International Journal of Commerce and Finance, Vol. 7, Issue 1, 2021, 109-121 109 IMPACT OF FISCAL POLICY ON DEVELOPMENT FINANCING: EVIDENCE FROM NIGERIA Mukaila Abiola TONADE Olabısı Onabanjo Unıversıty, Nigeria Bamidele ILO Olabısı Onabanjo Unıversıty, Nigeria Olusola Enitan OLOWOFELA Olabısı Onabanjo Unıversıty, Nigeria Received: February 17, 2021 Accepted: April 14, 2021 Published: May 01, 2021 Abstract This study examined the relationship between fiscal policy and development financing in Nigeria and the extent to which the former effects the latter. The study employed public choice framework and the model is estimated with time-series data from 1981 to 2014, using the Johansen estimation technique. The findings revealed that there is a strong positive relationship between fiscal policy and d evelopment financing, real GDP per capital, consumer price index and capital expenditure respectively. The results further confirmed that more expenses were incurred funding recurrent than capital and this had taken its toll on development. The study recommended that government should increase revenue base so as to fund capital expenditure in order to achieve sustainable development while it is also necessary to reduce recurrent expenditures and domestic debt. Keywords: Fiscal Policy, Economic Growth, Development financing JEL Classification: B22, C25, E62, H2 1. Introduction The modern-day economic crisis has invigorated the debate on importance of fiscal policy over monetary policy in achieving gross domestic growth. Developing countries economic crises had shown that monetary policy may not offer adequate response to macroeconomic challenges, hence there is need to bring into discussion how fiscal policy can serve as a machinery to correct dampening gross domestic growth and increase capital expenditure. This thought continued to spark debate among researchers, developmental institutions and academics among others. Fiscal policy is an essential determinant of cyclical dynamics of macroeconomic aggregates that contributes positively in achieving stabilization and inclusive growth. It could take either expansionary or contractionary approaches. It’s also involves the use of government spending, taxation and borrowing to influence the pattern of economic activities, growth of aggregate demand, output and employment and economic stability in order to achieve inclusive growth and development (Olugbenga, and Owoye, 2007). Nigeria, like most developing countries depend solely on revenue from crude oil as a major source of income in achieving macroeconomic goals and other developmental projects. However, this major source of income is subjected to revenue volatility as a result of decline in global oil price thereby creating disruption in provision of government essential services since the quantum of income flows usually determines the level and pace of development attainable by the country. Intently, governmental development activities in developing countries particularly Nigeria has continued to increase despite the serious threat posed by shortage of funds for developmental propose (Shonchoy, 2010). It is therefore expedient for government to consider alternative source of income in order to increase capital expenditure because of the growing population and problems connected with urbanization which often aggravate the need for government to increase public expenditure (Shelton, 2007). As a result of these, government mobilizes long-term funds either directly or indirectly for the capital expenditure and In te rn a ti o n a l Jo u rn a l o f C o m m e rc e a n d F in a n c e In te rn a ti o n a l Jo u rn a l o f C o m m e rc e a n d F in a n c e In te rn a ti o n a l Jo u rn a l o f C o m m e rc e a n d F in a n c e Olusola Enitan OLOWOFELA 110 other development aspirations of government. Development financing mix available to Nigerian economy can broadly be classified into internal and external sources. It can also be categorized into debt and non-debt ( Duc-Anh, Phu and Arnelie ,2015). The debt source includes treasury bonds, development loan stocks and loan from bilateral, multilateral and international capital market sources used by government to finance development. The non-debt sources include public and private savings and gains from international trade. Others include foreign direct investment, foreign aids and grants (Bolaji, Olukayode and Abdulmaq, 2011). Intently, Taiwo and Abayomi (2011) affirmed that the degree and composition of public expenditure will determine the pattern and growth in