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revenue shocks and government expenditure relationship in Nigeria for effective policy decision and economic management.
The studies on revenue and expenditure relationship are concerned with testing four important hypotheses. First, the revenue-and-spend hypothesis supported that change in revenue lead to change in expenditure and not vice-versa (Ahmad & Masan, 2015; Aregbeyen & Kolawole, 2015; Dandan & Maharmah, 2015; Dizaji, 2014; Garkaz, Azma & Reza, 2012; Zubair, 2002).
Second, the spend-and-revenue hypothesis proposed that change in expenditure lead to change in revenue and not vice-versa (Zinaz & Samina, 2010). Third, the fiscal synchronization hypothesis supported that both change in expenditure and revenue lead change to one another (Paleologou, 2013). Lastly, the institutional separation hypothesis supported that there is no relationship between change revenue and change expenditure in any direction (Adelowokan &
Osoba, 2015).
The aim of this paper is to investigate the relationship between oil revenue shocks and government expenditure in Nigeria. Majority of the previous studies in this area concentrated on the relationship between aggregate government expenditure and oil revenue/price in Nigeria. Few studies such as Nwasu & Okafor (2014) examined the relationship between oil revenue and disaggregated government expenditure in Nigeria using current and recurrent government expenditures and/or oil and nonoil revenues in their analysis. This paper differs from the previous studies because it provides evidence on the relationship between oil revenue shocks and subcategories of disaggregated government expenditure which includes health expenditure, education expenditure, communication expenditure, construction expenditure, agricultural service expenditure, defense expenditure and internal security in Nigeria. To my knowledge there is little or no evidence on such kind in Nigeria. This study is important because understanding the direct impact of oil revenue shocks on these subcategories will assist in making effective fiscal policy decision in the country. Furthermore, the result of this paper will guide in deciding alternative source of revenue and boosting economic growth because large portion of Nigeria’s government expenditure comes from oil revenue. The remainder of this paper is organized as follows. Section 2 discusses the literature related to the study. Section 3 discusses the methodology for the study. Section 4 describes the data and their statistical characteristics. Section 5 presents the empirical results and discussion. And Section 6 concludes and offers recommendations.
Literature Review
There are many studies on the relationship between government revenue and expenditure using different methodology and data set. Aregbeyen and Kolawole (2015) using the causality test investigated the oil revenue and government expenditure relationship including economic growth into their analysis and find that change in oil revenue granger cause change in government expenditure and economic growth and not vice versa. Ademola, Olasade, Raji and Adedoyin, (2015) using the regression analysis find a positive and significant relationship between government expenditures on health and education and oil revenue in Nigeria. Nwasu and Okafor (2014) using the vector autoregressive and error correction models investigate the relationship between government expenditure (total, capital and recurrent) and revenue (total, oil revenue, nonoil revenue) and find bidirectional causality between both aggregated and disaggregated government expenditure and revenue supporting the spend-revenue hypothesis in Nigeria. Adedokun (2014) employing the SVAR model find that oil revenue shocks lead to change in government spending in both the short run and long run in Nigeria. Adelowokan and Osoba (2015) applied the causality test to investigate the relationship between oil revenue
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shocks and government expenditure on poverty and result show no relationship supporting the institutional hypothesis in Nigeria. Fasanya and Ogundare (2018) examined the government expenditure and oil revenue relationship including economic growth and the impulse response analysis show that changes in oil revenue strongly influences government expenditure and economic growth in Nigeria.
