IJAIYA, Muftau Adeniyi
Accounting & Finance
Senior Lecturer
Budgetary Allocations and Sectoral Contributions to Economic
Development in Nigeria. Interdisciplinary journal of Contemporary
Research in Business 1 (10): 83-94, (A Publication of Institute of
Interdisciplinary Business Research, Canterbury, Kent, UK). Available
online at http://www.ijcrb.webs.com
FSFARCH IN
BUSINESS
Budgetary allocations and sectoral contributions
to economic development in Nigeria
FEBRUARY 201
VOL I, No 10
Listed in ULRI
USMAN, Abdullateef
Department of Economics. University of Ilorin, Ilorin, Nigeria
IJAIYA, Muftau Adeniyi
Department of Accounting and Finance, University of llorin, Ilorin, Nigeria
Abstract
The aim of budgetary allocations to sectors of the economy is to bring Government closer
to the people. Using a Vector Autoregression (VAR) model to estimate the impact of the
sectors on GDP, this paper examines the underlining factors responsible for the poor
performance of sectoral allocation to key sectors (Agriculture, Education, Health, and
Transport) of the economy. The result shows a clear response of the GDP to budgetary
allocations on Education, Health and Transport except Agriculture. To increase the
sectors contribution to the economy, it is suggested that more budgetary allocation should
be provided for the key sectors.
Keywords: - Budget Performance, Sectoral allocations, Economic development.
1. Introduction
The ways government budgets are allocated have an important impact on economic
development. This is because meaningful budgetary allocations to sectors of the economy
could bring government closer to the people. According to Gupta, Clements, Guen-siu
and Leruth (2001) budgetary allocations to some key sectors of the economy through its
positive effects can enhance equity and reduce poverty. The productivity of these
allocations depends on the efficiency of resource allocation within the sectors.
In Nigeria, government places a lot of premium on agriculture, education, transport and
health sectors. Because of the catalytic roles these sectors played in the development of the
other sectors. The overriding budgetary objective is that these prime sectors will be able to
grow the other sectors giving the enabling environment. However, in some cases, these
sectors return have not produced the desired result. The question that readily come to
mind is that in spite of large fiscal space, why has budgetary allocations to sector still
perform abysmally poor?. This is the motivation for this study. Therefore, the objectiveof this paper is to identify the underlining factors responsible for the poor performance of
sector allocation. The rest of the paper is organized into four sections. Section two
provides a conceptual overview of budget and its determinant. Section three provides the
data source and methodology. Section four presents and discusses the results. The
conclusion and recommendation are contained in the last section.
2.
Conceptual Clarification: Budgets and Budgetary Allocation
2.1
Meaning and Determinants of Budget
Budget is a legal document that is often passed by the legislature, and approved by the
chief executive or president as an instrument of economic management for a given
financial year. The structure and size of the budget in any economy depends on the
economic prosperity of the country, which also determines whether a deficit, balance or
surplus budget will be in operation. A balance budget occurs when the total sum of
money a government collects in year is equal to the amount it spends on goods, services
and debt interest. Budget deficit on the other hand is defined as the amount by which
government spending exceeds income from government revenue. To cover this shortfall,
the government usually borrows from the public by floating long and short terms bonds.
Surplus budget occurs when government revenue exceeds its total expenditure.
Freinkman and Haney (1997) categorized the determinants of budget into three factors
namely national economy expenditure, total investments and budget loans. National
economy expenditure includes expenditures on agriculture, housing, transportation, and
other sectors (including food price subsidies). Total investment includes public and quasipublic investments (local infrastructures, housing, social assets and investment grants to
commercial entities). All these factors according to them determine the budget size of any
government. Besides, Sturm (2001) and Quijano (2005) categorized government budget
determinant into three classes of variables, namely:
i.
Structural variables which includes degree of urbanization and population growth;
ii.
Economic factor which includes government budget deficits, government debt,
interest payment of government, private investment, foreign aid, degree of
openness, and foreign direct investment;
iii.