output of the economy. However, how this development financing mix has transformed capital expenditure remain puzzle. The examination of country’s debt sources of finance shows that domestic debt in 1981 is about 11.19billion representing 11.87% of GDP, this continue to increase till 1994 to 407.58billion representing 29.12% of GDP. Recently the amount contracted on domestic debt in 2014 is about 7904.02billion representing 8.88% of GDP. External debt on the other hand rose from 2.33billion in 1981 representing 2.47% of GDP to an all time highest point in 1987/92 of about 60% of GDP due to the introduction of Structural Adjustment Programme (SAP). This trend continues to the beginning of this current republic when external debt was contracted to the tune of about 50% of GDP. Recently the amount contracted on external debt had fallen to all time low point of about 1.83% of GDP (CBN, 2015). The same thing can be said of the government fiscal policy, much of the government revenue has been used to finance recurrent expenditure which leaves very little for capital expenditure. Majority of the project still surviving till today are those projects which have been executed since the 90s. Right from the beginning of this republic investment in capital project has been on the downward trend till it drops to 7.78% of the total government revenue in 2014. Despite all this funds from various financing mix, the economy has been engaging in deficit financing throughout these periods of study except in 1995/96 when the economy had a surplus, not much has been gained in terms of investment on development since much of these finance usually go into recurrent expenditure. The amount spent on capital expenditure during the period hovers around 5% of GDP in fact in 2014 only 0.88% of GDP was spent on capital expenditure. From the foregoing, the main objective of this study is to examine the extent to which government fiscal policy has impacted on development financing, using both fiscal policy mix and development financing mix as complement and substitute and regressing the same on capital expenditure. Many works previously conducted in this area have been looking at the nexus between fiscal policy and economic growth or purely on development financing and economic growth. Apart from the introduction, the rest of the paper is divided into five sections. Section 2 Literature Review, section three (3) focuses on research methodology, section four (4) is discussion of findings and section five (5) concludes the paper. 2. Theoretical Review/ Literature Review The theoretical postulates linking fiscal policy to development financing can be established through the way and manner in which fiscal policy, particularly deficit financing affect economic growth and development as government expenditure is believed to be financed by different development financing mix available. There is consensus in the literature that most of the government expenditure should be channelled to capital spending particularly in developing economy for meaningful development to take place. Fiscal policy aims at stabilizing the economy (Amada &Essi, 2006). Increases in government spending or a reduction in taxes tend to pull the economy out of a recession; while reduced spending or increased taxes slow down a boom (Dornbusch& Fischer, 1990). Government interventions in economic activities are basically in the form of controls of selected areas/sectors of the economy. These controls differ, and depend on the specific needs or purpose the government desires to achieve. Samuelson &Nordhaus (1998), distinguished between two forms of regulation, namely: Economic regulation (involving control of prices, entry and exit conditions, regulation of public utilities, such as transportation and media organizations, regulation of the financial sector operations and social regulation (aimed at protecting the health and safety of workers at work place, the environment, and protection of consumer rights. our focus is on economic regulation.Proponents of government expansion (the Keynesian economist) are of the view that government expenditures provide valuable public goods including: education, roads, infrastructure, and security, among (Mitchell, 2005). They claim that increases in government spending are capable of enhancing growth through, perhaps, increase in purchasing power of the citizenry, both in the short- and long run (Samson, 2013). The importance of fiscal policy as an instrument of economic development was first envisaged by Keynes in his General