Impact of Capital Expenditure on Exchange Rate within the Period of the Second and Fourth Republic in Nigeria

Abstract

Government involvement in economic activities through fiscal policy, according to Keynes is very crucial for the growth of the economy. The government uses fiscal policy to regulate the economy through expansion or contraction of its spending consisting of recurrent and capital expenditures. However fiscal expansion tends to lead to increase in exchange rate. This paper examines the impact of government capital expenditure on exchange rate in Nigeria, using disaggregate approach. The finding indicates that Nigerian government capital expenditure, particularly government spending on social and community services has a statistically significant impact on exchange rate in Nigeria, while capital expenditures on administration, economic services and transfer are not statistically significant in respect to their impact on exchange rate. Based on this finding, policy recommendation was made that government should ensure strict compliance with the procurement act in the awards of government capital projects contracts to avoid over invoices. More so, high percentage local content should be ensure in all capital projects to minimize imports which may increase demand for foreign currency and put pressure on exchange rate.