The studies on the relationship between oil revenue and government expenditure in other countries offers mixed conclusion. For instance, Ahmad and Masan (2015) investigated the relationship between government expenditure, oil revenue and economic growth in Oman using the VAR and find that changes in government expenditure response to oil revenue shocks in the short run, while in the long run government expenditure influences changes in economic growth. Dandan and Maharmah (2015) using the regression analysis examined the government expenditure and oil price/revenue relationship in Saudi Arabia and find positive and significant relationship with government expenditures and oil price/revenue. Dizaji (2014) using the impulse response and variance decomposition analyses find that change in oil revenue strongly influence government expenditure in Iran and oil revenue lead to change in government expenditure supporting the revenue-spending hypothesis. Garkaz et al (2012) applied the Wavelet analysis approach to examine the relationship between Iranian government expenditure and revenue from oil export and find that they have significant and positive with each other. Farzanegan (2013) reexamined the relationship between subcategories of government expenditure and oil revenue shocks in Iran using the VAR model and find that military and security expenditures response significantly to shocks in oil revenue while the relationship is insignificant with social spending components. Fasano and Wang (2002) using oil revenue and government expenditure in GCC countries support the revenue-spending hypothesis in all the GCC countries.
The above review shows that majority of the previous studies concentrated on the relationship between aggregate government expenditure and oil revenue while there are few studies that conducted the disaggregated analysis focusing on current and recurrent government expenditures and/or oil and nonoil revenues. This paper adds to the existing literature by examining the relationship between oil revenue shocks and subcategories of government expenditures in Nigeria.
Methodology
The paper employs the Vector Autoregressive Model (VAR) to investigate the relationship between the oil revenue shocks and government expenditure in Nigeria. The multivariate unrestricted VAR model can be specified as:
yt =
tp= Aiyt−i +BXt +et (1) where yt is vector for endogenous variables and xtis the vector of the exogenous variables, Ai and B represents the slope parameter matrices and etis a vector of innovation. The VAR model is used to investigate the causality, impulse response and variance decomposition analysis of time series economic variables. Before running the VAR, the Augmented Dickey Fuller (ADF) unit root test was used to examine the order of integration of the series. If the time series variable is non-stationary, we reject the null hypothesis of the unit root test. Second, the Granger causality test was employed to find the predictive ability of the variables on each other. The model can be specified as:112
t
m j
j t j n
i t i
t x y e
y 1
1 1
1
1+ + +
=
= −
= −
(2)
t
m j
j t j n
i t i
t y x e
x 2
1 1
1
2 + + +
=
= −
= −
(3) When the lagged values of xt are significant in explainingyt, xt Granger-cause yt and vice-versa. If lagged values of xtand yt are significant in each other’s equation, there is bidirectional causality, while the insignificants of the variables means that there is no causality relationship between them (they are independent). In the VAR system, the Granger causality between the variables is tested using the standard joint F-test (Brooks, 2008). The impulse response analysis was then employed to trace the responses of the government expenditure and its subcategories of to shocks in oil revenue. Impulse response not only provides understanding of responses of the variables to shocks but also shows how long the effect persists, its size and direction (Abdullahi, Kouhy & Zahid, 2014). Finally, the variance decomposition analysis (VDC) was estimated to gives the proportion of movement in each variable due to its own shocks and from oil revenue shocks.
Data and its properties
The paper used annual time series data for oil revenue, total and subcategories of government expenditures for Nigeria covering the period 1986 to 2018. Data for the oil revenue and government expenditures were sourced from the Central Bank of Nigeria Statistical Bulletin (2018). The sub-categories of expenditures include health expenditure, education expenditure, communication expenditure, construction expenditure, agricultural service expenditure, defense expenditure and internal security. The notations used for the selected variables are: Oil revenue (Oilrev), total government expenditure (Govt), education expenditure (Educ), health expenditure (Health), construction and transport expenditure (Cons), communication expenditure (Com), Agricultural expenditure (Agric) , security expenditure (Sec) and defence expenditure (Def).
Table I presents the summary statistics for the natural logarithms of oil revenue, total and subcategories of government expenditures in Nigeria. The results show that the means and standard deviation are higher for oil revenue. All the variables show negative skewness and are Platykurtic because their kurtosis value is less than 3. The Jarque-Bera test shows that all the variables are not normally distributed because we cannot reject the null hypothesis at the 5%
significant level.
