This study examines the impact of fiscal, monetary and trade policies on Nigerian economic growth from 1985 to 2020. This study adopts endogenous growth model (AK model) as its theoretical framework. The unit root test results reveal that there is mixed level of stationarity in the variables. The bound test result shows that the variables cointegrate. The ARDL long-run result shows that fiscal policies stimulate economic growth, while on the contrary, trade policies deter Nigerian economic growth. The short-run result shows that the fiscal policies has an inconsistent impact on Nigerian economic growth and thus differs from the long-run result; while government spending continues to drive economic growth in Nigeria, government revenues have no effect on the growth of the economy. The result of the impact of monetary policies shows that interest rate impels growth of the economy while money supply deters growth of Nigeria’s economy; lastly, the trade policies maintain her negative influence on the economy in both the long run and short run. Sequel to the findings, the study recommends the following: Policymakers should place more emphasis on using fiscal policy which was found to be stimulating the country's growth rate. Whenever it is expedient to use monetary policy to stimulate economic growth, policy makers should make use of interest rates as it stimulates the growth of the economy in the short run. The government should review her trade policies to reduce import by encouraging consumption of local products and motivate exporters of goods (raw material) to refine the products before exporting such.
The fundamental roles of fiscal policy, monetary policy and trade policy cannot be over-emphasized in any open economy, especially in terms of economic management. Notably, the quests to achieve and sustain macroeconomic objectives explain the vital roles played by fiscal, monetary and trade policies in both developed and developing economies, which Nigeria is inclusive. Babar [1] noted that it is the goal of any rational government to improve the living conditions of her populace through major economic policy either through fiscal, monetary or trade policy. Again, these economic policies are mostly used to stabilize and sustain the economic progression, especially during the period of economic crisis. For example, fiscal policy measure is used by government of different economies to counter economic imbalances by adjusting the public spending to moderate taxation which is an important approach to control aggregate demand, financial uncertainty and economic distortions. Keynes posited this approach need to be adopted, especially during economic recession so as to build a stable framework to attain full employment; hence, this theoretical model had been practically used as policy guide to sustain economic activities over time [2]. Meanwhile, the classicalists argued for effective price mechanism where efficient and robust resources allocation can guarantee economic freedom that is devoid of government intervention in the cause of addressing economic crisis [3]. On the other hand, monetary policy is adopted by the Apex Bank of any given economy to stimulate collective demand through adjustable changes in money supply and interest rate. In the time of economic crisis, government combines both fiscal and monetary policies to curb fluctuations of business cycle. In a similar vein, government put in place trade policy with the aim of improving trade relation and builds the necessary safety net against external shocks through stabilized exchange rate.
Over the years, many developing economies have been facing the problem of huge fiscal, monetary and trade deficits, which Nigeria is inclusive. The insufficient and the nature of public goods such as infrastructure and utilities services hugely rely on the rate of government spending, which affect both the nature and condition of macroeconomic framework and fiscal sustainability in any small open economy. Fiscal policy, monetary policy and trade policy in Nigeria are characterized by profligacy, poor financial framework, which is strengthened by poor management of huge oil revenue that pose a threat to macroeconomic stability [3]. Relatedly, policy makers in Nigeria have implemented series of trade policies through various objectives, for example the export promotion strategy in 1981; exchange rate liberalization and trade liberalization in 1986; creation of Nigerian Export–Import in 1991; and several trade bilateral and multilateral agreements with different countries among others [4]. The main objectives of these trade policies are: to achieve Nigeria’s macroeconomic stability and to improve trade nexus with the global community via hitch-free inflow and outflow of both liquidity and non-liquidity transactions across the borders, while these activities are expected to increase international competitiveness which in the long run could bring about an improvement in national economic growth [5]. However, in the time past, the Nigerian economic growth has not significantly tapped from those expected gains from trade policies which could have been traced to the mono-economic nature of the Nigerian economy where government mostly relied on oil revenue. This has caused incessant rise in budget deficit in recent times; hence, there is need for policy makers to adopt effective fiscal and monetary measures so as to stabilize the aggregate economic outlook. Notably, a persistent rise in military spending to counter terrorism and additional unproductive outlays might have contributed to slow economic growth in Nigeria. In the meantime, Idris and Ahmad [6] posit that continuous show of fiscal deficit in Nigeria may be connected to over dependency on gains from oil coupled with external borrowings. Consequently, significant effects of improved fiscal measures would increase aggregate growth which could curb persist ineffective monetary and fiscal policies. It is worth agreeing with the position of Khattry and Rao [7] which state that trade policy improves fiscal balances through rise in tax revenue. And this is expected to increase the size of government revenue that could be channeled to various productive sectors via government spending on infrastructure.
