The Interplay of Government Expenditure and the Private Sector Investment on the Nigerian Economy (1981-2013)

Abstract

This paper investigates theinterplay of government expenditure and private sector investment on the economy of Nigeria. Annual time series data are used for the period from1981-2013. The Unit root tests show that at the 5% level of significance, all the variables were stationary at both level and first difference, thus confirming a transitory stochastic trend. The Johansen cointegration test demonstrate that three cointegrating long-run relationship exist between the GDP, Capital Expenditure, Recurrent Expenditure and Credit to the Private Sector.However, in the short-run, disequilibrium errors were detected. Consequently, the Error correction modelwas engaged to ascertain the proportion of the disequilibrium errors built up in the preceding short-run periods that are corrected in the current period. Our result gave a speed of adjustment of 66% with its expected negative sign, which shows statistical significance at the 5% level. In addition, we conducted a Granger causality test to demonstrate the direction of causality of the variables. We find bi-directional causality between CAPEX and GDP; CPS and GDP; and REPEX to CPS; while uni-directional causality exists from CAPEX to REPEX; and CPS to CAPEX. First recommendation is that monetary and fiscal authorities should make credible policies and give an in-depth attention to its capital investment strategies to ensure they are adequately implemented with feedback mechanisms. Second, an equilibrium fiscal management such that deficit financing do not interfere or create a negative multiplier effect on private sector credits.  Third, the interest rate charged by banks’ on credits to the Private sector should be minimal in order to boost economic activities.

Keywords: Government Expenditure, Private Sector Investment, Economic Growth, Error Correction model, Cumulative Sum of Residual Test.