Table I Summary Statistics for the Selected Variables
Oilrev
Govt
Educ
Health Cons Com Agric Sec Def Mean 6.6549 6.4426 3.2781 2.4329 2.0678 1.4469 1.4395 3.5763 3.4678 Max 9.0914 8.5793 5.9672 5.5519 5.2776 4.5001 4.1805 6.0166 5.8009 S.Dev. 2.0575 1.8368 2.2938 2.5556 2.1413 2.0676 2.3268 1.7546 1.6359 Skewness -0.6352 -0.5418 -0.6959 -0.5614 -0.1167 -0.4407 -0.7381 -0.0317 -0.0507 Kurtosis 2.2234 2.0365 2.3854 2.1416 1.6669 1.9600 2.3995 1.3679 1.5329 J.Bera 2.8639 2.7159 2.9898 2.5800 2.3658 2.4004 3.2806 3.4455 2.7935 (0.238) (-0.257) (0.224) (0.275) (0.306) (0.301) (0.194) (0.178) (0.247)
Note: The oil revenue and subcategories of government expenditures series are in natural logarithmic form, the figures in bracket are probabilities of the Jarque-bera test.
113 Empirical Results and Discussion
Unit Root Test
Table II present the results of the ADF unit root test conducted with intercept and trend specifications. The results show that all the variables are non stationary in their levels except total government expenditure. However, the result show that the variables are all stationary in their first difference suggesting that they are integrated of order 1 and they are I (1).
Table II Results of unit root test
Variables ADF
Levels IstDifference
Oil revenue -2.9749 -5.0637
Expenditures
Govt -4.2416* -
Educ -2.2152 -6.9387*
Health -2.3241 -9.8599*
Cons -1.4896 -6.9174*
Com -2.1524 -7.1273*
Agric -2.3585 -7.5661*
Sec -0.9191 -7.1273*
Def -0.5362 -6.9711*
Note: * indicates significant at 5% level based on the Mackinnon’s critical value. The values reported are the t-statistics in level and first difference.
Granger-Causality Test
Table III presents the estimated results of the Granger causality test between oil revenues, total and subcategories of government expenditures in Nigeria. The VAR model specified in equation (2) and (3) was first estimated in level. The VAR is run using two lags which are the optimal lags selected based on Schwarz information criterion (SIC) and Akaike Information Criterion (AIC). The results of the aggregated analysis indicate that oil revenue shocks and government expenditure does not granger cause each other at the 5% significant level. This implies that there is no causal relationship between oil revenue and total government expenditure consistent with the findings of Fasano & Wang (2002) and Aregbeyen & Kolawole (2015). This result suggests that total government expenditure does not depend heavily on oil revenue supporting the institutional separation hypothesis in Nigeria. The findings also show that total government expenditure cannot be explained using changes in oil revenue in Nigeria.
It can be suggested that the country get its revenue from other sources such as borrowing to finance government expenditure may be due to the declined in the contribution of oil revenue in recent years.
Table III report the estimated results of the Granger causality test between oil revenue and subcategories of government spending. The results show that we reject the null hypothesis of oil revenue does not granger causes education expenditure, road and constructions expenditure, communication and internal security at the 5% significant level. The result implies that oil revenue shocks lead to changes in education expenditure, road and constructions expenditure, transportation and communication, and internal security and not vice-versa supporting the spending-revenue hypothesis. However, the results reject the hypothesis that oil revenue shocks cause changes in health expenditure, agriculture service expenditure and defence expenditures at 5% significant level. The implication of the findings is that shock in oil revenue does not
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significantly contribute in financing these expenditures compared to the other subcategories over the study period.
