ANALYSIS OF TWIN DEFICIT AND MANUFACTURING SECTOR OF NIGERIAN ECONOMY(1981 – 2015).
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ANALYSIS OF TWIN DEFICIT AND MANUFACTURING SECTOR OF NIGERIAN ECONOMY(1981 – 2015).
Chapter one
INTRODUCTION
1.1 Background for the Study
The “Twin deficit” dispute was a prominent policy issue in the 1980s and early 1990s, and the term was first used to characterise the co-movement of the US budget deficit and current account deficit (Chang and Hsu, 2009).
Researchers then began using it in other nations. Since then, academics have been interested in investigating the causal link between the two deficiencies, as well as the direction of causality.
The simultaneous emergence of budget deficits and current account deficits in most countries, particularly the United States (US), in the mid-1980s led to the characterization of this phenomenon as the “twin deficits” issue, as both economic theory and empirical observation suggested a link between the two deficits (Chinn, 2005).
Thus, the twin deficit theory has emerged as one of the most important links among aggregate economic variables. Over time, however, there has been a renewed interest in understanding the relationship between the budget and the current account deficit.
According to Kim et al. (2007), fiscal deficits are often associated with current account deficits. Giarcarlo et al. (2006) suggested that fiscal shocks would deteriorate the government’s budget while also worsening the country’s current account balance.
Thus, the main thrust of the twin deficit hypothesis is that most countries’ current account deficits are caused by government budget deficits, and the best way to solve this problem and stabilise internal and external deficits is to reduce the government’s budget deficit (Zamanzadeh and Mehrara, 2011).
The current account deficit, sometimes known as a “trade deficit,” is a measure of a country’s commerce in which the value of its imports exceeds the value of its exports. This is often funded by net capital inflows into the country from overseas.
Such an imbalance is typically regarded as undesirable because consumer demand is increasingly met by foreign goods produced by foreign workers, at the expense of the home labour (Njoroge, Kosimbei, and Korir, 2014).
According to Yanik (2006), the link between current account deficits and budget deficits (BD) has become central to international macroeconomics literature. The two deficits are thought to move together, at least in the long run (Yanik 2006).
The twin deficit hypothesis, based on international macroeconomics, proposes that changes in a country’s budget deficit can lead to changes in its current account balance, or vice versa.
This relationship, however, is stated to occur via the channels of real interest rates, real income, and real exchange rates (Neaime, 2008).
According to Kim et al. (2007), fiscal deficits are frequently associated with current account deficits. Giarcarlo et al. (2006) believe that fiscal shocks will deteriorate the government’s budget and damage the country’s current account balance.
Thus, the main thrust of the twin deficit hypothesis is that most countries’ current account deficits are caused by government budget deficits, and the best way to solve this problem and stabilise internal and external deficits is to reduce the government’s budget deficit (Zamanzadeh and Mehrara, 2011).
According to Ogbonna (2014), a large budget deficit is a source of economic instability, and a significant current account deficit raises interest rates and reduces aggregate demand, resulting in a drop in investment and an increase in unemployment, all of which harms long-term economic growth by increasing national indebtedness.
1.2 Statement of Problem
The recent fiscal expansion caused by the global financial crisis in 2008 has made it appropriate to reassess Nigeria’s twin deficit phenomena and examine its influence on the manufacturing industry.
Several government policies aimed at ensuring the stability of the Nigerian economy through the manufacturing business have resulted in numerous difficulties to the expansion of the Nigerian manufacturing industry, according to researchers.
These challenges include: corruption and ineffective economic policies (Gbosi, 2007); inappropriate and ineffective policies (Anyanwu, 2007); lack of integration of macroeconomic plans and fiscal policy harmonisation and coordination (Onoh, 2007);
gross mismanagement/misappropriation of public funds (Okemini and Uranta, 2008); and a lack of economic potential for rapid economic growth and development (Ogbole, 2010).
The apparent parallel movement of the budget and current account deficits raised the possibility of a link between the two deficits (Egwaikhide et al, 2002).
Economic theory and actual observation have both shown a relationship between the two deficiencies. Nigeria has experienced persistent and rising fiscal deficits, particularly since the 1970s. The country has also been running current account deficits, despite holding a surplus in the previous 12 years.
So it is clear that the Nigerian economy has been facing the twin deficit phenomena, which has had an impact on Nigeria’s manufacturing industries.
In the same vein, Nigeria, as an oil-exporting country whose revenue from oil production accounts for more than 95% of its foreign exchange, 40% of GDP, and 80% of fiscal revenues, is vulnerable to fluctuations in government revenues caused by oil revenue volatility (Onafowokan and Owoye, 2006).
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