Impact of Fiscal Policy on Development Financing: Evidence From Nigeria 111 Theory wherein he showed that the total national income was an index of economic activity and brought out the relationship of economic activity to total spending (Emanuele 2003). Hence fiscal policy could be used to influence economic development. Proponents of minimal government spending (the neo-classical economist), however, are of the opinion that high government spending do crowd-out private investments and hence, undermine economic growth. They are of the opinion that increases in government spending often transfer resources from the productive sector of the economy to government, where the resources are likely to be used inefficiently. They also argue that expanding public sector can complicate efforts aimed at implementing pro-growth policies such as, fundamental tax reform and personal retirement accounts (Mitchell, 2005). Thomas (2012) submitted that effectiveness of fiscal policy depends on the theoretical model of the macro economy that is adopted. That is because fiscal policy works through aggregate demand, and the impact of aggregate demand on the real economy depends on macroeconomic perspective. The implication is that fiscal policy debate is ultimately a debate over macroeconomic theory. No theoretical paradigm is completely satisfying. Comparison of paradigms spotlights the critical assumptions each makes; provides a better basis of understanding; and can help guide and improve policy Ajisafe and Folorunsho (2002) investigate relative effectiveness of fiscal and monetary policy on macroeconomic management in Nigeria using co-integration and error correction modeling techniques. The result of the analysis shows that monetary rather than fiscal policy exerts a great impact on economic activity in Nigeria. The emphasis on fiscal action of the government has led to greater distortion in the Nigerian economy. The result however, suggests that both monetary and fiscal policies should be complementary. Nurudeen and Usman (2010) investigate effect of government expenditure on economic growth in a disaggregated analysis using co-integration and error correction methods to analyze data. Their findings revealed that government total capital expenditure, total recurrent expenditures, and government expenditure on education have negative effect on economic growth. On the contrary, rising government expenditure on transport and communication, and health results to an increase in economic growth. The study recommends that government should increase both capital expenditure and recurrent expenditure, including expenditures on education, as well as ensuring that funds meant for the development of these sectors are properly managed. Secondly, government should increase its investment in the development of transport and communication, in order to create an enabling environment for business to strive. Thirdly, government should raise its expenditure in the development of the health sector since it would enhance labour productivity and economic growth. Lastly, government should encourage and increase the funding of anti-corruption agencies in order to tackle the high level of corruption found in public office. Babalola and Aminu (2011) investigate impact of fiscal policy on economic growth in Nigeria using error correction mechanism. The result indicates that productive expenditure positively impacted on economic growth during the period and that long run relationship exist between them. The paper recommends that there should be an improvement in government expenditure on health and education and economic services, as components of productive expenditure, to boost economic growth. Joshua, Kenneth and Brian (2007) considered optimal public investment and fiscal policy for developing countries that have limited tax and debt capacities using non stochastic constant returns to scale (CRS) endogenous growth model where public expenditure is captured in the production process, in countries where distortions and policy enforcement neglect affect fiscal abilities, as captured by a maximal effective tax rate. The finding revealed that flow of public expenditure increase productivity. It furthered show that government should not borrow to finance as this can lead to increase in public debt, which would lower welfare and the growth rate. Liu Chih, Hsu, and Younis (2008) considered causality between GDP and public expenditure of United State between 1947- 2002. The result showed that total government expenditure causes growth of