Table III Results of Granger-causality test
Null Hypothesis: F-Statistic Prob
GOVT does not Granger Cause OILREV 0.86388 0.4342
OILREV does not Granger Cause GOVT 0.53522 0.5924
EDUC does not Granger Cause OILREV 0.80976 0.4568
OILREV does not Granger Cause EDUC 3.84267 0.0357*
OILREV does not Granger Cause HEALTH 2.78355 0.0818
HEALTH does not Granger Cause OILREV 1.21488 0.3144
CONS does not Granger Cause OILREV 0.13321 0.8759
OILREV does not Granger Cause CONS 3.48859 0.0468*
COM does not Granger Cause OILREV 3.59395 0.0431
OILREV does not Granger Cause COM 3.74421 0.0384*
AGRIC does not Granger Cause OILREV 1.31667 0.2867
OILREV does not Granger Cause AGRIC 3.39382 0.0504
DEF does not Granger Cause OILREV 0.63043 0.541
OILREV does not Granger Cause DEF 1.92673 0.1675
SEC does not Granger Cause OILREV 0.48779 0.6199
OILREV does not Granger Cause SEC 3.50914 0.046*
Note: The Akaike Information Criterion (AIC) and Swartz Information Criterion (SI C) were used to choose the lag lengths. The P-values and F-statistics are shown in parenthesis. * denotes in significance at 5% level.
Impulse Response Functions
Figure I present the results of the impulse response analysis between shocks on oil revenue and government expenditures in Nigeria. The results of the aggregated analysis indicate positive and significant response of government expenditure to one standard deviation increase in oil price shocks consistent with Ahmad & Masan (2015) and Dizaji (2014). The results based on point estimate shows that government spending response permanently to oil revenue shock with moderate increase of about 0.3% over the study period.
-.4 .0 .4 .8
2 4 6 8 10
Response of government expenditure
% Responses
-.8 -.4 .0 .4 .8
2 4 6 8 10
Response of education expenditure
% Responses
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-1.0 -0.5 0.0 0.5 1.0
2 4 6 8 10
Response of health expenditure
% Responses
-0.5 0.0 0.5 1.0
2 4 6 8 10
Response of agriculture expenditure
% Response
-1 0 1 2
2 4 6 8 10
Response of communication expenditure
% Response
s -1.0
-0.5 0.0 0.5 1.0
2 4 6 8 10
Response of constructions expenditure
% Responses
-.4 .0 .4 .8
2 4 6 8 10
Response of Internal security expenditure
% Response
-.50 -.25 .00 .25 .50
2 4 6 8 10
Response of defence expenditure
% Response
Figure I Response to Cholesky One S.D. Innovations ± 2 S.E
The results of the subcategories of government expenditures show positive and significant response of construction, communication, internal security, health and defence expenditures to oil revenue shocks. However, the expenditures on education and defence show insignificant response to shock on oil revenue during certain years. The estimates indicate that education expenditure was statistically significant but decline in the 5th year, and then slight increased and become moderate over the rest of the period. Health expenditure shows positive response to shock in oil revenue consistent with that of Ademola (2015). Agriculture service expenditure was statistically significant but declined in the 2th year and rise in the 8th year by about 0.3%.
Defence expenditure indicate insignificant response to oil revenue shocks after the 2th year which continued until the 10th year showing a slight increase of 0.01% up to the 20th period supporting the findings of Fargzenegen (2011). The construction expenditure response to oil revenue shocks was insignificant during the 2th year but increased sharply to 0.4% after the 4th year. Communication expenditure response is significant and high between the 4th and 6th years but declined sharply. The result might be because the telecommunication which was contributing significantly to the sector has been privatized in the country. Lastly, internal security show significant and positive response to shocks in oil revenue over the entire study period. This finding suggests that shocks in oil prices can seriously affects internal security in Nigeria.
116 Variance Decomposition Analysis
Table IV presents the results of the variance decomposition analysis of oil revenue to government expenditures from one to twenty years period. The result shows that oil revenue shocks contribute significantly in explaining about 93% variation of total government expenditure in the first period but slightly declined to 62% at the end of the 20th forecast periods. The findings contradict the causality test which indicates that oil revenue shocks and government expenditure have no relationship in Nigeria. This implies that contribution of oil revenue to changes in total government expenditure is significant but declined over the study period. This is may be because the country has been running a deficit budget for over 17 years and the recent declined in the world oil prices have decrease the amount of the country’s oil revenue which may be make it to obtained funds from other sources to finance government expenditures.