As well as politico-institutional factor which includes political ideology, electoral-
cycles, coalition factors, and political freedom as well as political instability. For instance,
government of a socialist (or socialist democratic) persuasion would tend to increase
public expenditures at a faster rate than right-wing government that is a private led
economy.
Besides, the kind of government (coalition, majority government or
minority government) can also determine the size of government spending (see also
Roubini and Sachs. 1989 cited in Sturm. 2001). The reasoning is that large coalition and
minority governments may have difficulties in reaching agreement to balance the budget,
hence government investment spending will be a more easy spending category to cut (see
Da Haan and Sturm. 1997).
The World Bank (1997) also reiterated that government budgets are determined by the
expanded role of government, which include the provision of pure public goods e.g.
defense, law and order, property rights, macroeconomic management, public health and
education, protecting the poor, through the provision of anti-poverty programmes and
disaster relief programmes. It also includes, addressing externalities such as
environmental protection, provision of social insurance e.g pension, unemployment
allowances, coordinating private sector activities and redistribution of income and assets
(World Bank 1988: Van de Walle 1995: 1996; Gupta et al; 1998: Castro-Leal et al.. 1999;
Pradha sand Ravallion 1999: Fozzard et al.. 2001: Ijaiya et al 2003).
2.2 Budgetary Allocations: Meaning and Importance
Budgetary allocations play an important role in development process of any country.
Budgetary allocations to public sector are usually recorded as capital expenditure and
recurrent expenditure. The Central Bank of Nigeria (CBN) (2003) defined expenditure as
an outflow of resources from government to other sectors of the economy whether
requited or unrequited. Capital expenditure are payment for non-financial assets used in
production process for more than one year while recurrent expenditure are payments for
non-repayable transactions within one year. Budgetary allocations according to Olaniyi
and Adam (2003) are made to enhance a suitable improvement in human welfare or
quality of life such as health, education, agriculture and transport services. Accordingly,
budgetary allocation to sectors of the economy plays different roles in the economy. Forinstance, education according to Odusola (1984) sets off an intergenerational process of
poverty reduction, because better educated persons are more likely to ensure the
education of their children and also attend to the health requirements of their wards.
The impact of education on distribution and social equity is well acknowledge, for
instance, the achievement of East Asian countries were largely due to successful
educational strategies (see World Bank. 1993). Budgetary allocations to health sector
would reduce the scourge of diseases most especially HIV/AIDS and malaria as well as
improve life expectancy of the people. Powell (2000) observed that increased budgetary
allocation to health has assisted some Heavily-Indebted Poor Countries (HIPC) to fight
poverty, and raise the living standard of people in these countries. Okuneye (2001)
opined that agriculture sector is a major source of raw materials for the agro-allied
industries which necessitates the expansion of the secondary and tertiary sectors of the
economy, the sector also serves as a potent source of foreign exchange apart from
generating employment opportunities for the people as well as providing high income
returns for farmers. Studies by Qureshi, Nabi and Faruquee (1996) show that agricultural
production in rural India has improve farmers income and their well being. The transport
sector on the other hand has also served as a source of income for the people apart from
moving people and goods from one area to the other. Therefore, improvements in
budgetary allocations to education, health, agriculture and transport sectors reinforce each
other (See Ekpo, 1987: World Bank 1990).
However, Pradhan and Swaroop (1993) noted that public sector wages and spending at
the tertiary level tend to crowd out basic capital spending on core sectors of the economy
and non-waged operations and maintenance, and concludes that public expenditure
should be integrated into policy framework. This view support the position of Schultz
(1961) and Denison (1962) that more budgetary allocations should be made to the key
sectors of the economy.