GDP. While growth of GDP does not create expansion of government expenditure. Estimation analysis results indicated that public expenditure raises the US economic growth. Akanni and Osinowo (2013) discussed effect of fiscal instability on economic growth in Nigeria. The cyclical effects of fiscal spending component were quantified using the HodrickPrescot (HP)-filtered fiscal spending components and output with the correlation technique. Results indicated that between 1970 and 1985, both the real gross domestic product and real total fiscal spending were highly volatile. However, total fiscal spending appears to be countercyclical between 1970 to 1986. But from 1987 to 2010, Olusola Enitan OLOWOFELA 112 the variation in total fiscal spending was relatively stationary while real output was still relatively unstable. The paper concludes that fiscal discipline is required to ensure a sustainably stable economic environment in Nigeria. Agu, Okwo, Ugwunta&Idike (2015) discussed impact of various components of fiscal policy on the Nigerian economy using descriptive statistics and OLS multiple regression analysis for estimation. Findings revealed that total government expenditures have tended to increase with government revenue, with expenditures peaking faster than revenue. Investment expenditures were much lower than recurrent expenditures evidencing the poor growth in the country’s economy. Hence, there were some evidence of positive correlation between government expenditure on economic services and economic growth. Therefore, in public spending, it is important to note that the effectiveness of the private sector depends on the stability and predictability of the public incentive framework, which promotes or crowds out private investment. Babalola (2015) examined the short-run and long-run impact of fiscal policy on economic development in Nigeria using pair-wise correlation, co-integration and error correction mechanism. The result showed that government recurrent expenditure and government investment have positive and significant impact on economic development both in the short-run and long-run. Capital expenditure however, appeared to have short-run positive impact but not in the long-run. Tax revenue had an inverse significant impact both in the short run and long run. Cyril (2016) investigates the effect of fiscal policy on economic growth in Nigeria. Using descriptive statistics and Ordinary Least Square (OLS) multiple regression analysis, the result reveals that total government expenditures is significant and positively related to government revenue. Investment expenditures were much lower than recurrent expenditures evidencing poor growth in the country’s economy. The paper recommends that government should formulate and implement viable fiscal policy option that will stabilize the economy. Olugbenga and Owoye (2007) considered the relationship between government expenditure and economic growth in thirty (30) countries during the period of 1970-2005. Their study revealed that a long-run relationship exists between government expenditure and economic growth. Also, the causality runs from economic growth to government expenditure in 10 of the countries, this affirmed Wagner’s law. From the foregoing, and inconformity with Abata, Kehinde and Bolarinwa, (2012), it is clearer that if fiscal policy is used with circumspection and synchronized with other measures, it will likely smoothen out business cycles and lead to economic growth and stability. This paper contribute empirically to literature by looking at the nexus between fiscal policy and development financing in Nigeria.To the best of our knowledge we have not been able to see any works looking at the nexus between fiscal policy and development financing directly. 3. Research Methodology The annual data used in this study cover a period of 33 years from 1981 to 2014; these years were picked because it comprised of the periods of economic, political and financial sector transformation in Nigeria and there was data availability. The data was sourced from Central Bank of Nigeria statistical bulletin, 2014, and World Development Indicators (WDI, 2014). 