CHAPTER ONE

INTRODUCTION

1.0. Background to the Study

The most basic motivation for the existence of a public sector follows from the observation that entirely unregulated economic activity cannot operate in a very sophisticated way (Jean

&  Gareth, 2006). In fact, an economy would not function effectively if there were no property rights (the rules defining the ownership of property) or contract laws (the rules governing the conduct of trade). From this follows the first role of the government, which is to assist with the attainment of economic efficiency by providing an environment in which trade can flourish. Governments are generally concerned with organizing economic activity so that the best use is made of economic resources and also to see that the benefits of economic activity are distributed fairly. Without the government, organized economic activity could not take place. These arguments provide a justification for the existence of governments and hence, of government expenditure. Thus, government expenditure involves all the expenses which the public sector incurs for its maintenance for the benefit of the economy (Anyanwu, 1997).

It should be noted that government cannot effectively embark on expenditure without enough resources to achieve this. Therefore, the growth in output is essential for the government to generate the requisite revenue necessary to executive her projects through public expenditure. One of the variables that generally guarantee economic growth as identified by endogenous growth theorists is the natural resource base of the country (Odularu & Okonkwo, 2009). With adequate development of these natural resource bases, a country can use it to generate income in order to fund her projects. The Nigerian economy is well endowed with abundant natural resources which include energy resources. Apart from revenue accruable from the sale of petroleum products, a well developed energy sector in the country can lead to the growth of the country’s economy through increased energy consumption by the real sector. The multiplier effect of oil revenue and increased productivity owing to increased energy consumption is an increase in government expenditure.

Government expenditure (particularly on infrastructure) as an important instrument in the development process has long been acknowledged by development economists worldwide. Public expenditure has remained a crucial issue in economic development, most especially in the developing countries of sub-Saharan Africa (Ekpung, 2014). Nigeria is the most populated country in sub-Saharan Africa with over 150 million people (National Population

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Commission (NPC) 2006). The country is still developing and has experienced changes in the trend of public expenditure policy over the years. These periodic changes in the administration of fiscal policy are largely reflected in the way governance has been changing hands between the civilian and the military (Joseph, 2012). The study noted that the trend of expenditure has been changing as the fiscal unit kept changing in the economic system. Nigeria’s economy is characterized by a market economy with government assuming the role of creating enabling environment within which businesses can flourish and contribute to the development of the economy. Therefore, the primary role of government is to provide extension services and infrastructural facilities which stimulate investment and augment the productive capacity of the economy.

In providing these services through government expenditure, the government has to rely on several sources of revenue which energy sources, especially crude oil plays a major role. Unarguably, Nigeria is richly blessed with abundant natural resources which include energy resources. The main energy resources are crude oil, natural gas, coal, tar sand, biomass and other renewable energy resources such as solar energy, tidal and wind power, as well as large hydroelectric potential. Crude oil and natural gas resources have been the mainstay of the country’s economy for decades. Oil contributed over US$ 391.6 billion to government revenue between 1970 and 2005 (Adenikinju, 2008). The International Monetary Fund in 2012 also estimates that crude oil and natural gas export revenue accounted for 96% of total export revenue. It is not surprising therefore, that energy export is the mainstay of the Nigerian economy since 1970s.

Not only is that revenue generated from the sale of oil used to finance government expenditure, energy consumption is also very necessary for the growth of the economy. Apparently, energy is crucial to the improvement of social and economic welfare and today’s modern economy thrives on energy consumption. It is necessary to continued economic activity in modern industrial nations, and its absence would result in interruption of economic growth and diminishing standards of living. Surprisingly, for most developing countries that depend on energy for growth like Nigeria, standard of living and energy consumption rise in unison. Adhikari and Chen (2012) noted that energy consumption is increasing at fastest rate in developing nations due to the rapid population growth, growing standard of living, urbanization, industrialization and economic development.

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In fact lack of modern energy services is the principal cause of low levels of economic and social development in developing nations (Evans & Hunt, 2009). Energy is the indispensable force deriving all economic activities (Alam, 2006; Kabir, Zaku, Tukur & Aikhuele, 2013). Thus, the greater the energy consumption, the more the economic activity in the nation and as a result a greater economy emerges. Also, Olusegun (2008) believes energy is the backbone of economic growth and thus suggests the sector should be given attention for the development of Nigeria economy. To underscore the significance of energy in the development process, each time there is energy crisis, the world economies are almost brought to their knees. With the exception of the great depression, perhaps, no economic phenomenon of global importance has seized the attention of the industrialized capitalist world as energy crisis of 1973-1975 (Attamah, 2000).

