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PROJECT TOPIC- EFFECT OF GOVERNMENT CAPITAL EXPENDITURE ON THE MANUFACTURING SECTOR OUTPUT IN NIGERIA

PROJECT TOPIC- EFFECT OF GOVERNMENT CAPITAL EXPENDITURE ON THE MANUFACTURING SECTOR OUTPUT IN NIGERIA

CHAPTER ONE

INTRODUCTION

Background of the Study

In almost all economies of the world, government intervenes in undertaking fundamental roles of allocations, stabilization, distribution and regulation, especially when market proves inefficient. Government particularly pursues key macro-economic objectives such as economic growth and development, full employment, price stability and poverty reduction (Usman, 2011).

Capital expenditure is defined as a spending on assets. It is the purchase of items that will last and be used time and time again in the provision of goods or services. In the case of government, examples would be the building of a new hospital, the purchase of new computer equipment or networks, constructing new roads etc. (IMF, 2010).  Also according to Central Bank of Nigeria (CBN, 2011), government capital expenditure is the money spent on goods that are classified as investment goods. This means spending on things that last for a period of time. This may include investment in hospitals, schools, power sector, telecommunication and road construction. The role of government capital expenditure in output and capacity utilization of manufacturing industry in Nigeria has been of a growing concern. However, despite the fact that the government had embarked on several policies aimed at improving the growth of the Nigerian economy through the contributions of manufacturing industry to the economy, the capacity utilization of the sector has remained low (Adebayo, 2011; Peter and Simeon, 2011 and Loto, 2012).

Manufacturing sector refers to those industries which are involved in the manufacturing and processing of items and indulge in either the creation of new commodities or in value addition (Adebayo, 2011). According to Dickson (2010), manufacturing sector accounts for a significant share of the industrial sector in developing countries. The final product can either serve as finished goods for sale to customers or as intermediate goods used in the production process.

Thus, manufacturing sector plays key role in an economy and motivates conversion of raw materials into finished goods. Charles (2012) posits that the manufacturing industries create employment which helps to boost agriculture and diversify the economy and in the process of helping the nation to increase its foreign exchange earnings.

Activities in the manufacturing sector cover a broad spectrum which includes; agro processing, metal/plastic, electrical, textile, clothing, footwear, cement and building. These activities contribute to the economy as a whole in terms of output of goods and  services; provide a means of reducing income disparities; develop a pool of skilled and semi-skilled labour for the future industrial growth; improve forward and backward linkages within the value chain and between socially and geographically diverse sectors of the country; offer an excellent breeding ground for entrepreneurial and managerial talent and serve as a source of foreign exchange for the economy (Imoughele and Ismaila, 2014). Apart from laying solid foundation for the economy, it also serves as the import substituting industry, provides ready market for intermediate goods and contributes significantly to government revenue generation through tax (Aderibigbe, 2004).

In the Nigerian experience, the downturn of the global oil market as frequently observed with its attendant and the sharp decline in foreign exchange earnings have adversely affected macroeconomic performance in the economy coupled with the global financial crisis that occurred within the past decade. Nigeria’s economy has consistently faced the problems of balance of payment deficit as a result of excessive dependence on imports for consumption and capital goods, dysfunctional social and economic infrastructure, unprecedented fall in capacity utilization rate in industry and neglect of the agricultural sector, among others. These have resulted in fallen incomes and devalued standards of living (Anyanwu, 2004).

Given the importance of manufacturing sector as the bedrock of economic growth and development, Nigeria, over the years, has employed several strategies which were aimed at enhancing the productivity of this vital sector as a means of achieving sustainable growth.  For instance, the country adopted the import substitution industrialization strategy during the First National Development Plan (1962-1968) which was targeted at reducing the volume of imports of finished goods and encouraging foreign exchange savings by producing locally some of the imported consumer goods (Ishola, 2012).

The country consolidated her import substitution industrialization strategy during the Second National Development Plan period (1970-1974 and 1976-1980) which actually fell within the oil boom era. During this time, manufacturing activities were so organized to depend on imported inputs because of the weak technological base of the economy. However, as a result of the collapse of the world oil market in the early 1980s, there was a severe reduction in the earnings from oil exports. Consequently, the import-dependent industrial structure that had emerged became unsustainable owing to the fact that earnings from oil exports could not adequately pay for the huge import bills.

Manufacturing sector are categorized into; Engineering, construction, electronics, Chemical, Energy, Textile, food and beverage, metal-work, plastic, transport and telecommunication sectors (CBN, 2010). In recent times, some manufacturing industries in Nigeria have been characterized by declining productivity rate. It has been argued that the persistent poor performance of the manufacturing sector in Nigeria is mainly due to massive importation of finished goods, inadequate financial support and other variables which has resulted in the reduction in capital utilization and output of the manufacturing sector of the economy (Tomola, Adebisi and Olawale, 2012).

Looking at the manufacturing sector share the Gross Domestic Product (GDP) in recent years (1990-2010), it has not been relatively stable. In 1990, it was about 5.5% while it dropped to 2.22% in 2010. Also at the same period, the overall manufacturing capacity utilization grew from 40.3% in 1990 to 58. 92% in 2010 (CBN, 2011). This may be attributed to the increase in government increased expenditure on infrastructure in recent times. There has been mixed result in relationship between government capital expenditure and manufacturing sector out in Nigeria looking at their percentage from 1990 to 2012. The manufacturing sector output rate which rose to 6.05% in 1991 was reduced to 5.3% in 1994, from 1995, it has been fluctuating till 2011 to 2012 when it increase from 4.2% to 7.70% respectively.