3.1. Definitions and Measurement of Variables Variables Definition/Measurement Dependent Variable: DEVNA This depicts development financing and proxied by capital expenditure. Development is only financed when financing capital expenditure. All fund expended on recurrent expenditure is only for consumption Independent variables: Impact of Fiscal Policy on Development Financing: Evidence From Nigeria 113 DDBT Domestic Debt EXDBT External Debt DEFIN Deficit Financing, measured as difference between total revenue and total expenditure NONOILR Non-oil revenue (Mainly tax), measured as non-oil tax revenue and other revenue from other sources apart from oil. Control variables: RGDPPC Real GDP per capita, a proxy for economic development to measure the interaction between development financing and economic development. Measured at 2005 constant price CPI Consumer price index, a proxy for the level of inflation 3.2. Empirical Model and Estimation technique The paper examines the impact of fiscal policy on development financing in Nigeria. The relationship between fiscal policy and development financing is specified as follows: Where; development financing is expressed as a function of fiscal policy mix available to the government and some control variables. The model is therefore specified in econometric form as: Where, DEVNA = development financing, DDBT= domestic debt, EXDBT= external debt, DEFIN= deficit financing, NONOILR= non-oil revenue, RGDP per capita= proxy for economic development and CPI= consumer price index. μ= error term, β1 to β6 = coefficient of regression equation. 3.3. Descriptive Statistics TABLE 3.3: DESCRIPTIVE STATISTICS MEAN MAXIMUM MEDIAN MINIMUM STD ERROR DEVNA 347.0652 1152.797 240.5696 4.100100 371.8570 DDBT 1546.756 7904.020 531.2906 11.19260 2212.566 Olusola Enitan OLOWOFELA 114 EXDBT 1119.329 4890.270 606.6260 2.331200 1363.869 DEFIN 243.5869 1158.518 67.71415 -32.04940 382.4501 NONOILR 661.0862 3275.121 152.6488 2.984100 940.5360 RGDPPC 695.0275 1098.040 597.9042 494.2390 189.8668 CPI 39.32688 145.7960 25.00820 0.493799 43.86516 Sources: Extract from Appendix II Note: DEVNA = Development financing. DDBT= Domestic Debt. EXDBT= External Debt. DEFIN= Deficit Financing. NONOILR= Total non-oil revenue. RGDPPC= Real GDP per capita. CPI= Consumer Price Index. The characteristics of data series used in the regression analysis are presented in Table 3.8 below. It provides information about the mean, median, standard deviation and their maximum and minimum values. The mean value of development financing is #347.07billion while the mean value of fiscal policy mix, for instance, domestic and external debt is #1546.76billion and #1119.33billion. The mean value of deficit financing is #243.57billion and that of non-oil revenue is #661.09billion. On the other hand, the mean value of real GDP per capita is #695.03billion while the mean value of consumer price index is 39.33. The data shows that all the series display high level of consistency as their mean and median values are within their maximum and minimum values. TABLE 3.4: CORRELATION DEVNA DDBT EXDBT DEFIN NONOILR RGDP CPI DEVNA 1.0000 DDBT 0.8414 1.0000 EXDBT 0.1955 0.1492 1.0000 DEFIN 0.8059 0.9298 0.1534 1.0000 NONOILR 0.8844 0.9881 0.1594 0.9097 1.0000 RGDPPC 0.8581 0.8936 0.0320 0.8117 0.9115 1.0000 CPI 0.9296 0.9630 0.2594 0.8775 0.9734 0.9146 1.0000 Sources: Extract from Appendix III Note: DEVNA = Development financing. DDBT= Domestic Debt. EXDBT= External Debt. DEFIN= Deficit Financing. NONOILR= Total non-oil revenue. RGDPPC= Real GDP per capita. CPI= Consumer Price Index. The Table 3.4 shows the correlation matrix result measuring the degree of relationship between the variables in the study. The result shows that there exist a very strong positive correlation between development financing and Impact of Fiscal Policy on Development Financing: Evidence From Nigeria 115 domestic debt, deficit financing, non-oil revenue, real GDP per capita and consumer price index respectively at 0.84, 0.81, 0.88, 0.86 and 0.93 respectively. The correlation between external debt and capital spending is weak and positive at 0.20. Augmented Dickey Fuller Test is used to check the stationary of the variables. A time series data usually show trend with time. This trend can be removed by differencing. The results of ADF test are given in the table below: TABLE 3.5: ADF UNIT ROOT TEST 1ST DIFFERENCE 2ND DIFFERENCE LAG LENGTH Variables T-Statistics Variables T-Statistics DEVNA -3.711722* 1 - - DDBT -4.413812* 1 EXDBT -3.891276* 1 DEFIN -3.780040* 1 NONOILR -4.045837* 1 RGDPPC -3.212804** 1 CPI -3.249275** 1 Critical Values: Critical Values: 1% -3.661661* 1% -4.296729* 5% -2.960411** 5% -3.568379** 10% -2.619160*** 10% -3.218382*** Sources: Extract from Appendix VI Note: DEVNA = Development financing. DDBT= Domestic Debt. EXDBT= External Debt. DEFIN= Deficit Financing. NONOILR= Total non-oil revenue. RGDPPC= Real GDP per capita. CPI= Consumer