Overall and Bilateral Trade Complementarities

143 Hypothesis Six

H0: Recurrent expenditure, capital expenditure and fiscal deficit have no significant effect on exchange rate.

H1: Recurrent expenditure, capital expenditure and fiscal deficit have significant effect on exchange rate.

Table 51: Test of Hypothesis Six

Estimated Model f-statistic P-value Decision EXR → REXP + CEXP + FSD

REXP 1.38329 0.2482 Accept H₀ and Reject H₁

CEXP 0.31932 0.5760 Accept H₀ and Reject H₁

FSD 2.31635 0.1378 Accept H₀ and Reject H₁

Source: Granger Causality Output in Table 45

Table 51 reveals that recurrent expenditure, capital expenditure and fiscal deficit have no significant effect on exchange rate as the p-values of 0.2482, 0.5760 and 0.1378 are higher than 0.05. Subsequently, the hull hypothesis that recurrent expenditure, capital expenditure and fiscal deficit have no significant effect on exchange rate would not be rejected but the alternate hypothesis is rejected.

144 The ARDL relationship between real gross domestic product and fiscal policy tools indicates that recurrent and capital expenditure have negative relationship with real gross domestic product. This is in line with the neoclassical theory that fiscal policy no matter the measure does not propel economic growth. Fiscal deficit had a significant positive relationship with real gross domestic product. The negative relationship between recurrent and capital expenditure would be owed to the issue of corruption by politician and those in the helm of affair that embezzle or siphon funds allocated for public spending by the government. This finding is in line with the previous studies of Adigwe, Anyanwu and Udeh (2016), Osuala and Ebieri (2014), Falade and Folorunso (2015) and Nwankwo, Kalu and Chiekezie (2017). However, the positive association between the two components of government expenditure as reported by Babalola (2015), Audu (2012), Ismail (2011), Tagkalakis (2013), Agu, Idike, Okwor and Ugwunta (2014) would not be verified. From Table 45, capital expenditure having significant effect on real gross domestic product further affirms the results of Adigwe, Anyanwu and Udeh (2016), Nwankwo, Kalu and Chiekezie (2017) and Falade and Folorunso (2015).

Industrial development is not affected by government fiscal policy programmes over the years as this sector lack the infrastructure to contribute to the growth of the economy. The poor performance of the industrial sector signals the over dependence of the country on foreign goods and services for her consumptions. Recurrent and capital expenditure were found to have insignificant negative relationship with industrial development on one side, while on the other hand, industrial development insignificantly and positively related with fiscal deficit. This would be that the perceived increases in the

145 Nigeria real gross domestic product propels the government to constantly seek fiscal deficit as a way of increasing the quantum of money in circulation in the economy.

Money supply was significantly influenced by variation in recurrent and capital expenditure. This is a support of the theoretical postulation that once government increases spending, the level of money in circulation is bound to rise. This would lead to high inflation or rise in interest rate especially if the Central Bank of Nigeria does not use monetary policy to compliment the discretionary fiscal policy of the government. Fiscal deficit was observe to be propelling the level of money in circulation as a unit rise in fiscal deficit result in a corresponding appreciation in money supply which is statistically significant. This is true that in developing countries, government resort to fiscal deficit to accelerate the pace of economic development accompanied by upsurge in money supply. This finding is in line with Kosimbei (2009), Bakare (2011), Hoang (2014), Lozano (2008), Milo (2016), Zuze (2012) and Umeora and Ikeora (2016) among other studies.

Inflation rate is not affected by fiscal policy instruments: recurrent, capital expenditure and fiscal deficit. This shows that the high level of inflation in Nigeria is empirically not as a result of government fiscal policy.

Nevertheless, the ARDL result in Table 30 reveal the presence of an insignificant positive relationship between recurrent expenditure, fiscal deficit and inflation, while a negative insignificant relationship was found between inflation and capital expenditure. The negative association between fiscal deficit and inflation agrees with the findings of Nwakoby, Okaro and Ananwude (2016), Dockery, Ezeabasili and Herbert (2012) and Twari, Bolat

146 and Kocbulut (2015), whereas the positive linkage between is in line with Nwakoby (2016), Umeora (2013), Oladipo and Akinbobola (2011) and Egbulonu and Wobilor (2016).

In the same vain, interest rate is not significantly affected by recurrent, capital expenditure and fiscal deficit. This is an indication that the high cost of capital/interest rate charged by deposit money banks in extending loans and advances is in no way influenced by fiscal policy tools of the government:

recurrent, capital expenditure and fiscal deficit. This supports the study of Mukhtar and Zakaria (2008), Bayat, Kayhan and Senturk (2012), Chakraborty (2012) but rejected the outcome of the research of Noula (2012) and Asamoah (2016). Again, recurrent expenditure and fiscal deficit have positive insignificant relationship with interest rate, whereas capital expenditure is negatively linked with interest rate. The positive relationship between fiscal deficit and interest rate affirms the results of Bonga-Bonga (2012), Laubach (2003), Pandit (2003), Putri, Kuncoro and Sebayang (2015) and Saher and Herbert (2010), while the result of Nkalu (2015) on the negative association between interest rate and fiscal deficit was refuted.

Exchange rate is not affected by government fiscal policy owing to the absent of causal relationship between recurrent expenditure, capital expenditure, fiscal deficit and exchange rate. This is to say that deterioration in exchange rate cannot be empirically attributed to fiscal policy practice of the Nigerian government even when the level of external debt contracted from foreign organizations/countries are increasing on yearly basis. This is in agreement with Saysombath and Kyophilavong (2013) that government fiscal policy does not have any significant effect on exchange rate but contradicts

147 Afonso and Sousa (2012) who portrayed that fiscal deficit has significant effect on exchange rate in USA, UK, Germany and Italy. Exchange rate has significant positive relationship with government capital expenditure but insignificant positive relationship with recurrent expenditure. The positive linkage between exchange rate and government confirms the result of but contrary to Parsley and Wei (2014), Giorgio, Nistico and Traficante (2016) and Gulcan and Bilman (2005) that a one standard exogenous fiscal stimulus at home produces a real exchange appreciation. Fiscal deficit has negative and significant relationship with exchange rate. This implies that servicing of external debt obligation results in more foreign currency leaving the country, which in turn lead to depreciation of the local currency (Naira) against other countries of the world. This is based on the fact that Nigeria is an import dependent country thus requiring more forex for importation.

Industrial development, inflation, interest rate, exchange rate and real gross domestic product is in tandem with the neoclassical assumption that macroeconomic fundamentals would in no away affected by government fiscal policy. The theory argue that the use of fiscal policy by the government to boost aggregate demand is uncalled for as it crowd out private sector investments. Besides, pushing up the level of aggregate demand outside the outmost intent of the citizen is bound to result in inflation which in no small way defeat the government anticipated benefits of expansionary fiscal policy.