Government Policies Affecting the Nigerian Economy

How Government Policies Transform the Nigerian Economic Space

The Nigerian economy, that rough but loose horse to ride, is constantly reshaped and re-formed every day by the labyrinth of government policies. From the radiant sloganeering of budget policy to the two-faced duplicity of monetary management, government policies infuse every nook and cranny of economic existence, defining growth trends, dictating investment choices, and finally, over the drab lives of millions of Nigerians. It is most important that business men, investors, and all citizens who care to know what’s going on with the economic state of the nation grasp how these kinds of policies impact the economy. What follows shall interact with the most important forms of government policy exerting the largest influence upon the Nigerian economy, arguing their avowed aim, how they’ve impacted, and the customary Byzantine intricacies of how actually they really do come to get put into effect and have effects.

The Government Revenue and Spending Playbook

Fiscal policy is really intentional control of government expenditures and taxation to affect the trend and pace of economic activity. It is found in the guise of the Nigerian budget, tax code, public debt policy, and other instruments of government spending. Fiscal policy may have a direct or indirect impact and can affect aggregate demand, resource allocation, and income distribution.

– Government Expenditure: Government expenditure on sectors – infrastructure, education, health, security, and social welfare – is significant in the achievement of economic growth and development. Infrastructure, i.e., transport infrastructure, power, and road, government expenditure can lower the cost of doing business, enhance productivity, and bring in investment. Similarly, government expenditure on healthcare and education has the potential to trigger human capital development and a more improved and efficient workforce. Welfare policy as government spending, whether to the poor or with the aim of filling up gap, aims to change consumption pattern as well as general economic status. How forthcoming and advantageous the funds that are being invested are determining factors in gauging to what extent positive impact it is exerting behind. Mis-spending, lack of efficiency, and corruption may push the desired effects to an unusually high point and even develop unwanted effects like accumulation of burden of debt without respective economic benefits.

–Taxation: It gives the government income in terms of various forms of taxation – corporate tax, individual income tax, value-added tax (VAT), custom duty, etc. – with direct implications on people’s disposable incomes and enterprises’ profitability. Tax law may be invoked to stimulate some type of economic activity, i.e., investment in a specific type of sectors or environmental protection, with tax relief and exemptions. Additional taxes can limit the amount of income available and decelerate economic development unless revised appropriately. The machinery’s size and efficiency are also significant. An inefficient and wasteful apparatus would raise tax evasion, lower government revenues, and give enterprise a level playing field. Second, equity and justice of the tax system play a front ranking role in the public acceptability and social unity.

–Public Debt Management: In case government spending exceeds its revenues, the deficit will to a large extent be financed through borrowing and consequently result in growing public debt. Though debt is a powerful financial weapon for mega infrastructure or shock-absorbing economic shock impacts, surplus in debt burdens enormous risks on the economy. Debt servicing is so large that it displaces other high-priority government expenditure, and over-borrowing results in currency weakening and macroeconomic instability. Effective administration of the public debt to prudent consideration of terms of borrowing, diversification of sources of finance, and in that borrowing to productive investment is essential towards eventual economic sustainability.

–Monetary Policy: Steering Money and Credit Flows

Monetary policy, whose operation is in the main within the control of the CBN, is referred to as instruments for control of money supply and credit conditions in the economy. Most fundamental goals of monetary policy are generally price stability (inflation control), economic growth, and financial system stability. CBN has several instruments for the above goals.

–Interest Rates: The Monetary Policy Rate (MPR) is the anchor interest rate the CBN fixes, and it fixes other interest rates within the economy, including the lending rates quoted by commercial banks. By increasing the MPR, the CBN attempts to contain inflation through higher borrowing, thus aggregate demand reduction. On the other hand, lowering the MPR will have the effect of boosting economic activity through lower borrowing. Nevertheless, the effectiveness of interest rate actions will differ significantly depending on numerous variables including the degree of financial inclusion, the responsiveness of business and individuals to interest rate adjustments, as well as overall macroeconomic conditions.

–Reserve Requirements: Commercial banks are required to maintain a portion of their deposits in reserve with the CBN. By adjusting these reserve requirements, the CBN is able to raise or lower the level of money available to be lent by the banks. Lowering reserve requirements boosts banks’ lending capacity and can stimulate economic activity, while raising them tightens lending capacity and can be utilized to moderate inflation.

–Open Market Operations (OMO): CBN buys and sells government securities (Treasury Bills) in the open market. In buying securities, CBN injects funds into the banking system. Selling drains money out of the system. OMO is a potent and highly flexible tool to implement short-run interest rate and liquidity adjustments.

– Exchange Rate Management: The regulation of the exchange rate system of Nigeria is mostly the task of CBN. This involves specifying the exchange rate determination mechanism (e.g., fixed, floating, managed float) and foreign exchange market intervention to influence the Naira’s value. Exchange rate policies have far-reaching consequences for inflation (since imports are relatively cheaper or more expensive), trade competitiveness, and foreign investment inflows. The CBN management of the exchange rate has been contentious in Nigeria at times and, over time, different policy approaches have been adopted, each with advantages and disadvantages.