Price Index. From the result above, Development financing, External Debt, Deficit Financing and non-oil revenue are stationary at first difference at 1 percent level while Real GDP per capita and Consumer Price Index are also stationary at first difference but at 5 percent level respectively. Domestic Debt on the other hand is found to be stationary at second difference at 1 percent level respectively. Based on the result of Johansen co-integration test presented below, there is evidence in support of co-integrating relationship. The test result indicates the existence of 4 co-integrating relationship in the equation at 5 percent level of significant. Thus, the null hypothesis of no co-integration is rejected. It indicated that there exist a long-run relationship between fiscal policy and development financing in Nigeria. Olusola Enitan OLOWOFELA 116 TABLE 3.6: JOHANSEN CO-INTEGRATION TEST Unrestricted Cointegration Rank Test (Trace) Hypothesized Trace 0.05 No. of CE(s) Eigenvalue Statistic Critical Value Prob.** None * 0.908011 240.0834 125.6154 0.0000 At most 1 * 0.847667 163.7286 95.75366 0.0000 At most 2 * 0.707519 103.5147 69.81889 0.0000 At most 3 * 0.627632 64.17527 47.85613 0.0007 At most 4 0.525856 32.56332 29.79707 0.0234 At most 5 0.232141 8.683532 15.49471 0.3955 At most 6 0.007185 0.230744 3.841466 0.6310 Unrestricted Cointegration Rank Test (Maximum Eigenvalue) Hypothesized Max-Eigen 0.05 No. of CE(s) Eigenvalue Statistic Critical Value Prob.** None * 0.908011 76.35480 46.23142 0.0000 At most 1 * 0.847667 60.21394 40.07757 0.0001 At most 2 * 0.707519 39.33942 33.87687 0.0101 At most 3 * 0.627632 31.61195 27.58434 0.0143 At most 4 0.525856 23.87979 21.13162 0.0200 At most 5 0.232141 8.452789 14.26460 0.3345 At most 6 0.007185 0.230744 3.841466 0.6310 Trace test and Maximum Eigenvalue indicates 4 cointegratingeqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Pairwise Granger Causality test presented below shows the direction of causality between development financing, and fiscal policy mix in the model. The result shows evidence in support of a uni-directional causality among development financing, domestic debt, deficit financing, external debt, non-oil revenue and real GDP per capita. Impact of Fiscal Policy on Development Financing: Evidence From Nigeria 117 Causality is running from development financing to domestic debt, from development financing to deficit financing, Capital spending to non-oil revenue, and development financing to real GDP per capita while causality is running in opposite direction from External debt development financing. TABLE 3.7: PAIRWISE GRANGER CAUSALITY TEST Null Hypothesis: Lags Obs F-Statistic Prob. CPI does not Granger Cause DEVNA 2 32 0.77008 0.4729 DEVNA does not Granger Cause CPI 1.03516 0.3688 DDBT does not Granger Cause DEVNA 2 32 2.17648 0.1329 DEVNA does not Granger Cause DDBT 11.9646 0.0002 DEFIN does not Granger Cause DEVNA 2 32 25.5159 6.E-07 DEVNA does not Granger Cause DEFIN 10.1730 0.0005 EXDBT does not Granger Cause DEVNA 2 32 2.70512 0.0850 DEVNA does not Granger Cause EXDBT 0.81544 0.4530 NONOILR does not Granger Cause DEVNA 2 32 0.55716 0.5793 DEVNA does not Granger Cause NONOILR 5.06245 0.0136 RGDPPC does not Granger Cause DEVNA 2 32 1.67817 0.2056 DEVNA does not Granger Cause RGDPPC 2.59252 0.0933 Sources: Extract from Appendix V Note: DEVNA = Development financing. DDBT= Domestic Debt. EXDBT= External Debt. DEFIN= Deficit Financing. NONOILR= Total non-oil revenue. RGDPPC= Real GDP per capita. CPI= Consumer Price Index. The regression result as presented below in Table 3.8 shows that proxies for fiscal policy like deficit financing, non- oil revenue and consumer price index exert positively and significantly on proxy for development financing (capital spending) at 1 percent level respectively. Indicating that a 1 unit increase in deficit financing, non-oil revenue and consumer price index would increase development financing (capital spending) by 0.4728, 0.3857 and 16.0930 units respectively. On the other hand, domestic debt, external debt and real GDP per capita exert negatively and significantly on development financing. Indicating that a 1 unit increase in domestic debt, external debt and real GDP per capita would reduce development financing (capital spending) by 0.3737, 0.0518, and 0.3310 units respectively. The R-square value of 0.966 (96.6%) implies that 96.6 percent of total variation in development financing is explained by proxies for fiscal policy in Nigeria. coincidentally the Adjusted R-square, measuring