The world economy is interconnected by energy and changing energy prices and economic crises spin rapidly around the globe. As a result, countries have taken significant efforts to ensure the efficiency of their energy sector. But for understandable reasons, Nigeria has not devoted equal attention to her abundant energy resources and this has posed serious energy challenges in the country. According to Amakom and Nwogwugwu (2012), the energy challenge became more intense following the widespread acknowledgement that access to clean and reliable energy supply is necessary for accelerating economic growth and sustained poverty reduction. World economies are heavily reliant on energy, and improving access to modern energy is a necessary condition for boosting growth and reducing poverty in Nigeria and in sub-Saharan Africa in general.

One of the key policy objectives of any nation is to promote a sustainable economic growth process that could improve the living standard of the people. Thus, not only does energy consumption improves social and economic welfare of the citizenry, it also brings about changes in the structure of output in the economy by altering the manner in which other activity sector like the agriculture, industrial and service sectors that contribute greatly to economic growth operates. Government expenditure is used as a measure of government activity; and public expenditure is an important instrument for a government to control the economy. On one hand, public investment are also used to fill up the holes that are left untouched in a market economy such as public utilities and health care thereby contributing to capital accumulation. On the other hand, tax which is the entire financial source of public expenditure does directly reduce the benefits to taxpayers. Thus in both ways government

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spending have significant effect on energy consumption and economic growth (Akinlo, 2008). This is practically true as energy is consumed through appliances.

1.1. Statement of the Problem

The importance of energy in boosting the economy of countries cannot be over-emphasized. Energy has become an important input in the production processes of modern economies. In Nigeria, there is a vast energy resources both renewable and nonrenewable. Notwithstanding these enormous energy resources, emphasis is mostly placed on the oil sub-sector which contributes to a large percentage of her revenue. This over-reliance on the revenue from oil export has rendered the country highly vulnerable to external influence.

In a similar vein, revenues from oil have encouraged much spending by the government over the years. According to Niloy, Emranul and Osborn (2003), government spending over the past decades has been increasing in geometric term through various activities of government with its Ministries, Departments and Agencies (MDAs). The persistent rise in government expenditure in Nigeria is largely due to the huge receipts from production and sales of crude oil, which by extension leads to the increase in the demand for public (utilities) goods like roads, communication, power, education and health (Nurudeen & Usman, 2010). Available statistics show that total government expenditure (capital and recurrent) and its components have continued to rise in the last three decades. For instance, government total recurrent expenditure increased from N4, 05.20 billion in 1980 to N36, 219.60 billion in 1990 and further to N1, 589,270.00trillion in 2007 and later to N2, 632,876.50 trillion in 2011, while government capital expenditure rose from N10, 163.40 billion in 1980 to N24, 048.60 billion in 1990. Capital expenditure stood at N239, 450.90 billion and N759, 323.00 billion in 2000 and 2007 respectively and by 2011, it was N1, 934, 524.20 trillion. The various components of capital expenditure have risen between 1980 and 2011 (Oni, Aninkanya, & Akinsanya, 2014). Thus, oil booms have increased the consumption levels of both the government and the ordinary citizens, though; these levels have not been sustained nor translated into a permanent increase in the standard of living of Nigerians (Adenikinju, 2008). The stylized fact on the growth of government expenditure and GDP in fig.1 below buttresses the fact that the growth of government expenditure in Nigeria over the years has not improved the GDP.

In a similar vein, according to the studies by the United Nations Development Programme (UNDP, 2010) and World bank (2012), in spite of the continuous rise in government expenditure and despite the fact that Nigeria is fortunate to have huge energy resources and being among the fifteen (15) largest exporter of petroleum (oil) in the world, she ranks very 4

high among nations with poor living standard. This dismal state of affairs could be as a result of the misapplication of oil revenues by successive governments over the years. Another major reason why Nigeria has not experienced growth could be low energy consumption in the country which affects productivity. According to the Energy Information and administration (EIA, 2010), total energy consumption by resource type in the country as at 2010 are: oil 13%, natural gas 4%, hydro 1%, traditional biomass and waste 82%. The implication of the above picture is that the growth of the real sector is stunted owing to low commercial energy consumption in the country. The dominance of the traditional energy consumption means that the modern sector is starved of conventional energy in its operations.

It is on the basis of this that studying the relationship between government expenditure and energy consumption has become necessary in Nigeria. Identifying the causal link between government expenditure and energy consumption in Nigeria is important because as government expenditure is expected to lead to economic growth that increases energy consumption, energy consumption is also expected to improve productivity that leads to improved revenue generation by the government to execute her projects. Therefore, investigating the direction of causality between the two will enable an appropriate energy policy that will guarantee economic growth. It will also guide the proper channeling of government expenditure to areas that will encourage the growth of the real sector. This study is essential more so, as several studies in Nigeria have focused on the examination of the relationship between energy consumption and economic growth on one hand and public expenditure and economic growth on the other hand. This research work therefore seeks to provide answers to the following research questions:

1.2. Research Questions

From the foregoing stated problems, the following questions shall guide this study:

1.      What is the effect of energy consumption on government expenditure in Nigeria?