The nigerian tourism sector and the impact of fiscal policy.a case study of 2000 2009 federal budgets

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The nigerian tourism sector and the impact of fiscal policy.a case study of 2000 2009 federal budgets

  1. 1. TITLE PAGETHE NIGERIAN TOURISM SECTOR AND THE IMPACT OF FISCAL POLICY; A CASE STUDY OF THE 2000-2009 FEDERAL BUDGETS BY ATTAH ANDUNG NANBOL PETER UJ/2006/SS/0478 BEING A PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF A BACHELOR OF SCIENCE (B.Sc.) DEGREE IN THE DEPARTMENT OF ECONOMICS, FACULTY OF SOCIAL SCIENCES,UNIVERSITY OF JOS, PLATEAU STATE, NIGERIA OCTOBER, 2011 APPROVAL PAGE
  2. 2. -1- DEDICATIONI dedicate this research work to the average Nigerian who battles to eke a living in thischaotic scenery.
  3. 3. -2- ACKNOWLEDGEMENT A wise man once said, “God is in everything”. I am overwhelmed with gratitude toGod for all the blessings bestowed upon me throughout this academic quest, especially forsound health of mind and body. I am also thankful to my supervisor, Mrs R.I Umejiaku whoworked tirelessly to monitor and oversee this research work, in spite of the loss of herloving husband. I am also appreciative of the contribution of Prof Akor, Prof. Akerele, DrAdemu and all of the lecturers in the department, for there advise and encouragement. My parents, Mr Matthew A. Attah and Mrs Rosalyn J. Attah played a stellar role inensuring that I remained focused throughout this experience. Their concerned words of“How is school?” were really therapeutic. You guys are the best ever. My siblings, Ferdinand,Elizabeth (Mumsy), Abigail and Abraham (HAM) you have been my source of inspiration andstrength. I treasure the families of Prof J.F Jemkur and Prof (Mrs) E. Chuwak for their warmheartedness, hospitality, care, and support. They made this experience quite pleasant andenjoyable. You will forever remain dear in my heart. My friends, Ponfa, Kunkur, Esebom, Blessing, Vasty, Martha, Gloria, Hanmak, Nanko,Danlami, Magaji, Churchill, Uju, Nankiyer, Wella, Bala, Ukwa, Tsenba, Anita, Daniel, Solo, Njo,Joe, Sandra and Dungus. I am flattered by your company and enduring support, you peoplemean a great deal to me.
  4. 4. -3-Table of ContentsTitle Page .......................................................................................................................................... IApproval page ................................................................................................................................. IIDedication ..................................................................................................................................... IIIAcknowledgement ......................................................................................................................... IVTable of Contents ........................................................................................................................... VList of Tables .............................................................................................................................. VIIIAbstract ...................................................................................................................................................................... IX CHAPTER ONE INTRODUCTION 1.0 Background to the Study .................................................................................................. 1 1.1 Statement of the Problems ............................................................................................... 3 1.2 Objective of the Study ....................................................................................................... 4 1.3 Methodology of the study ................................................................................................. 4 1.3.1 The Model .............................................................................................................. 4 1.3.2 Model Specification................................................................................................ 5 1.4 Research Hypothesis .......................................................................................................... 6 1.5 Sources of Data................................................................................................................... 7 1.6 Significance of Study.......................................................................................................... 7 1.7 Scope and Limitation of the Study .................................................................................... 7 References........................................................................................................................... 9 CHAPTER TWO LITERATURE REVIEW 2.0 Introduction .............................................................................................................................................. 10 2.1 Concept of Tourism ............................................................................................................................... 10 2.2 Tourism Sector......................................................................................................................................... 11 2.3 Effects of the Tourism Sector ............................................................................................................ 13
  5. 5. -4- 2.4 Historical Development of Fiscal Policy ......................................................................................... 16 2.5 The Concept and Objectives of Fiscal Policy................................................................................ 18 2.6 The Nature of Fiscal Policy ................................................................................................................ 20 2.6.1 Government Revenue ............................................................................................................. 21 2.6.2 Government Expenditure ...................................................................................................... 22 2.7 Multiplier and Crowding out effects ............................................................................................... 23 2.8 Fiscal Policy Hypothesis ....................................................................................................................... 24 2.9 Fiscal Policy lags ...................................................................................................................................... 26 2.10 Tourism Sector and Fiscal Policy ...................................................................................................... 27 References ................................................................................................................................ 29 CHAPTER THREE THE NIGERIAN TOURISM SECTOR AND THE IMPACT OF FISCAL POLICY 3.0 Introduction .............................................................................................................................................. 32 3.1 Nigerian Tourism Sector ...................................................................................................................... 32 3.2 Prospects of the Nigeria Tourism Sector ....................................................................................... 33 3.2.1 Employment Creation............................................................................................................. 34 3.2.2 Generation of Foreign Exchange ........................................................................................ 34 3.2.3 The Issue of Poverty Alleviation ........................................................................................ 35 3.2.4 Generation of Revenue........................................................................................................... 36 3.3 Reasons for Nigeria’s Underdeveloped Tourism Sector .......................................................... 38 3.4 Fiscal Policy in Nigeria ............................................................................................................................ 39 3.5 Fiscal policy Pattern in Nigeria Between 2000-2009................................................................... 41 3.6 Fiscal strategy for enhancing and sustaining Tourism ............................................................ 46 3.6.1 Improved Investments ........................................................................................................... 46 3.6.2 Reducing Structural leakages ............................................................................................. 47 3.6.3 Strategic Oversight .................................................................................................................. 47 3.6.4 Firm Regulations and Standards ........................................................................................ 47References ..................................................................................................................................... 49 CHAPTER FOUR
