1.0 Background of the study

The most basic motivation for the existence of a public sector follows from the observation that entirely unregulated economic activity cannot operate in a very sophisticated way (Jean

& Gareth, 2006). In fact, an economy would not function effectively if there were no property rights (the rules defining the ownership of property) or contract laws (the rules governing the conduct of trade). From this follows the first role of the government, which is to assist with the  attainment  of  economic  efficiency  by providing  an  environment  in which  trade  can flourish. Governments are generally concerned with organizing economic activity so that the best use is made of economic resources and also to see that the benefits of economic activity are distributed fairly. Without the  government, organized economic activity could not take place. These arguments provide a justification for the existence of governments and hence, of government expenditure. Thus, government expenditure involves all the expenses which the public sector incurs for its maintenance for the benefit of the economy (Anyanwu, 1997).

It should be noted that government cannot effectively embark on expenditure without enough resources to achieve this. Therefore, the growth in output is essential for the government to generate the requisite revenue necessary to executive her projects through public expenditure. One of the variables that generally guarantee economic growth as identified by endogenous growth theorists is the natural resource base of the country (Odularu & Okonkwo, 2009). With adequate development of these natural resource bases, a country can use it to generate income in order to fund her projects. The Nigerian economy is well endowed with abundant natural resources which include  energy resources.  Apart from revenue accruable from the sale of petroleum products, a  well developed energy sector in the country can lead to the growth of the country’s economy through increased energy consumption by the real sector. The multiplier effect  of oil revenue and increased productivity owing to increased energy consumption is an increase in government expenditure.

Government  expenditure (particularly on infrastructure)  as an important instrument  in  the development process has long been acknowledged by development economists  worldwide. Public expenditure has remained a crucial issue in economic development, most especially in the  developing  countries  of  sub-Saharan  Africa  (Ekpung,  2014).  Nigeria  is  the  most populated country in sub-Saharan Africa with over 150 million people (National Population

Commission (NPC) 2006). The country is still developing and has experienced changes in the trend   of  public   expenditure   policy  over   the   years.   These   periodic   changes   in   the administration of fiscal policy are largely reflected in the way governance has been changing hands between the civilian and the military (Joseph, 2012). The study noted that the trend of expenditure  has been changing  as the fiscal unit kept changing  in the economic  system. Nigeria’s economy is characterized by a market economy with government assuming the role of creating enabling environment within which businesses can flourish and contribute to the development  of  the  economy.  Therefore,  the  primary  role  of  government  is  to  provide extension services and infrastructural facilities which stimulate investment and augment the productive capacity of the economy.

In providing these services through government expenditure, the government has to rely on several sources of revenue which energy sources, especially crude oil plays a  major role. Unarguably, Nigeria is richly blessed with abundant natural resources which include energy resources. The main energy resources are crude oil, natural gas, coal, tar sand, biomass and other renewable energy resources such as solar energy, tidal and wind power, as well as large hydroelectric potential. Crude oil and natural gas resources have  been the mainstay of the country’s  economy  for  decades.  Oil  contributed  over  US$  391.6  billion  to  government revenue between 1970 and 2005 (Adenikinju,  2008). The  International Monetary Fund in

2012 also estimates that crude oil and natural gas export revenue accounted for 96% of total export  revenue.  It  is  not  surprising  therefore,  that  energy  export  is the  mainstay  of  the Nigerian economy since 1970s.

Not  only  is  that  revenue  generated  from  the  sale  of  oil  used  to  finance  government expenditure,  energy consumption  is also  very necessary  for the growth  of  the economy. Apparently, energy is crucial to the improvement of social and economic welfare and today’s modern  economy thrives  on energy consumption.  It is  necessary  to  continued  economic activity in modern industrial nations, and its absence would result in interruption of economic growth and diminishing standards of living. Surprisingly, for most developing countries that depend on energy for growth like Nigeria, standard of living and energy consumption rise in unison. Adhikari and Chen (2012) noted that energy consumption is increasing at fastest rate in  developing  nations  due  to  the  rapid  population  growth,  growing  standard  of  living, urbanization, industrialization and economic development.

