Capital Expenditures and Gross Fixed Capital Formation in Nigeria

Abstract

This paper explores the relationship between capital expenditures and gross fixed capital formation in Nigeria. The study made use of secondary data covering the period 1981 to 2011. A least square regression analysis was carried out on a time series data, and to avert the emergence of spurious results, unit root tests were conducted. Other econometric tools of co- integration, Vector Auto Regression technique as well as Granger causality tests were deployed to ascertain the order of co integration and the level of relationships existing between the dependent and independent variables. Findings of study reveal that while Capital Expenditures (CAPEX) maintained a negative significant relationship with Gross Fixed Capital Formation (GFCF) in Nigeria at both 1% and 5% Alpha levels; Imports and National Savings had a positive significant relationship with GFCF at both the short and long runs. It was equally observed that the lagged value of GFCF had no significant impact on GFCF in the preceding year. Outcome of study did not come as a surprise, seeing that a functional classification of Nigeria’s expenditure profile for the period under review reveals that; outlays on capital expenditure accounted for only about 32% of total expenditures, while the remaining balance of 68 % went to recurrent expenditures. That is certainly not good enough for a nation that is aspiring to grow. No nation has ever treaded the path of growth with this burgeoning level of recurrent expenditures. This, calls for caution and a national rethink! This paper concludes that for sustainable gross fixed capital formation to be achieved, the federal government of Nigeria should cut down on her recurrent expenditure profile in favor of an increased CAPEX. Our macroeconomic projections should guide the overall level of expenditures.There is need for a policy shift from our present protective-sectors - dominance to productive- sectors –dominance. Again, efforts must be made to mobilize the desired level of gross national savings that could attract foreign direct investments. Lastly, government is also advised to work on her potentially exportable goods and services that are needed elsewhere in the larger world and to reduce the level of inflationary trends.

Keywords: Capital Formation; Capital expenditure; Economic growth; Economic development; Investment