  6. 6. -5- EMPIRICAL ANALYSIS 4.0 Introduction .............................................................................................................................................. 50 4.1 Data Presentation.................................................................................................................................... 50 4.2 The Model .................................................................................................................................................. 51 4.3 Model Specification ................................................................................................................................ 51 4.4 Research Hypothesis ............................................................................................................................. 53 4.5 Model Estimate......................................................................................................................................... 54 4.6 Discussion of Research Findings ...................................................................................................... 58References ..................................................................................................................................... 61 CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATIONS 5.0 Summary of Major Findings ............................................................................................................... 62 5.1 Conclusion ................................................................................................................................................. 62 5.2 Policy Recommendation ....................................................................................................................... 63Bibliography .................................................................................................................................. 66Appendix ....................................................................................................................................... 72 LIST OF TABLESTable 4.1: Showing International tourism receipts, Federal government, ExpenditureFederally collected revenue and International Tourism Receipts in Dollars ................................45Table 4.2: Regression Result..............................................................................................................................47
  7. 7. -6- ABSTRACT The promotion of the tourism sector in developing countries is heightened by thenumerous benefits of the sector, amidst the many problems typical to developing nations.Unfortunately in Nigeria, the tourism sector is poorly developed, unorganised and non-functional; hence the nation is eluded of the numerous benefits of the sector. On the otherhand, fiscal policy in developing countries is seen as the most potent tool of economicplanning, thus sectors that are critical or have the greatest linkages enjoy investment andsupport from government. This is aimed at spurring private sector and foreign directinvestment in the nation, while the overall macroeconomic productivity is enhanced. Thisresearch work investigates the effects of fiscal policy as shown by federal budgets particularlyat the tourism sector level, so as to shed light on the responsiveness of the tourism sector onfiscal policies in Nigeria. This study uses multiple regression method of analysis in other tomeasure the response of the tourism sector to the execution of fiscal policies in Nigeria. Theresults reveal that federal government expenditure has a positive effect on the tourism sector,while federally collected revenue has a negative effect on the sector. In this light, the studyproposes that in the quest for tourism development in Nigeria, fiscal policy should be designedso that government expenditure is properly focused to ensure that facilities required bytourism sector operatives are provided through public means, also the tourism sector needs tobe restructured and reorganized so as to be better poised to benefit from governmentintervention.
  8. 8. -7- CHAPTER ONE Introduction1.0 Background of the study Firms and operators in the tourism sector attempt to take advantage of the spirit ofhuman adventure and the desire for leisure so as to attain economic objectives. The tourismsector is a service oriented sector which is very sensitive to issues of personal security,comfort and convenience. These issues form the orientation of most developers andpromoters of the tourism sector. Ode (2001) and Okey & Ovat (2003) asserts that theavailability of tourism product and services as well as tourism destination stimulate tourismdevelopment in any country. Implying that when the essential and optional components oftourism products, are available in abundance the tourism sector will grow and develop. Ode (2001) described a developed tourism sector to contain an adequate, wellpackaged information for tourist concerning tourism products, which is complimented byadequate physical infrastructure such as transport (air, land water), communication,banking services, electricity and water supply. With assurances on the sensitive issues ofpersonal security, comfort and convenience, which are embed in a coordinated andencompassing tourism policy. Officially, The Nigerian government considers the tourism sector as a preferred sector;with numerous incentives to attract and improve private sector investment, both local andforeign. This is based on the realisation that the tourism sector is quite important in thenational economy, Okey & Ovat (2003) and Okpolo, Emeka, & Chris (2008) identified thecontributions of this sector in terms of generation of foreign exchange, governmentrevenue, promotion of tourism based rural enterprises, employment generation, theintegration of rural-urban areas as well as the enhancement of cultural exchanges. However,examining the incentives that have mainly constituted of policies which promise to improvethe sector, but lack the necessary commitment on the part of government to actually pursuethese plans. As acknowledge by Anyanwu J. C., (1997) government policies have been
  9. 9. -8-ineffective in carrying out their intended objectives as government usually extricate itselffrom the chosen plan. The key function of government whether democratic or not, is to protect and promotethe welfare of its citizens. In doing this, the Government must choose the economicapproach to pursue. It may, for instance, decide to pursue a planned economic approach, afree market economic approach or a synthesis of both. Whichever one it decides to pursue isdetermined by the social, political and international politics of the time. It is important forus to emphasize the fact that all forms of governments are essentially social constructs.However it’s quite difficult to ascertain which form of government is “right” or “wrong”. Theimportant thing is that whatever form of Government that is in place, the objectives aresimilar. Components of macroeconomic policy, monetary and fiscal policy are fundamentalin the promotion of the main government objective of promoting the welfare of its citizens.Conventional, economic theory tends to suggest that a central bank uses monetary policyinstruments to predominantly influence the general price level. This broadly translates intothe monetary control of the price level, which implies monetary dominance in thedetermination of the price level. In reality however, as identified by Oyejide (2003) fiscalpolicy is sometimes dominant especially in Less Developed Countries (LDCs) withunderdeveloped securities markets. This is because the underdeveloped securities marketessentially limits the ability of a central bank to effectively develop and use monetary policyinstruments. Hence the Nigerian macroeconomic policy has always been fiscal oriented. Fiscal policy in Nigeria is normally carried out by the three tiers of government, aseach level develops its own policy. However the size and range of the sub national fiscalpolicies is mainly dependent on the federal or national fiscal policy. The bone of contentionhere is given the economic effects of the tourism sector in Nigeria, objectives of fiscal policyand the regard given to federal budgets in Nigeria. Can the macroeconomic environment bestabilized so as to strengthen economic productivity and development in the tourismsector?