In fact lack of modern energy services is the principal cause of low levels of economic and social development in developing nations (Evans & Hunt, 2009). Energy is the indispensable force deriving all economic activities (Alam, 2006; Kabir, Zaku, Tukur & Aikhuele, 2013). Thus, the greater the energy consumption, the more the economic activity in the nation and as a result a greater economy emerges. Also, Olusegun (2008) believes energy is the backbone of  economic  growth  and  thus  suggests  the  sector   should  be  given  attention  for  the development   of  Nigeria   economy.   To   underscore   the  significance   of  energy  in  the development  process,  each  time  there  is  energy  crisis,  the  world  economies  are  almost brought to their knees. With the  exception of the great depression, perhaps, no economic phenomenon  of global  importance  has seized  the attention  of the industrialized  capitalist world as energy crisis of 1973-1975 (Attamah, 2000).

The world economy is interconnected by energy and changing energy prices and  economic crises spin rapidly around the globe. As a result, countries have taken significant efforts to ensure the efficiency of their energy sector. But for understandable reasons, Nigeria has not devoted equal attention to her abundant energy resources and this has posed serious energy challenges  in  the  country.  According  to  Amakom  and  Nwogwugwu  (2012),  the  energy challenge became more intense following the  widespread  acknowledgement  that access to clean and reliable energy supply is necessary for accelerating economic growth and sustained poverty reduction. World economies are heavily reliant on energy, and improving access to modern energy is a necessary condition for boosting growth and reducing poverty in Nigeria and in sub-Saharan Africa in general.

One of the key policy objectives of any nation is to promote a sustainable economic growth process that could improve the living standard of the people. Thus, not only does energy consumption  improves  social and economic  welfare of the citizenry,  it  also brings  about changes in the structure of output in the economy by altering the  manner in which other activity sector like the agriculture,  industrial and service  sectors  that contribute greatly to economic growth operates.  Government  expenditure  is used as a measure of government activity; and public expenditure is an important instrument for a government to control the economy.  On one hand, public investment  are also used to fill up the holes that are left untouched in a market economy such as public utilities and health care thereby contributing to capital accumulation. On the other hand, tax which is the entire financial source of public expenditure does directly reduce  the benefits to taxpayers. Thus in both ways government

spending  have  significant  effect  on  energy  consumption  and  economic  growth  (Akinlo,

2008). This is practically true as energy is consumed through appliances.

1.1. Statement of the Problem

The importance of energy in boosting the economy of countries cannot be over-emphasized. Energy has become an important input in the production processes of modern economies. In Nigeria, there is a vast energy resources both renewable and nonrenewable. Notwithstanding these enormous energy resources,  emphasis  is mostly  placed  on the oil sub-sector  which contributes to a large percentage of her revenue. This over-reliance on the revenue from oil export has rendered the country highly vulnerable to external influence.

In a similar vein, revenues from oil have encouraged much spending by the government over the years. According to Niloy, Emranul and Osborn (2003), government spending over the past decades has been increasing in geometric term through various activities of government with its Ministries, Departments and Agencies (MDAs). The persistent rise  in government expenditure in Nigeria is largely due to the huge receipts from production and sales of crude oil, which by extension leads to the increase in the demand for public (utilities) goods like roads, communication, power, education and health (Nurudeen & Usman, 2010). Available statistics show that total government expenditure (capital and recurrent) and its components have continued  to rise in the last three  decades. For instance,  government  total recurrent expenditure increased from N4,  05.20  billion in 1980 to N36, 219.60 billion in 1990 and further to N1, 589,270.00trillion in 2007 and later to N2, 632,876.50 trillion in 2011, while government capital expenditure rose from N10, 163.40 billion in 1980 to N24, 048.60 billion in 1990. Capital expenditure stood at N239, 450.90 billion and N759, 323.00 billion in 2000 and 2007 respectively and by 2011, it was N1, 934, 524.20 trillion. The various components of capital expenditure have risen between 1980 and 2011 (Oni,  Aninkanya, & Akinsanya,

2014). Thus, oil booms have increased the consumption levels of both the government and the ordinary citizens,  though;  these  levels  have  not  been sustained  nor  translated  into  a permanent increase in the standard of living of Nigerians (Adenikinju, 2008). The stylized fact on the growth of government expenditure and GDP in fig.1 below buttresses the fact that the growth of government expenditure in Nigeria over the years has not improved the GDP.