In lieu of the above narrative on the nexus between fiscal policy and economic growth, or nexus between monetary policy and economic growth, or relationship between trade policy and economic growth, it has been observed through the studies that increase in government spending and trade openness and decrease in interest rate have not transmitted to improved economic growth in Nigeria. Interestingly, further related studies have equally come up with mixed revelations. For example, Kemal et al. [8] conclude that regulated and restricted flow in the level of imports expand the nation’s economic output, whereas Martes [9] observed that trade liberalization impact negatively on productivity rate. Again, Amassoma et al., [10] explained that monetary policy is a vital tool which could be used to achieve price stability, and hence strengthen both private and foreign investors that guarantees economic progress in the long. Also, Idris et al., [11] posit that robust and effective fiscal operations guarantee economic growth since any slight distortion in fiscal operation in the form of deficit brings adverse effect on growth rate, which further substantiate the epistemology method of neo-classical theory that posit growth-retarding effects on the general economic performance due fiscal deficit. With this narrative, it can further be observed that studies on the subject matter in Nigeria have come up with different results, but most of these previous works are not encompassing in terms of linking fiscal policy, monetary policy, trade policy and economic growth rather most of these works had either attempted to link monetary policy with economic growth or relate fiscal policy with economic growth. It is interesting to note that this study intends to fill the gap observed from previous studies through empirical investigation into the nexus between fiscal policy, monetary policy and economic growth in Nigeria. Going forward, series of questions arise, which this study seeks to address; thus, do fiscal, monetary, trade policies matter on economic growth? What is the nexus between economic growth and fiscal, monetary, trade policies in Nigeria? Therefore, the aim of this study is to empirically estimate the link between the key variables while the outcome from this study would further provide guide for both government and policy makers so as to address the current perennial economic recession in Nigeria.
The reviewed literature clearly shows evidence that there exists a paucity of knowledge as regard how the combined effect of different policies affect economic growth in Nigeria. The above studies have examined how either each of fiscal policy or monetary policy or trade policy affects economic growth in Nigeria. However, to the best of our knowledge, no existing study has examined the combined effect of fiscal policy, monetary policy and trade policy on economic growth using Nigeria as a case study. In addition, this is particularly pertinent as the Nigerian government continues to implement different policies aimed at achieving economic growth and stability but the economy continues to experience a low level of economic growth as indicated by the national bureau of statistics. Consequently, this study adds to the existing literature and gives an original contribution to knowledge by examining the impact of government policies (monetary, fiscal and trade policies) on economic growth in Nigeria so as to suggest viable recommendations to the Nigerian government.
The rest of the study is structured as follows: “Literature review” section addresses comprehensive literature review of the previous related studies; “Method” section deals with model specification and the research methods; “Results and discussion” section accounts for empirical analysis of the dataset; and lastly, “Conclusions” section explains the general conclusion drawn from the study and policy recommendations that could serve as a guide for the Nigerian government and other developing economies at large.
There are various empirical studies conducted in the past which form the existing literature for the subject matter of this current study. Previous studies that relate to this current study are reviewed and categorized based on how each of the variables affects economic growth in Nigeria as presented in the existing literature. For instance, for the review of how fiscal policy affects economic growth, Agu et al. [12] examined how fiscal policy affects growth of Nigeria’s economy with a focus on the different components of public spending using OLS estimation technique. They found that government spending increase with an increase of revenue generated by the government. The study concluded that the correlation between government spending and growth of the economy is a strong and positive one. Babalola and Aminu [13] investigated the effect of fiscal policy on Nigerian’s economic growth from 1977 to 2009. The study observed that productive expenditure positively influence the country’s economic growth. The study therefore recommends that government should improve its spending on economic services, education and the health sector to boost the growth of the economy. Onwe [14] investigated the growth of Nigerian economy vis-à-vis effect of fiscal policy components on Nigerian economic growth. The study observed the positive impact of federal expenditure on administration as well as on community and social services on growth of the economy. However, it also observed the non-positive impact of federal spending on transfer payments and economic services on the growth of Nigeria’s economy. The study recommended a need for federal government to place special emphasis on administrative, social and community services in its fiscal policies because these fiscal components have potential contribution in the development of the Nigerian economy. Mobolaji et al., [15] examined inclusive growth in Nigeria vis-à-vis the role of fiscal policy using a baseline regression model. They found that fiscal policy significantly promotes inclusive growth in Nigeria. The study also observed a unidirectional causal relationship from fiscal policy to inclusive growth in