  10. 10. -9-1.1 Statement of the problemIt is no longer news that the Tourism sector is relatively a budding enterprise in Nigeria,even amidst the country’s endowed climate, vegetation and interesting natural features,which is a factor component in most tourism industrious economies. Over the past decades,the Nigerian economy been characterized by growing a dominance of the energy sector,which is highly supported by several government policies. However, while this was justifiedat the inception as the nation benefitted from global energy booms and international power.These have lead to the collapse and choke off of other sectors in the economy. The resultingeffect has been serious inequality and lopsidedness in the economy as increasing use anddepletion of non-renewable resource, amidst redundant underutilized renewable resources. As the government attempts to address these issues in its overall plan to diversifythe economy, certain questions are worth consideration. • What impact has fiscal policy measures had on the development of the tourism sector? • What is the present magnitude of the tourism sector in respect of other sectors, especially the energy sector in Nigeria? • Will a change in the magnitude of the tourism sector be beneficial to the economy of Nigeria? • Are fiscal policy measures capable of bringing about the necessary change in the tourism sector?In view of these research questions listed below it is worthy to note that these questionspresented are in no way exhaustive1.2 Objectives of the studyThe objective of the study is to examine the various issues of how the fiscal policy measurescould aid and enhance the tourism sector’s performance in Nigeria.The specific objectives of this study include
  11. 11. - 10 - • To analyse the impact of fiscal policy measures on tourism sector’s performance • To examine the roles the tourism sector in the economy • To address and recommend appropriate policy measures aimed at enhancing the tourism sector performance.1.3 Methodology of the study This research employed econometric method of linear regression analysis. Thisinvolved estimation of the model in order to establish whether fiscal policy in form offederal budgets has had any impact on the performance of the tourism sector in Nigeriabetween 2000-2009 or not. The econometric linear regression model was used to test the impact of total federalgovernment expenditure ( ) and federally collected revenue ( ), on thetourism sector’s performance which will be measured by the amount of internationaltourism receipts. This estimation technique was aimed at achieving unique parameter estimates thatwould enable us to interpret the regression co-efficient in terms of elasticity andconsequently give a slightly better fit.1.3.1 The model The econometric linear regression model specification of this study is specifiedusing the total federal government expenditure ( ) and federally collected revenue( ). The Ordinary Least Square (OLS) method is used for the estimation of theparameters in the model.1.3.2 Model specification The relationship between tourism sector performance and the total federalgovernment expenditure ( ) and federally collected revenue ( ) can beexpressed as follows.
  12. 12. - 11 - = ( , ) .................................................... (1)The econometric linear model specification of equation (1) above is given as =β +β −β +µ .................................................... (2)WhereITR = International Tourism Receipts (Proxy for tourism sectorperformance) = federal government expenditure = Federally collected revenue β = the Intercept which represents the autonomous part of the tourism sector’s performance when federal fiscal policy measures are zero, i.e. federal government expenditure and federally collected revenue. β = parameter estimate which represents the coefficient of federal government revenue. β = parameter estimate which represents the coefficient of federal government expenditure. µ = White noise, error term (stochastic term)When estimated, the model becomes, = β +β −β2 .................................................3 Given the relationship between tourism sectors performance (ITR), federalgovernment expenditure ( ) and federally collected revenue ( ). The aprioriexpectation of equation (3) is thusβ > 0 ...................................................................................4
  13. 13. - 12 --β < 0 ....................................................................................5Therefore, β > 0, β > 0, β < 01.4 Research Hypothesis The research seeks to evaluate how the tourism sector in Nigeria is been influencedby government fiscal policy, how its components contributes to the growth of the Nigeriantourism sector. In this research, there is a need to make certain statements that will besubject to scientific testing. The following hypothesis will be tested to determine the validityto the research.The basic hypotheses used for this research work are: H0: i = 0 (null hypothesis) H1: i ≠ 0 (alternative hypothesis)Null hypothesis: The Nigerian tourism sector has not been significantly influence by federal government fiscal policy within 2000-2009Alternative hypothesis: The Nigerian tourism sector has been significantly influenced by federal government fiscal policy within 2000-2009Where = coefficient parameter for fiscal policy i1.5 Sources of Data The data employed in this research work consist mainly of secondary data which arerelevant to the study, and will be obtained from both published and unpublishedsources.The published sources include data from textbooks, central bank publications,
  14. 14. - 13 -statistical bulletins, journals, magazine, newspapers, the internet (web) and other relevantpublications. Unpublished works include seminar papers, government documents from ministries,central bank of Nigeria (CBN) library, National Bureau of statistics (NBS) and personaldiscussions.1.6 Significance of study The study is expected to broaden the scope of understanding and awareness of thetourism sector in Nigeria, and how fiscal policy measures can be used to enhance thissegment of the economy. The findings and recommendations of this research would enhance the forecastingabilities of policy makers, to make necessary and more accurate adjustment to enhancetourism sector performance in Nigeria, as the engine of economic growth and development. This research work is intended to lay a good foundation for future research and willequally serve as a reference to prospective researchers. It will assist professional bodies bycontributing to knowledge for future aid on research. Finally, Nigeria as a whole will benefit from this work because the tourism sectorplays a very critical role in creating employment and infrastructural development in theNigerian society.1.7 Scope and Limitation of the study The research is focused on the impact of fiscal policy on the tourism sector in Nigeria.The research covers the period between 2000 and 2009. While it is imperative to note thatthe investigation will not be limited to Nigeria, especially in some instances wheninvestigating certain aspects of the research, generalizations will be made which will includeother countries especially where there exist similarities in the setting and operations of thefederal authorities. Whereas, this research intends to investigate the impact of fiscal policy
  15. 15. - 14 -on the tourism sector in Nigeria, it is imperative to note that some challenges wereencountered in the course of the research work which constitutes limitations of theresearch. These include inadequate finance, lack of proper documentation and records byboth the tourism and financial institutions and finally epileptic power supply.