In a similar vein, according to the studies by the United Nations Development Programme (UNDP,  2010)  and  World  bank  (2012),  in  spite  of  the  continuous  rise  in  government expenditure and despite the fact that Nigeria is fortunate to have huge energy resources and being among the fifteen (15) largest exporter of petroleum (oil) in the world, she ranks very

high among nations with poor living standard. This dismal state of affairs could be as a result of the misapplication  of oil revenues by successive  governments  over the years.  Another major reason why Nigeria has not experienced growth could be low energy consumption in the   country   which   affects   productivity.   According   to   the   Energy   Information   and administration   (EIA, 2010), total energy consumption by resource type in the country as at

2010  are: oil 13%, natural  gas 4%,  hydro  1%, traditional  biomass  and  waste  82%.  The

implication of the above picture is that the growth of the real sector is stunted owing to low commercial  energy consumption  in the country.  The dominance  of the traditional  energy consumption means that the modern sector is starved of conventional energy in its operations.

It is on the basis of this that studying the relationship between government expenditure and energy consumption has become necessary in Nigeria. Identifying the causal link between government  expenditure  and  energy  consumption  in  Nigeria  is  important   because  as government  expenditure  is  expected  to  lead  to  economic  growth  that  increases  energy consumption,  energy consumption  is also  expected  to improve  productivity  that  leads to improved   revenue  generation  by  the  government  to   execute  her  projects.  Therefore, investigating the direction of causality between the  two will enable an appropriate energy policy that  will  guarantee  economic  growth.  It  will also  guide  the  proper  channeling  of government expenditure to areas that will encourage the growth of the real sector. This study is essential more so, as several studies in Nigeria have focused on the examination of the relationship  between energy consumption  and economic growth   on one hand and public expenditure and economic growth on the other hand. This research work therefore seeks to provide answers to the following research questions:

1.2. Research Questions

From the foregoing stated problems, the following questions shall guide this study:

1.   What is the effect of energy consumption on government expenditure in Nigeria?

2.   What  is  the  direction  of  causality  between  energy  consumption  and  government expenditure in Nigeria?

1.3. Objectives of the Study

The  broad  objective  of  the  study  is  to  examine  the  relationship  between  government expenditure and energy consumption in Nigeria between 1981 and 2013, while the specific objectives are:

1.   To estimate the effect of energy consumption on government expenditure in Nigeria.

2.   To investigate the causal relationship between energy consumption and  government expenditure in Nigeria.

1.4. Research Hypotheses

Given our research objectives we therefore test the following null hypotheses:

H01: Energy consumption has no significant effect on government expenditure in Nigeria. H02: Energy consumption does not Granger cause government expenditure in Nigeria.

1.5. Significance of the Study

Several  studies  have  investigated  the  connection  between  government  expenditure  and economic growth on one hand and energy consumption and economic growth nexus on the other hand. There is however, a dearth of research on the relationship between government expenditure and energy consumption. This study is therefore out to cover this gap which will end up providing policy guidelines to policy makers both within and outside Nigeria. Apart from this, the outcome of the study will be of immense benefit to those interested in fiscal policy  matters  and  energy  economics  just  as  it  will  add  to  existing  knowledge.  The knowledge of the actual link between government expenditure and energy consumption will guide the government on how to use energy polices to improve the growth of the economy and hence; boost government expenditure.

1.6. Scope of the Study

This study intends to focus on government expenditure and energy consumption in Nigeria. The analysis will use time series data covering the period 1980-2013 which is informed by the availability of data. The variables that will be used in this study  include government expenditure (proxied by total government expenditure), GDP  (proxied by GDP per capita) and  energy  consumption  (proxied  by  electricity  consumption,  gas  consumption  and  oil consumption). Data sources shall be from the World Development Indicators and the Central Bank of Nigeria Statistical Bulletin.

1.7. Organization of the Study

This study is organized in five chapters. Chapter one treats the introduction including the  research  problem  and  hypotheses.  Chapter  two  looks  at  the  profile  of  government expenditure and energy consumption in Nigeria. Chapter three treats the  conceptual issues and literature review. Chapter four treats the research methodology,  estimation issues and data.  Results  are  presented  and  interpreted  in  chapter  five,  while  chapter  six  treats  the summary   of  findings,   policy  implications,   policy   recommendations,   contributions   to knowledge, conclusion and recommendations for further studies.

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