2.3
Trends of Budgetary Allocations and Sectors Contributions t o Economic
Development in Nigeria
The trend of government budgetary allocations to the agriculture, education, health and
transport sectors is shown on Table 1. The table shows the percentage of the Government
Expenditure allocated to the sectors between year 1977 to year 2005.. For instance, the
total percentage of total expenditure allocated to the Agricultural sector from year 1977
to year 2005 ranges from 1.37percent to 17.41 percent. Within this period, the years that
witnessed allocation above 10 percent coincided with various Government agriculture
programmes like the Green Revolution programme (1981 to 1983); Food for All
programme (1985 to!986) and mass investment on Dams and Irrigation facilities to boost
food production (2001 to 2005).
The percentage allocation to the Education sector for the period ranges from 2.20 percent
to 8.94 percent of the total Government Expenditure. During this period, none of the
allocation of the year meets the 25 percent budgetary allocation recommended by the
UNESCO. Few years with budgetary allocation above 5 percent also coincided with
deliberate Government Policy of Qualitative Education (1980 to 1982) and the Universal
Basic Education free programme of the Government. Government budgetary allocation to
the Health sector for the period under review also ranges from 0.89 percent to 6.91
percent. The sector allocations' that were above 4 percent were between 1999 and 2004.
This is the period when Government place emphasis on primary health care delivery and
the development of the tertiary health care institutions (like the Teaching Hospitals and
Federal Medical Centers).
The allocation to the Transport sector under review ranges from 5.38 percent to 7.30
percent between 1977 and 1983; while the period between 1999 to 2003 received between
4.29 percent and 10.10 percent respectively. The reasons for this could be the
rehabilitation of the Federal roads, railway system, airways and development of Inland
Waterways. Apart from these reforms, these sectors have suffered seriously from poor
budgetary allocations and this is largely due to economic conditions, debt service
burdens, and competing claims from recent emerging social sectors as well as poor
monitoring and evaluation of capital budgets. All could have explained the abysmal
performance of the sectors under review, (see Adenuga, 2002: World Bank, 2004 CBN.2008). The sectoral contribution of the above sectors to the GDP is shown in Table 2.
As shown below, the agricultural sector's contribution ranges from 21.16 percent in 1981
to 42.20 percent in 2007, while the education's sector contribution to the GDP ranges
from 4.84 percent in 1981 to 2.50 percent in 2007. The health sector contribution ranges
from 1.26 percent in 1981 to 2.75 percent in 2007; and transport sect or contribution
ranges from 1.93 percent in 1981 to 2.69 percent in 2007. All these contributions is a
reflection of government allocations to these sectors of the economy.
Table 1: Total Government Expenditure and Expenditure on Agriculture,
Education, Health and Transport Sectors in 1977-2005.
Years
Total Govt.
Expenditure
Agric Exp.
as a o/o of
Total Govt.
Expenditure.
Education Exp.
as a o/o of
Total
Govt.
Expenditure.
Health Exp.
as a o/o of
Total
Govt.
Expenditure.
Transport Exp.
as a o/o of
Total Govt.
Expenditure.
1.37
3.84
11.80
17.41
15.12
7.38
10.55
4.21
9.78
10.52
5.40
5.04
13.19
3.52
11.30
6.51
6.36
6.71
5.09
2.77
2.92
2.38
2.20
8.40
7.42
3.29
6.21
4.52
6.07
3.88
1.48
1.14
1.95
1.99
3.93
1.46
1.35
1.05
1.89
2.87
1.92
5.39
4.58
2.66
3.06
5.38
5.21
9.00
7.30
1.93
2.39
1.83
1.87
1.88
1.99
1.11
4.29
7.73
9.37
1.10
N' m
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
7,676.4
8,379.1
6,564.2
6,807.3
6,516.4
4,759.4
9,297.10
13,085.4
18,600.0
44,559.0
115,690.0
136,984.0
438,696.5
241,688.6
706,884.2
Source: CBN Statistical Bulletin, 1999 and 2005.
Sectoral Contributions in term of Value Added to GDP ( Percentage -
Table.2.
points).