  16. 16. - 15 - CHAPTER TWO Review of Literature2.0 INTRODUCTION In this chapter, an attempt is made to review the related literature to form abackground, and conceptual frame work for the study. This review also analyses the conceptof fiscal policy and the tourism sector, it also considers to a large extent the controversialbut critical views and opinions of intellectuals and experts on the two critical points. Alsoan assessment of fiscal policy measures and systems, and the nature and structure of thetourism sector in Nigeria shall be evaluated to determine the level at which past policies hadimpacted and wedged the tourism industry in Nigeria. The purpose of this is to have anunderstanding and put into perspective the issues concerning the research topic.2.1 CONCEPT OF TOURISM Tourism has been practiced since the beginning of human civilization even with theproblems associated with travel in earlier times, the barriers and difficulty on the modes oftravel, accommodation and services. There was barely enough time for leisure, but still timeto relax and wander was found by man. As the quality of life became higher and better dueto technological advancement people began to move easily from one place to another.Shorter working hours, holidays and holy days contributed to mass travel, relaxation andself-development. According to (Bhatia, 1983), tourism has gradually transformed to aworld-wide leisure experience due to technological, political and social events. Etymologically, the word “tour” is coined from both a Latin and a Greek word tornareand tornos signifying the movement around a central point. Hence, when the word “tour”and the suffix “ism” is merged to indicate the action of movement around a circle, theDictionnaire universel du XIXiFme siecle in 1876 defined tourism as travelling out ofinquisitiveness and idleness (McIntosh, 1995)
  17. 17. - 16 - Over the years a lot of scholars and institutions have attempted to shed more lighton this thought-provoking phenomenon, and have drawn up many definitions to this regard.According to Tribe (2009) tourism can only be contemporarily comprehended when; Truth(Reality, Knowledge and Disciplines); Beauty (Well being, Aesthetics and Art); and Virtue(Ethics, Values and The Good Life), are explored. Therefore, the use of three Aristoteliantranscendental entities, truth (verum) beauty (pulchrum) and virtue (bonum) are the meansto which tourism can be understood. The World Tourism Organization developed a definition that disaggregates tourisminto two parts Domestic and international. It states that Domestic tourists are visitors fromwithin the country who stay a minimum of twenty-four hours and not more than one yearfor pleasure, recreation, sport, business, visiting friends and relatives, missions,conferences, health reasons, studies and religion. Whereas international tourists areresidents of one country visiting another for many or all of the same purposes as domestictourists (World Tourism Organization, 1994). Feifer (1985) regarded tourism as the science, art and business of attracting andtransporting visitors, accommodating them and graciously catering to their needs andwants. It is in this regard that the activities of the tourism sector are put into view, asproviding services to tourists.2.2 TOURISM SECTORThe tourism sector is mainly a conglomeration of service industries; it is based on manydifferent components and interrelated parts. Some of these components might span to morethan one sector. The tourism industry includes: • Transportation services, which enable the tourist to travel to and from the destination (for example travel agents, airlines, bus companies, tour operators and rental car companies) • Hospitality services. are part of the product at the destination (for example, accommodation, facilities and attractions)
  18. 18. - 17 - • the human component of tourism (the labour force) • public sector or government agencies, regional tourism organisations, professional associations and industry training organisations (Wikipedia, 2010) The link between these varied services and their individual growth reflects thedegree of the tourism sector in an economy. Also the overall output level of the tourismsector is a constituent of the nation’s Gross domestic product (GDP) Globally, the tourism sector has shown fait accompli seamlessly in the past fivedecades, generating roughly $1 trillion in receipts in 2008 (reflecting a 1.8 percent growthfrom 2007), and international tourism is ranked as the fourth-sector industry in the world,after fuels, chemicals, and automotive products (UN World Tourism Organization (UNWTO),2009). Thus the tourism sector has proven itself as a potent sector in the world economy,with the participation rate greatly expanding in recent years. In 1950 just fifteendestinations, primarily European accounted for 98 percent of all international arrivals. By2007 that figure had fallen to 57 percent (UN World Tourism Organization (UNWTO), 2009).More countries are availing themselves of this goldmine sector and developing countriesseem to be showing a lot of interest. The developing world has now become its majorgrowth area as tourism is a key foreign exchange earner for 83 percent of developingcountries and the leading export earner for one-third of the world’s poorest countries(Mastny, 2001). Thus the impact of the tourism sector on the economy cannot be unstated. However the story is not quite bliss in the African continent as the tourism sector islargely primitive and unorganized in its operations, with few nations such as Egypt andSouth Africa having an extensive and developed sector that can exploit the endlesspotentials of this sector (Idowu & Bello, 2010). Consequently, the continent’s tourism sectorhas been comparatively smaller and paltry in Gross Domestic Product (GDP) contributions,than in South America, Europe or Asia where it a dominant contributor. In 2005, touristarrivals in Africa registered only 37 million (or 5 percent of the world) as compared to 444million arrivals (55 percent) in Europe, 156 million (19 percent) in Asia/ Pacific, 133 million(16 percent) in the Americas, and 38 million (5 percent) in the Middle East. In 2004, tourism