Table IV Results of the Variance Decomposition Analysis
Government expenditure Education expenditure
Period S.E. LOILREV LGOVT Period S.E. LOILREV LEDUC
1 0.168926 6.493649 93.50635 1 0.697061 0.325963 99.67404
5 0.24757 24.7099 75.2901 5 0.890537 31.28988 68.71012
10 0.299612 33.33761 66.66239 10 0.980528 40.43654 59.56346
20 0.338461 37.24416 62.75584 20 1.028143 44.39332 55.60668
Health expenditure Communication expenditure
Period S.E. LOILREV LHEALTH Period S.E. LOILREV LCOM
1 0.622989 0.002754 99.99725 1 0.750237 0.0041 99.9959
5 0.804301 28.89822 71.10178 5 0.866992 15.01828 84.98172
10 0.906011 37.18487 62.81513 10 0.929282 20.51995 79.48005
20 0.964386 40.8014 59.1986 20 0.966977 23.60322 76.39678
Construction expenditure Agriculture service expenditure
Period S.E. LOILREV LCON Period S.E. LOILREV LAGRIC
1 0.578048 0.679972 99.32003 1 0.672582 12.69551 87.30449
5 0.770282 22.83491 77.16509 5 0.813939 32.6461 67.3539
10 0.889508 40.9832 59.0168 10 0.8919 39.80944 60.19056
20 0.959384 48.61026 51.38974 20 0.933904 43.12707 56.87293
Defence expenditure Internal security expenditure
Lag S.E. LOILREV LDEF Period S.E. LOILREV LSEC
1 0.374682 23.77247 76.22753 1 0.286363 2.511535 97.48846
5 0.578964 27.80352 72.19648 5 0.465456 32.97383 67.02617
10 0.710107 44.75037 55.24963 10 0.640493 58.99709 41.00291
20 0.814851 57.56635 42.43365 20 0.781281 71.64029 28.35971
The results of the subcategories of government expenditures indicate that oil revenue shocks explained more than 95% variation in all categories during the first period except for defence which shows 76% variation. Education expenditure indicates that the contribution of oil revenue shocks declined to 59% and 55% in the 10 and 20 periods. Health and communication expenditures show that oil price shock explain 99% of their variations in the first period but declined to about 60% to 76% variation of these categories in the 20 period forecast horizon respectively. The results of construction and agriculture service expenditures shows that the
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proportion of oil revenue shock in explaining their movement decrease from 60% to 50% in the 10 and 20periods respectively. Lastly, the oil revenue shocks contributes 42% in explaining movement of defence expenditure during the 20 period while internal security indicate a decline from 97%, 40% and 28% in the 1st, 10th and 20th periods respectively. This implies that there is a serious fall in contributions of oil revenue shocks in explaining defence and internal security forecast variance during the study period.
Conclusion
The paper investigates the relationship between oil revenue shocks and government expenditure in Nigeria using the Vector Autoregression Model (VAR) over the period 1986 to 2018. From the findings, it is concluded that there is no causality relationship between oil revenue shocks and aggregate government expenditure, while there is a unidirectional causality from oil revenue shocks to health, agricultural and defence expenditures and bidirectional causality between education, communication, construction and internal security expend itures and oil revenue shocks. The result of the impulse response and variance decomposition analyses also shows significant impact of oil revenue shocks on total government expenditure and its subcategories. The findings support the institutional separation hypothesis in the aggregated analysis while there is mixed conclusion in the disaggregated analysis.
The policy implication of the findings is that measures for regulating oil price/or revenue should take into account their effects on government expenditure. Nigeria should diversify to reduce its high dependence on oil sector because any negative shocks on oil revenue will seriously affects the level of public spending which in turns have impact on economic growth in the country. Moreover, policy makers should avoid decisions on increasing government expenditure that will not bring a corresponding increase in oil revenue because this will compound the problem of deficit budget in the country supporting Nwasu & Okafor (2014).
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Unpublished Msc thesis submitted to the Department of Economics, Faculty of Social Sciences, Ahmadu Bello University, Zaria.
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