FINANCIAL DEVELOPMENT, FISCAL RESPONSIBILITY ACT AND BUDGET PERFORMANCE IN NIGERIA

ABSTRACT

For developing countries, a major goal of annual budgets and other fiscal applications is to ensure macroeconomic stabilization and aid the development process. Budgets for these economies, including Nigeria, have however been found to reflect the macroeconomic conditions in each year: increasing when the economies are doing well, but decreasing when the economy is having a downturn. The unique nature of developing economies and the institutional framework are critical aspects of these considerations. In this study therefore, the effects of financial development and the adoption of the Fiscal Responsibility Act (FRA) in 2007 on budget performance in Nigeria were examined. The goal of the study is to investigate how well-functioning financial markets in Nigeria and the FRA contribute to aiding the budget process and the enhancement of fiscal policy implementation and outcomes in Nigeria, especially with regard to the annual budget activities. Four basic dimensions of the budget performance are assessed in the study, including fiscal deficit ratios, debt ratios, expenditure ratios, and the probability of meeting the FRA criterium (of a maximum of 3.0 percent of fiscal deficit ratio annually) in the budget system. Financial development is considered as overall financial liquidity in the economy (to assess the level of financial market depth) and the proportion of government finances in the total financial base in the economy (to measure ease of assess of public sector in the financial market). Annual data for the period 1981 to 2017 are used in the empirical analysis, though longer periods were used in the statistical analysis, while three basic empirical strategies are employed in the study in order to obtain robust estimates and relationships. First, a dynamic framework is devised for assessing the basic budget equations using the Autoregressive Distributed Lags (ARDL) approach; next, the Binary Regression analysis was employed to assess the equation for the probability of meeting the FRA criterium; finally, and the GMM approach was adopted for estimating the fiscal stabilization equations. The overall outcome of the study is that both financial development and the Fiscal Responsibility Act have tended to improve budget performance in Nigeria. In particular, financial development is found to have a dynamic impact on budget performance in Nigeria both through overall financial market development and the rate of participation of the public sector in financial markets. Moreover, the Fiscal Responsibility Act (FRA) is shown to have a more long-term impact on budget performance by helping to reduce fiscal deficits and excessive fiscal spending, thus suggesting that the FRA has contributed to the improvement of fiscal discipline in Nigeria. It is also found that both financial development and the adoption of FRA have both improved the counter-cyclical capacity of budgetary operations in Nigeria. The study thus demonstrates that deeper financial markets that encourages increased government assess will not only dissolve liquidity constraints in the budget process but will, in collaboration with the FRA, adequately guarantee more disciplined budget cycles in Nigeria over time. A major recommendation in the study is that the financial markets be expanded and made more efficient and that the medium-term expenditure framework (MTEF) in the formulation of budgets and overall fiscal policy in the Nigeria should be intensified.