  19. 19. - 18 -receipts were $623 billion (100%) for the world, $326.7 billion for Europe (52.5%), $131.7billion, $21 billion (3.4%) for the Middle East, and $18.3 billion (2.9%) for Africa (WTO, 2008).2.3 EFFECTS OF THE TOURISM SECTOR The economic might of the tourism sector has helped transform societies, often forthe better. It is on this information, that at the Lome III conference of less developed nationsin 1985, it was recognised that tourism promotes the development of several sectors of theeconomy since it is consumed at the point of production and hence directly benefits thecommunities that provides it. Tourism can serve as a source of revenue generation, especially as the Nigeriangovernment tries to find alternative revenue sources in its diversification programme of theeconomy. This is grounded on the fact that tourism has been an effective revenue source incountries that have a proactive tourism industry (Olayinka & Bello, 2010). Mauritius hasbenefited from this, with the sector contributing about $1billion as tourism receipts fromthe period March 2010 to February 2011 (Daily Trust, 2011). This gives government a chanceto collect higher revenues and, via the expenditure side, to exert a stronger influence on thedevelopment of the domestic economy. Government revenues from tourism are chieflyderived from taxation and investment earning, which is based on the extent of governmentinvolvement in the industry (Iwersen-Sioltsidis & Iwersen, 1996). Since developing nations have rich natural attractions, and development based onthese attractions offers the tourism sector some comparative advantage vis-a-vis othereconomic sectors. Vanhove (1997) expostulates that in addition to the above advantage,tourism has a lower import content compared to other basic economic sectors, and has ahigh growth rate potential. While tourism has become a major economic activity, “the abilityof the national economy to benefit from tourism depends on the availability of investmentto develop the necessary infrastructure and on its ability to supply the needs of tourists."(Williams & Shaw, 1988)
  20. 20. - 19 - Tourism Improves employment opportunities in a country, the tourism industry notonly generates employment once in operation, jobs are also created during the constructionof the tourist facilities. When considering individual cases, one must not overlook the extentto which tourism can also create secondary employment in other industries (indirect andinduced effects) (Stynes, 2011). It is particularly significant for developing countries thattourism as a service industry should be relatively labour employment-intensive. The extentof this employment effect depends on the size and nature of tourist facilities, the structuraldepth of the tourism sector, the type of tourism (individual, package, mass, gentle) Iwersen-Sioltsidis & Iwersen (1996) articulated that the development, completion anduse of tourist facilities in developing countries always go hand-in hand with infrastructuremeasures. Although most infrastructural facilities are not intended exclusively for thetourist trade, many infrastructure measures would not be realized, particularly indeveloping countries, if there had been no tourism. In many respects such facilities bringwealth creating effects for the country, both at the development and construction stagesand later on when they come into use. In general, the direct gross value added increases inproportion with the increasing significance of the tourism sector (Ode, 2001). However onemust bear in mind that once a certain volume of tourist business is exceeded, increasingsocial costs may develop which will then act as a damper on wealth creation The enhancement of human resource is also a positive effect of the tourism sector,as staff employed in the tourist industry need to be suitably qualified (Crandall, 1994). Aproportion of these qualified personnel will come from abroad; however, the more adeveloping country has put its economic weight behind the tourist industry, the more oftentraining will take place local (Iwersen-Sioltsidis & Iwersen, 1996). In an assessment of Nigeria’s potential for tourism, Francesco Frangialli, the formerhead of the UN World Tourism Organization, opined that since tourism has the capacity tospread its socioeconomic benefits to all levels of society, it can be a leading industry in thefight against poverty. (Secretary-General: UNWTO, 2006) With its tendency to produceflexible labour markets and offer diverse working opportunities in the Nigerian economy
  21. 21. - 20 -which is struggling with high unemployment and underemployment, tourism could serve asan activation for economic development and there by become a tool in whichmacroeconomic policies can be implemented, especially in the face of growing concernsabout poverty, unemployment and economic stagnation the Nigerian economy Archer (1984) warned that it is misleading, when one just focuses on the positiveeffects of the tourism industry without the recognition of the adverse effects tourism hason the economy especially when non sustainable measures and techniques are practiced..Small operators in the tourism industry in developing nations face stiff competition frommultinational companies (Sinha, 2002). Coupled with exposure of the domestic economy tointernational trade, frequent fluctuations in the international would advertently affect thedomestic market, thus the fate of domestic economy would be imperially determined by theneo-colonial powers. The volatility of the tourism sector to political, social, environmentaland economic disturbance makes it dangerously unsuitable for developing countries (Crick,1996). Tourism has led to increased urban-rural polarization as well as the concentration ofwealth in the hands of a few. According to Crick (1996) a developing nations desire toattach itself with the affluence of Europe or North America is naive, since it is theiraffluence that produces the underdevelopment of the Third World. The structuraldependencies are visible in the case of tourism. Tourist do not go to Third World countries because they are friendly, they go because a holiday there is cheap, and that cheapness is, in part, a matter of the poverty of the people, which derives in some theoretical formulations directly from the affluence of those in the formerly metropolitan centres of the colonial system. That affluence now produces conditions of work and life such that leisure activity is prized (Crick, 1996). . Also undesirable social effects like the development of miscreants or deviantactivities such as theft, begging Noronha (1979), prostitution Cohen (1983) and fraud Jones(1978) are quite possible. In many developing countries such as Thailand and the
  22. 22. - 21 -Philippines, tourism has generated thriving sex industries, which in turn have contributed tothe HIV pandemic in Asian countries. Ultimately tourism has the potential to propel Less Developed Countries(LDCs) togreater heights, though increase employment, revenue generation, competitive markets andsustained output expansion. These promises do not completely bench the damaging deedsof tourism, but it requires that LDCs that undertake the promotion of their tourism sectorshould do so with great caution in other to have a planned and sustainable tourism sector.2.4 HISTORICAL DEVELOPMENT OF FISCAL POLICY After the historical economic slump of the 1930s which created a dent on thecapitalist pillar of free market (laissez faire) and resulted to increasing concern on thedistributive potency of the laissez faire system amidst reoccurring economic slowdowns inthe industrialised nations of the world. The state took centre stage in the response to thefundamental economic questions of what to, How to and for whom to produce, in theeconomy in other to augment the efficiency of the invincible hand. This brought about therealisation that government financial operations had influences on the workings of thenational economy in terms of level of income and employment. It was John M. Keynes in hisGeneral Theory of Employment, Interest and Money, that this link was first detected andanalysed. He suggested that the state should manipulate its finances to influence the leveland direction of economic activity by boosting effective demand (Keynes, 1936). In most African countries fiscal policy measures are regarded as vehicles ofeconomic transformation since it plays a principal role in development plans of nations(Anyanwu, 1997). During the post independence era in the 1960s, the former coloniesattempted to take charge of their economies by promising to provide a stable and self-reliant economy, through increased employment and equality. Even though the economicstructure of colonial Africa was developed as a point of resource extraction, from thecolonies to the imperial town (Acemoglu, 2000), this is manifest in the dualisticsegmentation of the colonies with their transportation and mining (extractive) sectors beingdeveloped and the other sectors being non-commercialised throughout the occupation of