Nigeria. It recommended the need for government expenditure to be directed toward productive investments and infrastructural development in a bid to accelerate inclusive growth. Chinedu et al. [16] explored how sectoral spreads of government expenditure impacts Nigerian Economic growth employing an error correction model technique. It observed that economic performance in Nigeria was positively impacted by sectoral spreads of government expenditure. The study observed the statistical significance of government expenditure on agriculture and defense. However, the study also observed that there was no statistical significance for government expenditure on health, education, transportation and communication. The study recommended that political office holders should have the political will to transform Nigeria into a developed country through accountability and transparency in how public funds are used. For a review of how economic growth is affected by monetary policy, Ayomitunde et al. [17] examined how Nigerian economic growth is been affected by monetary policy for the years 1990 to 2017 using an ARDL Bound estimation technique. Findings showed monetary policy rate significantly propels growth of Nigeria’s economy in the short run while inflation rate positively influence growth of Nigeria’s economy in both the short and long run, there is a significant positive relationship between economic growth and inflation rate. They recommended that Apex Bank use monetary policy variables that help drive economic growth in Nigeria. Onyeiwu [18] explored how monetary policy affects Nigerian economic growth using OLS estimation technique. The findings showed that monetary policy stimulates gross domestic product cum balance of payment but adversely impact inflation rate. It recommended that monetary policy be used to create an investment-friendly environment and the money market should strive to provide financial instruments that meet the needs of increasingly numerous players.
Sulaiman and Migiro [19] investigated the nexus between growth of Nigerian economy and monetary policy. The study found that monetary policy supports economic growth, and the study also found that economic growth is unrelated to monetary policy. The study concluded that the mechanism for transmitting monetary policy makes a positive contribution to the productivity of the Nigerian economy, thereby improving economic growth. The study recommended that the regulatory framework for the financial sector be strengthened to contribute to the efficiency of the government's monetary policies. Adigwe et al. [20] studied how monetary policies in Nigeria affect the country's economic growth using the ordinary least square technique. The study observed that monetary policy promotes economic growth, while it adversely affected by inflation rate. The study recommended using monetary policy to foster an enabling investment environment through appropriate interest rates, liquidity management and exchange rates. Fasanya et al. [21] studied the effect of monetary policy on the growth of Nigeria's economy using the error correction model technique. The study found that monetary policy instruments such as the inflation rate, the exchange rate and foreign reserves boost growth in Nigerian economy in line with theoretical expectations while money supply in Nigeria is unrelated to economic growth. Consequently, the study recommended the establishment of primary and secondary government bond markets that would enhance the effectiveness of monetary policy and reduce the government's reliance on the central bank for direct financing. For a review of how trade policy affects economic growth, Afolabi et al. [22] researched the impact of trade (trade policy) on the growth of Nigeria’s economy using the ARDL technique. They found that price-based variables and adjusted trade ratio positively influence gross domestic product in both long and short run. In the long run, dynamic responses showed that gross domestic product responded positively to trade policy. The study recommended the need for policy makers to implement policies aimed at promoting international trade and innovations. Afolabi et al. [23] researched how international trade affects growth of Nigeria’s economy using the ordinary least square technique. The study found that government expenditure, interest rate, import and export exert positive impact while it observed that foreign direct investment and exchange rate have a negative significance impact on growth of Nigeria’s economy. The study recommended that the country's trade should not be limited to primary and oil exports, but to the promotion of non-primary exports and non-oil exports as well. In addition, there are some studies that examined the combined effect of fiscal and monetary policy on economic growth in Nigeria. For instance, Bodunrin [25] examined how fiscal and monetary policies affect Nigerian economic growth using vector error correction model technique to determine which of the policies has been more effective in driving the growth in Nigeria. The study observed that in the short-run fiscal policy distort economic growth while monetary policy had no effect on gross domestic product. The study opined that fiscal policy should take the central stage in the use of policy options. Ajayi and Aluko [26] evaluated how efficient is monetary and fiscal policy in Nigeria employing OLS estimation technique. The study observed that export and money supply growth significantly stimulate economic growth while government spending had no impact. Also, the study found that monetary policy stimulates the growth more than fiscal policy. The study recommended the use of monetary policy by the Nigerian government rather than fiscal policy as an economic stabilization tool. Titiloye and Ishola [27] examined the effect of fiscal and monetary policies on growth of Nigeria economy using ARDL technique. The study found that supply of money vis-à-vis government spending cum revenue stimulates Nigerian economic growth. The study recommended that there is a need for the government to allow expansionary monetary policy to stabilize economic growth.