the goodness fit remained high at 95.9 percent after adjusting for the degree of freedom. The DW statistics of 1.78 is observed to be higher than R-square of 0.966 indicating that the regression is non- spurious (meaningful), therefore it can be used for policy purpose. The DW statistics of 1.78 indicate the absence of Olusola Enitan OLOWOFELA 118 autocorrelation. The F-statistics of 129.0901 with a p-value of less than I percent shows that we can reject the null hypothesis and conclude that fiscal policy exert significantly on development financing in Nigeria. TABLE 3.8: REGRESSION RESULT Dependent Variable: DEVNA Variable Coefficient Std. Error T-Statistics P-value DDBT -0.373679 0.045454 -8.221053 0.0000 EXDBT -0.051767 0.012853 -4.027725 0.0004 DEFIN 0.472763 0.095922 4.928604 0.0000 NONOILR 0.385668 0.110612 3.486675 0.0017 RGDPPC -0.330984 0.205011 -1.614467 0.1181 CPI 16.09299 1.733211 9.285075 0.0000 CONSTANT 210.0361 117.5184 1.787261 0.0851 R-SQUARE ADJ R-SQUARE DW F-STATS P-VALUE 0.966315 0.958829 1.782279 129.0901 0.0000 Sources: Extract from Appendix I Note: DEVNA = Development financing DDBT= Domestic Debt. EXDBT= External Debt. DEFIN= Deficit Financing. NONOILR= Total non-oil revenue. RGDPPC= Real GDP per capita. CPI= Consumer Price Index. The result of diagnostic tests is shown in Table 3.6 the result shows that error term are not normally distributed. The model passes the breusch-pagan heteroskedasticity test, autoregressive conditional heteroskedasticity (ARCH) test, the serial correlation test and the Ramsey reset test suggests that the model is well specified. TABLE 3.9: SENSITIVITY TEST TEST F-STATISTICS P-VALUE Normalty 15.3561 0.0005 Breusch-Pagan Heteroskedasticity 0.8529 0.5412 ARCH Test 0.0349 0.8530 Serial Correlation Test 2.4580 0.1060 Ramsey Rest Test 1.4103 0.2457 4. Discussion and Conclusion Impact of Fiscal Policy on Development Financing: Evidence From Nigeria 119 The paper examines impact of fiscal policy on development financing in Nigeria from 1981 to 2014. The result of the correlation coefficient reveals that a very high positive association exists among fiscal policy and development financing. An increase in domestic debt, external debt, deficit financing, non-oil revenue, real GDP per capita and consumer price index is associated with 84.14%, 19.6%, 80.89%, 88.44%, 85.81% and 92.96% increase in development financing respectively. The results from the Augmented-Dickey Fuller unit root test shows that all the series are stationary at first difference signifying that there is no presence of unit root in the data used therefore confirming the consistency in the data. The Johansen co-integration test establishes evidence in support of a long run relationship among the proxy for fiscal policy and development financing. This is shown by the presence of four co-integrating equations at 5 percent level of significance. While the Pair-wise Granger Causality test shows that there is a uni-directional causality among fiscal policy and development financing, but the causality runs from development financing to domestic debt, to deficit financing, to non-oil revenue and real GDP per capita while it runs in the opposite direction from external debt to development financing and no causality exist between consumer price index and development financing. The regression result shows that proxies for fiscal policy, like deficit financing, non-oil revenue and consumer price index exert positively and significantly on proxy for development financing (capital spending) at 1 percent level respectively. Indicating that a 1 unit increase in deficit financing, non-oil revenue and consumer price index would increase development financing (capital spending) by 0.4728, 0.3857 and 16.0930 units respectively. This finding is in line with theoretical postulations of fiscal policy leading to development when an appropriate fiscal policy is geared toward appropriately financing capital expenditure. On the other hand, domestic debt, external debt and real GDP per capita exert negatively and significantly on development financing (capital expenditure). Indicating that a 1 unit increase in domestic debt, external debt and real GDP per capita would reduce development financing (capital spending) by 0.3737, 0.0518, and 0.3310 units respectively. This finding is only speaking the mind of the data since over the years the development of infrastructure as been neglected in favour of current consumption by the government. It implies that most of the debt contracted by the government as not been