Fiscal Policy and Inflation in Nigeria

Abstract

Aims: This study aims to analyze how Nigerian government activities impact inflation, considering the inadequacy of monetary policy. It focuses on recurrent and capital expenditures in various sectors and their influence on inflation, as well as public debt and tax revenue's role in inflation dynamics. Study Design:  The study employed secondary data. Place and Duration of Study: Data sources include the National Bureau of Statistics (NBS), Central Bank of Nigeria (CBN) statistical bulletin, Debt Management Office (DMO), and World Development Indicators (WDI) spanning from 1986 to 2021 Methodology: The study employs econometric techniques, including unit root tests and Autoregressive Distributive Lag (ARDL) analysis, with Inflation Rate (IFL) as the dependent variable. Independent variables representing fiscal policy include capital expenditure on transfers (CTRA), recurrent expenditure on administration (RADM), recurrent spending on social and community services (RSCS), recurrent expenditure on economic services (RECE), recurrent expenditure on transfers (RTRA), capital expenditure on administration (CADM), capital spending on social and community services (CSCS), capital expenditure on economic services (CECE), government direct and indirect taxes (TAX), government capital expenditure (GCE), government recurrent expenditure (GRE), and external debts (PUD). Results: Key findings reveal that in the long run, only RADM, RTRA, CADM, CECE, CSCS, GRE, GCE, PUD, and TAX had statistically significant relationships with inflation (IFL). RADM, CECE, CSCS, GCE, PUD, and TAX exhibited negative relationships with IFL, while RTRA, CADM, GRE showed positive relationships. In the short run, RSCS, RTRA, CADM, CECE, CSCS, CTRA, GRE, GCE, and TAX displayed statistical significance. RSCS, RTRA, CADM, and GRE positively correlated with IFL, while CECE, CSCS, CTRA, GCE, and TAX had negative associations. Conclusion: The study concludes that Nigeria's fiscal policy should prioritize increased government capital spending in economic and social sectors to manage inflation effectively. Additionally, implementing fiscal restraint through higher taxation can help mitigate inflationary pressures.