Year
Total GDP
Agric
Education
1981
47. 619. "0
21.16
1983
53,107.4
1985
67,980.6
198"
105.222.9
29.66
3.53
9.26
1.34
1989
216, 79.5
2609
2.34
6 .14
7 .60
1991
312.139.8
25.63
2.15
5.63
6.76
1 28.67
3.68
9.64
6.35
2". 28
1.74
4.56
1.18
4.84
24.23
5.78
29.39
:
:
Health
Transport
1.26
1.93
1.51
5.05
2.07
1.32
1.74
!
1993
683,869.8
1995
1,933.211.6
199-
2,801,972.6
28.82
i 999
3.194.023.6
29.68
200 1
4.685.912.2
28.54
1.34
2003
6,947,819.0
25.72
1.06
2005
14,572.2
41.19
2.20
2007
22,848.9
42.20
2 50
:
5.93
!
9.78
:
1.34
1.50
2.21
2.56
3.03
2.54
2.35
2.20
2.40
2.75
:
2.65
2.69
Source: CBN Statistical Bulletin 2005 and 2008.
3.
Data Source and Methodology
3.1
The Data Source
Time series data between 1977 and 2005 on government budgetary allocations on
agriculture, transport, education and health were used. The data were obtained from the
Central Bank of Nigeria (CBN) Statistical Bulletin, and Annual Report and Statement of
Account for various years.
The study uses Vector Autoregression (VAR) which is commonly used for forecasting
systems of interrelated time series and analyzing the dynamics impact of random
disturbances on the system of variables. Following the work of Coporale, Howells and
Soliman (2003) that used the Vector Autoregression (VAR) to estimate the impact of
sectors of the economy on growth. With the VAR model, impulse response tests were
used to examine the responses of the relevant variables to changes in growth in the
economy. The test of stationarity (unit root) and co-integration were
undertaken to avoid-spurious regression, and since Zellner and Palm (1974).
Zellner. (1979) and Palm (1983) averted that any linear structural model can
be written as VAR. the specification for the VAR model is thus stated as
follows:
GDP = f(Ag. Trans, Edu, Ht ) .................................... (i)
With a linear relationship such as
GDP -
o +  IAg +  2Trans +  3Edu +  4Ht + U
Where
GDP = Gross
Domestic Product Ag
= Agriculture
Trans = Transport
Edu = Education
Ht - Health
o = Intercept
 1,  2,  3 and 4= the estimation parameters.
U = Disturbance term.
4.
Empirical Results and Discussion
Table 1:
Regression Results of Budgetary Allocations and Sectoral
Contributions to Economic Development
Co-efficients estimates
and t-values Variables
Intercept
281050.20
(t)
agriculture
(2.13)
-79.62
(t)
(-4.83)
transport
12.23
(t)
(0.55)
education
(t)
83.94
(10.68)
health
2.13
(t)
(1.65)
R2
0.95
F
86.55
t-statistic in parentheses. * Statistically significant at 5 percent level of significance.
Table 1 shows that the model is fairly good, since it has an R-square of 95 per cent. At 5
per cent level of significance, the F-statistics which is 85.55 is greater than the tabulated Fstatistics, valued at 3.94. For individual variables, the t-test at 5 per cent level of
significance, showed clear response of the Gross Domestic Product to budgetary
allocations on transport, education and health sectors because the parameters are largely
positive expect the agricultural sector that shows a negative sign which implies that the
contribution of agricultural sector to Gross Domestic Product is unpredictable.
Given the above results and discussion above, the regression line is presented as follows:
GDP = 281050.2-79.62+12.23+83.94+2.13+U
5.
Conclusions and Recommendations
Given the above results there is need for policy recommendation in order for the sectors
to increase their contributions to the economic development of Nigeria. Besides,
allocations to these sectors when compared to other emerging sectors show that these
core sectors need more budgetary allocations.
Therefore for allocations in these sectors to meet international standard; to reduce or
alleviate poverty: and bring health care services, education, affordable transport services
as well as food to Nigerians, the Federal Government should increase budgetary
allocations to these sectors as a policy matter.
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