  23. 23. - 22 -the colonies by imperialist. The present condition required a conscious and strategic efforton the part of the state (newly independent state) to bring about balance in the economy.The aspiration and struggle for independence borne the active use of fiscal policy measuresduring the post independence period in Nigeria, with government indulging in conspicuousnational economic planning, all in a bid to bring about a balance in the economy (Federalministry of Economic Development, 1962). Fiscal policy plays a dynamic role in underdeveloped countries. In fact an extensiveuse of fiscal policy is indispensable for economic development (Jhingan, 2008). Ascomparatively advantageous sections of the economy are being stimulated so as to ensureefficiency of scarce resources. It also assumes a new significance in the face of the problemof capital formation in underdeveloped countries. Since the wealthy engage in conspicuousconsumption which is unproductive, thus fiscal policy diverts all these consumption intoproductive channels through its instruments of taxation and government expenditure.2.5 THE CONCEPT AND OBJECTIVES OF FISCAL POLICY The word fisc means ‘state treasury’ and fiscal policy refers to policy concerning theuse of ‘state treasury’ or the government finances to achieve the macroeconomic goals. ToAnyanwu (1993) it is any decision by government concerning the generation of fundsthrough taxation and other sources. It is mainly concerned with the critical managementdecisions, in respect of the receipts generated by the state. It is critical because any form ofmanipulation would affect the achievement of desired macroeconomic objective. To the Central Bank of Nigeria, fiscal policy is to bring into perspective all revenueand expenditure into the budgetary process with a view to ensuring transparency andsubstantial reduction in fiscal deficit and also to combat domestic inflation, stimulateeconomic growth, encourage diversification of Nigeria’ exports base (Central Bank ofNigeria, 2000).Deciding on the amount, level and pattern of expenditure for the purpose ofinfluencing economic activities or attaining some desirable goals is thus regarded as fiscalpolicy. Changing the level, composition or timing of government expenditure or varying theburden, the structure or frequency of the tax payment is also considered as fiscal policy. In
  24. 24. - 23 -modern economies the rational of engaging in fiscal policy is an attempt to bring aboutcredibility and legitimacy in government financial operations (government revenues andgovernment expenditure). According to Fan (2008) it essentially attempts to maintain a balance as much asfeasible, between the government revenues and government expenditures of liabilities in theeconomic system, the underlying purpose being to achieve adequate and stable economicgrowth. For Nigeria, this may translate into any or a combination of price stability, high levelof employment or an acceptable rate of unemployment, a sustainable growth rate over thelong term as well as balance of payments equilibrium. Broadly speaking, fiscal policy is the changes witnessed in government expenditureand government revenue. In Nigeria, the major fiscal policy instruments include changes intaxation rates (on personal income, company income, petroleum profits, capital gains,import duties, export duties and excise duties as well as mining rents, royalties, and NNPCearnings) and government expenditure(Recurrent and Current) (Anyanwu, 1997). Howeverthe importance of borrowing and financial aid as a fiscal policy instrument is gaining highstance in certain Less Developed Countries(LDCs) like Madagascar, which generates about50% of its revenue from such sources (Inside Africa, 2010). In economic theory Borrowing isdeferred taxation as debt must be repaid in the future, together with any interest payments(Wickens, 2008). Therefore taxation is mainly seen as the independent component offinancing government expenditures. According to the following scholars (Mankiw, 2002)(McDonald, 2003) (Jhingan, 2008), the main objective of fiscal policy is long-runstabilization, which it achieves through the following goals. 1. To achieve suitable employment level: The efficient employment level is most important in determining the living standard of the people. It is necessary for political stability and for maximization of production in the economy. Thus fiscal policy is carried out in other to ensure that this desired level is recorded 2. Increase in capital formation: In under-developed countries deficiency of capital is the main reason for under-development. Large amounts are required for industry
  25. 25. - 24 - and economic development. Fiscal policy can divert resources from less important (comparatively disadvantaged) sectors and increase capital 3. To achieve desirable price level: The stability of general prices is necessary for economic stability. The maintenance of a desirable price level has good effects on production, employment and national income. Fiscal policy is used to remove; fluctuations in price level so that the ideal level is maintained 4. To achieve desirable consumption level: A desirable consumption level is important for political, social and economic consideration. Consumption can be affected by expenditure and tax policies of the government. Fiscal policy is used to increase welfare of the economy by increased consumption. Furthermore, for the fiscal policy to effectively perform as a tool of economic policy, thecomposing measures (revenue and Expenditure) must be manipulated harmoniously andaligned with monetary policy measures (Pardhan & Swaroop, 1993)2.6 THE NATURE OF FISCAL POLICY The nature of fiscal policy in most industrialised and developing countries has oftenbeen procyclical in nature (Talvi, Ernesto, & Vegh, 2000). Governments tend to increasepublic expenditures when oil revenues are high and maintain public spending even afterrevenues fall, thus disproportionate spending increases combined with tax reductionsduring expansions leaving little slack to cope with downturns. Procyclical tendencies occurin most LDCs because it is characterized by political systems with multiple fiscal veto pointsand high output volatility (Lane, R., & GianMariaMilesi-Ferretti, 2002). In the present world economy fiscal policy has become an indispendable tool forgovernance. Irrespective of the form of government existing in the economy, fiscal policymeasures are applied. Nonetheless, there are variations in the degree to which the publicsector is involved in the overall economic life of the nation. For instance, as reported by theOECD Online Database and IFS Database (2003), the Swedish government spending hasaccounted for around 60% of GDP, while in the United States it has been around 30%. Somethings that governments do are both essential and could not be done by the private sector,
