1.1              Background to the Study

Fiscal policy generally implies basic duty of any government to manipulate the receipt and expenditure sides of its budget in order to achieve certain national objectives such as increase in per-capita income, low unemployment rate, positive balance of payments (BOP) position and price stability. The essence of fiscal policy anywhere in the world, is basically to stimulate economic and social development by pursuing a policy stance that ensures a sense of balance between taxation, expenditure and borrowing that is consistent with sustainable economic growth. However, in oil-exporting countries, government expenditures often depend on oil revenue, which in turn depends on movement of oil price in the international market. Hence government revenues tend to be highly volatile and this is due to the unpredictable nature of oil price thus making fiscal policy more challenging in such economies.

There has been up and down movements of oil prices ranging from the historical high and low oil prices until the recent plunge in oil market; that sees oil price dropping to its lowest record level for the first time since it reached its ultimate height of over $140 per barrel in 2008. In case of  crude oil exporting nations such as Nigeria and the likes, oil price shocks affect their economies first and foremost through the fiscal channel, as a very large portion (if not all) of oil generated revenue accrue to government. In particular, fiscal policy in oil-exporting countries face a number of specific challenges stemming from the fact that oil revenues, which constitute the bulk of government revenues in oil-centered economies, are exhaustible, volatile and largely originated from external demand.

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