use for the purpose for which they are meant leading to waste and problems of financial obligations associated with paying back these debts and accrued interest on it. The R-square value of 0.966 (96.6%) implies that 96.6 percent of total variation in development financing is explained by proxies for fiscal policy in Nigeria. coincidentally the Adjusted R-square, measuring the goodness fit remained high at 95.9 percent after adjusting for the degree of freedom. The DW statistics of 1.78 is observed to be higher than R-square of 0.966 indicating that the regression is non-spurious (meaningful), therefore it can be used for policy purpose. The DW statistics of 1.78 indicate the absence of autocorrelation. The F-statistics of 129.0901 with a p-value of less than I percent shows that we can reject the null hypothesis and conclude that fiscal policy exert significantly on development financing in Nigeria. All the result presented passes all required diagnostic test. The implication of the above findings is that a long-run a significant relationship exist between fiscal policy and development financing in Nigeria. The various result presented shows some interesting result which is pointing to the fact that government fiscal policy measures should be directed towards mobilizing the needed funds for development financing and these funds should be well monitored such that all money so received from various sources are channel towards developing capital projects. A situation in which debt is contracted to finance recurrent expenditure and the little earmarked for capital expenditure is not judiciously spent leave less to be desired. A serious development cannot take place in a country where more 70 percent of its revenue goes into recurrent expenditure and only 0.88 percent of GDP is spent capital expenditure. So in the current situation of economic recession the country is battling with, the policy makers should engineer a policy direction that will diversify the economy from primary base to manufacturing, improving all available infrastructures an opening up of new ones, opening all our rail system and all road network should be expanded and more should be constructed to cater for the ever increasing economic activities. Energy needs of the country should be cater for and the security of lives and property should be assured at all times. All the above can be achieved through a judicious use of the resources available to government from various sources and a large scale and extensive investment in capital project. There is dearth of studies linking fiscal policy to development financing. The commonest literatures explored fiscal policy and economic growth. This paper tries to cover this gap by examining the extent to which fiscal policy measures supports development financing in Nigeria. The result confirms the presence of long-run relationship between fiscal policy and development financing in Nigeria. A positive and significant relationship was confirmed Olusola Enitan OLOWOFELA 120 between development financing and deficit financing, non-oil revenue and consumer price index. While a negative significant relationship was confirmed between development financing, domestic debt, external debt and real GDP per capita. The various reliability test shows that the results are reliable. The paper therefore recommends that:  Government should mobilize more tax revenue by carrying out a comprehensive audit of all firms in the country particularly those in the informal sector so as to bring in more tax payer into the tax net. They should block all leakages in the tax system and ensure that those resources so mobilize are directed towards capital expenditure.  Government should cut its consumption on recurrent expenditure and divert same into capital expenditure. Capital spending is recommended not to be less than 40 percent of total revenue for serious development to take place.  Government should avoid contracting more debt particularly external debt, and if they must do it should be solely for development sake (capital expenditure) it should not be used to pay personnel cost. Increasing the level of domestic debt can also be detrimental to the economy as it can crowd-out private investors.  The amount of deficit financing should be kept at 4 percent level of GDP as recommended by the West African Monetary Zone. References Abata, M. A., Kehinde, J. S., &Bolarinwa, S. A. (2012). Fiscal/monetary policy and economic growth in Nigeria: A theoretical exploration. 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