FISCAL FEDERALISM AND MACROECONOMIC PERFORMANCE IN NIGERIA (1970-2010)

FISCAL FEDERALISM AND MACROECONOMIC PERFORMANCE IN NIGERIA (1970-2010)

Abstract:

The study examined the impact of fiscal federalism on key macroeconomic indicators; GDP, inflation and exchange rate in Nigeria between 1970 and 2010. The country having experienced fiscal federalism for over 50 years is still beset with problems of poor output growth, high inflation rate, and balance of payment deficit, among others. There is controversy in the literature on the impact of fiscal federalism on macroeconomic performance. The objectives of the study are to analyze the trend of fiscal federalism in Nigeria over the years; to measure and analyze the impact of fiscal federalism on real GDP, inflation, exchange rate, and to examine whether there is a long relationship between fiscal federalism and the above mentioned macroeconomic variables. A Vector Autoregressive (VAR) model was estimated using the Nigerian annual time series data from 1970 to 2010. Results from the VAR estimate revealed that the ratio of state governments’ expenditure to total government expenditure (FDC2), and the ratio of state governments’ revenue from the federation account to total government revenue (FDC3) have a positive impact on economic growth, while the ratio of state governments’ internally generated revenue to total government revenue (FDC1) has a negative impact on economic growth; FDC1 and FDC2 have a positive impact on inflation, while FDC3 has a negative impact on inflation; FDC1 and FDC2 have a positive impact on exchange rate, while FDC3 has a negative impact on exchange rate over the period of study; the Nigerian federalism is more of fiscal fragmentation rather than fiscal decentralization. It is concluded that fiscal federalism has a mixed (positive and negative) impact on real GDP, inflation, and exchange rate in Nigeria over the period of study. This implies that the impact of fiscal decentralization is not in all cases good on the economy, because it could result to economic growth that is accompanied with inflation and naira devaluation. Based on these, the study recommended that more fiscal powers should be devolve to the lower tiers of government taking into consideration the trade-offs of fiscal decentralization on real GDP, inflation, and exchange rate.

FISCAL FEDERALISM AND MACROECONOMIC PERFORMANCE IN NIGERIA (1970-2010)