  26. 26. - 25 -but it is hard to see how any entity but the government being responsible for the legalsystem, the police force, and national defense. Some things that governments do in manycountries are essential, but the private sector could do them. For example, in manycountries, public sector health and education services comprise much of the public sectorand little contribution from the private sector. Also some government activities need not bedone, and until recently, were not. For example, in most developed countries, governmentsprovide various kinds of social security (unemployment and sickness benefits, old agepensions). This kind of social welfare provision, or social insurance, is a relatively recentphenomenon, but one that accounts for much of the rise in the role of government ineconomies.2.6.1 GOVERNMENT REVENUE Government financial obligation spans on to a variety of things, from the militaryand police to services like education and healthcare, as well as transfer payments such asscholarships and unemployment compensations. This expenditure is funded using mainlytaxation, and the tax potential of a nation determines the degree in which the other forms offunding would be applied. It is worth noting that these forms which range from Seigniorage,domestic or foreign borrowing, consumption of fiscal reserves and sale of fixed assets areall forms of financing. Taxation is the act of charging against a citizens person or property or activity forthe support of government. Revenue for government is generated when taxes are leived, butjust like price it does not guarantee maximum revenue for government at all levels of taxrates. Thus according to the Laffer curve theorem, the revenue that the government raisesfrom taxes increases as the tax is imposed or increased from zero, but it will ultimately fallas taxes deter further production expansion. Therefore in the short run, Governmentrevenue is expected to increase as tax rates are hiked. An inverse effect is usually created in the economy when taxes are levied aseconomic decisions concerning output are influenced. Talvi, Ernesto, & Vegh (2000) arguethat tax cuts encourage business growth and reassure consumer confidence, thereby helping
  27. 27. - 26 -to stimulate the economy. Thus when there is a tax hike, firms hold back output asindividuals also cut down spending. .2.6.2. GOVERNMENT EXPENDITURE Most LDCs are saddled with responsibility of using their present resources to achievesustained economic growth within very short time periods and amidst low level of capitalstock which is mostly crude and primitive. Thus the state needs to carry continuous andcoordinated investments in the various segments of the economy, which is expected to bewell structured in other to ensure efficiency. Government expenditure is classified by (Barro& Grilli, 1994) into two main types. • Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is classed as government final consumption expenditure. • Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment (gross fixed capital formation), which usually is the largest part of the government gross capital formation. These acquisition of goods and services are made through own production by the government (using the governments labour force, fixed assets and purchased goods and services for intermediate consumption) or through purchases of goods and services from market producers A lot of empirical studies have been conducted on the effect of governmentexpenditure on the growth of the economy. Such studies include that of (Cooray, 2009),(Folster & Henrekson, 2001), (Schaltegger & Torgler, 2007), (Ghosh & Gragorious, 2008), tomention a few. There is however no unanimous verdict on the productivity of governmentspending even though unproductive spending generally impacts negatively on growth whileproductive spending impacts positively. Maku (2009) in his study posit that government expenditure in Nigeria andeconomic growth found that private and public investments have insignificant effects oneconomic growth during the review period 1977-2006. In his Bayesian analysis of
  28. 28. - 27 -government expenditure in Nigeria (Olayeni, 2010) found that government expenditure wasunproductive in Nigeria and that this conclusion is independent of macroeconomicenvironment. And neither is it dependent on the external circumstances, (Udah, 2010)Showed that government size did not complement private investment initiative in Nigeria. On the contrary Donald & Shuanglin (1993) investigated the differential effects ofvarious forms of expenditures on economic growth for a sample of 58 countries; theirfindings indicated that government expenditures on education and defence have positiveinfluence on economic growth, while expenditure on welfare has insignificant negativeimpact on economic growth. While (Niloy, Emranul, & Osborn, 2003) used a disaggregatedapproach to investigate the impact of public expenditure on economic growth for 30developing countries in 1970s and 1980s. They authors confirmed that government capitalexpenditure in GDP has a significant positive association with economic growth, but theshare of government current expenditure in GDP was shown to be insignificant in explainingeconomic growth.2.7 Multiplier and Crowding out effects The Multiplier is a Keynesian concept whereby the final impact on demand of anincrease in expenditure is greater than the initial impact. (Mankiw, 2002) reckoned thatwhen government increases spending or reduces revenue (expansionary fiscal policy) in theeconomy there is an additional shift in aggregate demand that occurs due to increasedincome and increases in consumer spending. When government spends there are certainrepercussions. The immediate impact of the higher demand from the government is to raiseemployment and profits, which further raises the demand for the products of many otherfirms in the economy. This multiplier effect continues even after the first round. Whenconsumer spending rises, the firms that produce these consumer goods hire more peopleand experience higher profits. This multiplier effect arising from the response of consumerspending can be strengthened by the response of investment to higher levels of demand.This positive feedback from demand to investment is sometimes called the investmentaccelerator.