Nwanne (2015) observed that capital expenditure on manufacturing sector output in Nigeria increased steadily with few fluctuations in some years. Nigeria’s government capital expenditure increased from 1990 to 2012. However, in 2000, 2002, 2003 and 2010 capital expenditure fell by 51.92%, 26.74%, 24.80% and 23.33% from the previous year quantum values. Apart from these years, the capital expenditure increased from year to year. The highest increase compared to the previous year was observed in 1990 by there was a 59.96% increase.

This was followed by 2001 when the increase was 83.21% and in 1996 when it increased by 75.81%. Again within these periods, the years with the least increase in capital expenditure was in 2009 with government capital expenditure increased by 2.61%, followed by 2006 with an increase of 6.33% and 1998 (14.60%) in ascending order. Manufacturing sector grew from 1990 to 2010, with a single increase in 1991. The highest increase in manufacturing sector within the period was in 2012 when Manufacturing Operation Products increased by 7.70%, this was followed by 1991 when manufacturing sector growth rate was 6.05%.

Furthermore, in Nigeria, the level of growth in manufacturing sector has been affected negatively because of high lending rates, which invariably is responsible for high cost of production (Rasheed, 2010). Okafor (2012) further observed that the level of Nigerian manufacturing sector performance has continue to decline because of low implementation of government budget and difficulties in assessing raw materials.

PROJECT TOPIC- EFFECT OF GOVERNMENT CAPITAL EXPENDITURE ON THE MANUFACTURING SECTOR OUTPUT IN NIGERIA

The manufacturing sector in Nigeria consists of large, medium, small and micro scale enterprises. On attainment of independence, government embarked on transforming the country from its predominantly agrarian nature, into an industrialized economy through various policies and programmes as encapsulated in the development plans. The share of the industrial sector averaged 27.9 per cent during the period of analysis, with its sectoral contribution declining from 35.4 per cent in 1999 to 19.3 per cent in 2011. The decline in the sectoral contribution of the industrial sector to GDP is attributed to various factors including policy inconsistencies and reversals, as well as infrastructural bottlenecks. The share of manufacturing sector averaged 4.0 per cent during the period of analysis. The declining share of the industrial sector, especially manufacturing sector is worrisome as this has exacerbated the unemployment situation in the country (CBN, 2013).

Statement of the Problem

Despite huge government capital expenditure on the Nigeria economy, a lot of challenges appear to have persisted. Among these challenges are ineffective economic policies, misappropriation and ineffective implementation of polices (Anyawu, 2007), lack of integration of macroeconomic plans and absence of harmonization and co-ordination of government capital expenditure, gross mismanagement and misappropriations of public funds (Okemini and Uranta , 2008).  Despite the emphasis placed on government capital expenditure in the management of the economy, the Nigerian economy is yet to come on the path of sustainable growth and development and this situation has largely been attributed to the poor capacity or output of the manufacturing sector of the economy.

The poor nature of electricity supply in Nigeria has imposed significantly cost in the industrial sector of the economy. This argument also corroborates the survey of the manufacturers Association of Nigeria (MAN) in 2005, where it was indicated that the cost of generating power constitute about 36 percent of the production cost. One of the effects of the Nigerian policy implementation failures is that despite the abundance of natural gas and renewable energy resources in the country, Nigeria has become known for its epileptic power supply. Some communities do not have access to this basic social infrastructure; those that have it cannot rely on the very poor supply from the holding company of Nigeria. This contributed to adverse impacts on industrialization in the country.

Road network which has been the dominant mode of transport account for not less than 80% of the tonnage of goods convey to and from the Nigerian Sea-Port when compared to other transport modes (i.e. rail and inland water) (CBN,2003). The importance of the road network to economic and business activities is not difficult to understand. Roads are ubiquitous. They provide virtually connectivity of countless origin and destination. (Allen 2003).

Telecommunication affects productivity by, for example, lowering the costs of collecting information and search for services, i.e. the cost of doing business falls. In a way, one can say that increased connectivity reduces the distance between economic actors. Like in the case of transport infrastructure, there is scope for network externalities because with more users, the derived value of those users increases. Firms need to efficiently communicate with both input and output markets. Correct and swift information caters to optimal decision-making.

The inability of government capacity expenditure to impact positively on the manufacturing sector to be part of the key drivers of growth in Nigeria may be responsible for the lack of congruence between growth and the well-being of Nigerians. Among the major policy questions generated by this has to do with whether governments are actually aiding economic growth in  Nigeria, and whether such expenditure  have  any positive correlation with key economic sector  such as manufacturing. This is the major issue that formed the thrust of this study.

Objectives of the Study

The broad objective of this study is to ascertain the effect of government capital expenditure on the manufacturing sector output in Nigeria.

The specific objectives of the study are:

  1. To determine how government capital expenditure on the power infrastructure affects the manufacturing sector output in Nigeria.
  2. To ascertain how government capital expenditure on road infrastructure affects manufacturing sector output in Nigeria.
  • To examine how government capital expenditure on telecommunication infrastructure affects the manufacturing sector output in Nigeria.

    Research Questions

The following research questions were formulated for the study:

  1. How does government capital expenditure on the power infrastructure affect the manufacturing sector output in Nigeria?
  2. How does government capital expenditure on road infrastructure affect manufacturing sector output in Nigeria?
  • How does government capital expenditure on telecommunication infrastructure affect the manufacturing sector output in Nigeria?

    PROJECT TOPIC- EFFECT OF GOVERNMENT CAPITAL EXPENDITURE ON THE MANUFACTURING SECTOR OUTPUT IN NIGERIA

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