–Sectoral Policies: Targeted Intervention for Sectors

Aside from the general macroeconomic policies, the Nigerian government, in general, follows sectoral policies that support growth and development in certain particular sectors of industries that are strategic to the economy. The policies followed can be in any format, such as subsidies, tax holidays, restriction of imports, and direct investment by the government into those sectors of industries.

–Agriculture: Being such an important industry to rural development, employment, and food security, the agricultural industry usually receives a lot of attention from the government. Agricultural policy can include input and fertilizer subsidies, farm credit schemes, price support policy, and agriculture research and infrastructure investments. The effectiveness of these policies in improving agricultural productivity and food security has been a recurring problem, often plagued by problems like mismanaged implementation, poor infrastructure, and the impacts of climate change.

–Manufacturing: Industrialisation policy and revving up the economy away from oil dependence will necessarily have a manufacturing orientation. New producers offered tax relief, foreign product taxes to benefit local producers, and establishment of industrial parks are among the instruments that fit here. The Nigerian manufacturing sector has been plagued by repeat issues of power generation, infrastructural weaknesses, costs of production, and imports depleting them at discounted prices. How effective government policy will turn out to be in helping improve the sector will depend on how the inherent limitations can be addressed.

–Oil and Gas: As the backbone of the Nigerian economy, the oil and gas sector is highly regulated by the state and guided by government policy. This includes licensing to explore and produce, taxation of oil producers, and local content development policy. The Petroleum Industry Act (PIA), a historic bill, will aim to transform the regulatory framework of the industry, spur investment, and increase transparency. Implementation of the PIA and its effect on the contribution of the sector to the economy will be closely monitored.

–Technology and Innovation: As the digital economy increasingly becomes important to the future of the country’s economy, the government has committed increased focus on policy that will promote technology adoption and innovation. These include investment in broadband networks, funding of technology start-ups, and digital business-friendly environment policies. Failure or success in delivering these policies in developing a competitive and thriving tech ecosystem will make or break Nigeria’s future economic competitiveness.

–Social Policies: Elimination of Poverty and Human Capital Development

Not a state budget surplus or an economy’s mode of production, social policies remain of central relevance as long as they decide a nation’s long-term economic fate by deciding whether to go for social protection, social coherence, or human capital formation.

–Education: Policy for government schooling, school funding, curriculum, and teacher professional development are included under drivers of workforce productivity and skills. Poverty/contraction in earnings inequality and long-term economic growth largely rely on investment in education of quality at every level.

Health care: Not just socially worthwhile but even economically. State policy measures to render improved facilities of health care in order to do good, in making low cost facilities available, and for improving public health may assist in aiding better in constructing healthy work forces.

–Social Safety Nets: Social programs for the purpose of a safety net in the poverty line segment of society like cash transfer schemes, unemployment allowance, and food subsidy can bypass the social and economic impact of money shocks and poverty. They can even stabilize the overall economy by infusing consumption at the moment of need.

The Interplay and Challenges of Policy Implementation

All government policies are heterogeneous. The monetary policy tools possess the ability to influence potential effects on the fiscal policy objectives, and the sectoral policies are open to the general macroeconomic forces. The heterodox policy tools must be coordinated and synchronized in the interest of responding to the need of implementing the intended economic effects.

Effectiveness of the policy in Nigerian public administration is, to some extent, however, loaded with some local problems. They are:

–Inconsistencies and Reversals in Policy: Policy inconsistency of reversal type will be a source of distrust to investor and business and will dissuade the latter from investing or planning to invest in the long run.

–Institutional Weaknesses: Bureaucratic inefficiency, the absence of training staff, and inefficient use of assets will render even good policies ineffective.

– Corruption: Corruption will certainly render policies obsolete with looting of resources, uneven levels, and corrupt incentives.

–Limited Accountability and Transparency: Public trust can be eroded with limited transparency and accountability of the policy-making and implementation and inability to monitor the impact of the government intervention.

–External Shocks: External shocks such as world price movement in oil and world trade flow patterns of trade flow can influence the application of policy and change the influence in the economy.

Conclusion: A More Efficient Policy Framework

Government policy is indeed a very strong force behind the Nigerian economy. Even as the justification for such policy will necessarily ultimately be ultimately selfish – to promote growth, poverty alleviation, and levels of living among its populace – the nature of its imposition and effect can be radically different. Constructing a more secure, richer, more diversified Nigerian economy requires there to be a more active, more freer, better-integrated, better-unified policy environment. There has to be institution-building, good governance, more earnest entrenchment of closer public-private sector cooperation and placing policy on rock-solid evidence-based ground and responding to evolving economic reality. And lastly, what is to be attempted is forging a policy agenda to drive innovation, investment, entrepreneurship, and overall prosperity to Nigerians. How to accomplish this vision is through adaptation, learning, and good governance and good economics.