DETERMINANTS OF FISCAL DISCIPLINE IN NIGERIA 1980-2015

Abstract

Fiscal Discipline (FD) is the ability of government to efficiently maintain smooth and long-term financial operations in relation to total revenue, financial balance, public debt and total spending. The growing fiscal deficit across countries and, the European sovereign debt crisis of 2010 underscored the need for FD. In Nigeria, the growing debt, unmanageable budget deficit, consistent imbalance in expenditure and revenue variance, and unnecessary delay in budget processes have made FD critical. However, little attention has been devoted to the identification of the determinants of FD in Nigeria. This study, therefore, examined the determinants of FD in Nigeria from 1980 to 2015. The Common pool resource theory provided the framework for the econometric model in the mould of Auto-Regressive Distributed Lag (ARDL). Data were sourced from Central Bank of Nigeria’s Statistical Bulletin, World Development Indicators, Quality of Governance Basic Data Set, and Approved Annual Budgets. The extent of FD was assessed using four complementary measures: Primary Balance (PB), Debt Sustainability (DS), Expenditure Variance (EV) and Revenue Variance (RV). The examined determinants of FD included spending units, capital inflows, government size, political regime, trade openness and transparency. The time-series properties of these variables were examined. The Bounds test approach and Error Correction Modeling technique were deployed for the long-run and short-run analyses, respectively. All estimates were validated at р≤0.05. The FD models, (except DS) exhibited a long-run path (PB, F-Stat. 29.4; EV, F-Stat.14.6; RV, F-Stat.55.0) in which spending units exerted significant influenceon the measures of FD. A percentage increase in spending units led to rise in PB (2.0%, t=4.77) and EV (0.4%, t=2.96) and decline in RV (2.6%, t=5.94). Similarly, a percentage increase in government size also led to rise in PB (23.5%, t=4.84) and EV (22.1%, t=3.61) and a fall in RV (52.7%, t=3.81). Conversely, trade openness reduced the PB (6.9%, t=3.27), while political regime (0.09, t=3.94) indicated that military regimes were more disciplined than democratic regimes. Capital inflows reduced EV (42.2%, t=3.92). The short-run estimates showed that a percentage increase in spending units deteriorated RV (1.6%, t=6.30), and increased the PB (1.3%, t=8.13) and EV (0.4%, t=2.11). In contrast, a percentage increase in capital inflows lowered the PB (26.1%, t=5.57) and EV (33.3%, t=3.39) and increased the RV (37.8%, t=5.99). A percentage increase in transparency lowered PB (0.4%, t=9.54) and EV (0.6%, t=5.14). Fiscal discipline was evidently lacking in Nigeria from 1980 to 2015, as primary balance, debt sustainability, expenditure variance and revenue variance indicated fiscal indiscipline. The indiscipline was essentially determined by spending units, government size, and regime type, as military regime was more discipline than democratic regimes. Therefore, there is the need to ensure fiscal discipline in fiscal operations accordingly.