  29. 29. - 28 - However, the crowding out effect is the tendency of extra government spending tocause reductions in private spending through inducing increases in interest rates. (Mankiw,2002) described it as the offset in aggregate demand that results when expansionary fiscalpolicy raises the interest rate and thereby reduces investment spending. When there is a fiscal deficit, it reduces the amount of funds available to borrowers,including the corporate sector. This leads to higher interest rates, which leads to lowerinvestment and consumption. The expenditure plans of the private sector have to bereduced in order to provide the financing for the fiscal deficit When the government increases its purchases, the aggregate demand for goods andservices could rise by more or less than the increase in government spending, depending onwhether the multiplier effect or the crowding-out effect is larger2.8 Fiscal policy hypothesis Within fiscal policy thought, it is often assumed that a government determines bothrevenues and expenditures in ways that maximize the social welfare of the society. However,four alternative hypotheses have been advanced to ascertain the nature of the causalitybetween these variables in the budgetary process. The tax-and-spend argument proposes that changes in government revenues lead tochanges in government expenditures. Friedman (1978) and Buchanan and Wagner (1978)were early proponents of this view but differed in their perspectives. Friedman argued thatincreasing the resources available to government by increasing tax revenues will only lead toincreases in government expenditures. The Friedman version of the tax-spend hypothesissuggests that government revenues have a positive effect on government expenditures.Alternatively, Buchanan and Wagner argued that increases in government revenues may leadto decreases in government expenditures through fiscal illusion. In particular, if thegovernment is financing expenditures by means other than direct taxation, the fiscal illusionoccurs because the public pays less in direct taxation but more in the form of indirecttaxation (e.g., crowding-out effects and bracket creep caused by inflation). If indirect
  30. 30. - 29 -taxation declines while direct taxation increases, this trend could reduce governmentexpenditures. The spend-and-tax hypothesis suggests that a government first makes expendituredecisions and then adjusts tax policy and revenues as necessary to accommodateexpenditures. From a Ricardian equivalence perspective, Barro (1994) argued that increasedgovernment expenditures financed by borrowing will translate into higher future tax liabilityfor the public. In the context of fiscal policy response to "crisis" situations, Peacock andWiseman (1979) argued that temporary increases in government expenditures in response tosuch crises will lead to higher permanent taxes. Under either perspective, higherexpenditures would lead to higher taxes. Under the fiscal synchronization hypothesis, a government simultaneously choosesthe desired package of spending programs and the revenues necessary to finance suchspending programs. Musgrave (1966) and Meltzer and Richard (1981) are proponents of thisview of the budgetary process. In addition, Miller and Russek (1989), Hasan and Sukar(1995), and Owoye (1995) found evidence to support the fiscal synchronization hypothesis. Finally, under the institutional separation hypothesis, government decisions tospend are independent from decisions to tax. Hoover and Sheffrin (1992) and Baghestaniand McNown (1994) have provided evidence of this view.2.9 Fiscal Policy Lags According to (Miles & Scott, 2005), the lags in the effect of any policy change on theeconomy can be characterized into an inside lag and an outside lag. The inside lag is thetime it takes to formulate and execute a policy change. It can be separated into threecomponents: • Recognition lags – the time between an economic disturbance and the recognition by policy-makers that a policy response is required. The recognition lag occurs because
  31. 31. - 30 - a) Forecasting is not reliable enough to use as a basis for a major change in policy; b) Data on macroeconomic developments are not immediately available and do not immediately present an unambiguous picture. Estimates of the recognition lag suggest that it is usually about 3 to 6 months. • Decision lags – the time it takes for the policy-makers to make a decision about policy. For fiscal policy, the decision lag can be lengthy because National assembly (congressional) action is necessary. • Implementation lags – the time it takes for a policy change to be put in place. A task as simple as promulgating and putting into action new withholding rates can take at least several weeks. All in all the inside lags are likely to take at least six months. Once policy has beenchanged there is an outside lag or the time it takes for the policy change to effect the macroeconomy. A fiscal policy change leads to a multiplier effect, which takes several quarters toget going, and the full effect is not felt for about a year.In the case of an economy entering a slowdown, it would typically take 3 months after thepeak in activity to recognize that a recession has begun. The decision lag is likely to be atleast another 2 or 3 months. The implementation lag for fiscal policy is another 2 or 3 months. Finally, severalmonths pass before the multiplier process has a significant effect on aggregate demand.Thus, the fiscal policy lag is about a year. But in the post-war period, recession has onaverage lasted only about 11 months. Thus, fiscal policy is hardly a useful tool for short-runstabilization policy.2.10 TOURISM SECTOR AND FISCAL POLICY Fiscal policies involves the use of taxes and changes in government expenditure toinfluence the level of economic activity .Undoubtedly, fiscal policy is central to the health ofany economy, as government’s power to tax and to spend affects the disposable income of
  32. 32. - 31 -citizens and corporations, as well as the general business climate. In this regard, theinterrelationship between public finance and the tourism sector performance is ofparamount importance. On one hand, Government expenditure can provide an impulse fortourism sector growth, while on the other, it can be harmful if budget deficits leads tocompetition for scarce financial resources from the banking sector as the government seeksto finance its projects. In such circumstances, the crowding out of the sector by theGovernment can outweigh any short-term benefits of an expansionary fiscal policy. It isbased on this that (Okonjo-Iweala, 2003) observed that the key to all these lies in striking agood balance in fiscal management thereby having enough expenditure outlays to meet theneeds of Government and support growth, but not so much as to deny the private sector theresources it needs to invest and develop. It is usually argued that the combined effect of revenue and expenditure, fiscalpolicy may have effects on aggregate output which are separate from those related to theabsolute level of either taxation or public expenditure, (Tanzi & Zee, 1997). Thus theconsequence of just government spending might be completely different when it is graftedwith a tax policy. Also the tourism sector itself possesses a long term effect on fiscal policy,especially in huge tourism exporting countries, as it contributes immensely to thegovernment revenues.
  33. 33. - 32 - CHAPTER THREETHE NIGERIAN TOURISM SECTOR AND THE IMPACT OF FISCAL POLICY3.0 INTRODUCTION Investment and the subsequent expansion in the tourism sector in Nigeria has beenlargely influenced by fiscal policy. This policy is quite significant because it sends long andshort run indicators to investors and customers alike, concerning the direction ofgovernment’s commitment and how it intends to manage the economy. The tourism sectoris that of great importance to most economies because of its capacity to deflate manymacroeconomic problems, which most governments have an obligation to solve. Thetourism sector assumes a new significance in Nigeria and other Less Developing Countries(LDCs) as they pursue economic development through diversification of revenues andincreased employment. However, this can only be made possible if the government is able toremove social, institutional and economic bottlenecks.3.1 NIGERIAN TOURISM SECTOR The general story of the Nigerian economy is a tale of wasted potentials on all fronts,with the tourism sector also bearing this loss. It is quite evident that, tourism in Nigeria hasthe potentials to generate significant foreign exchange earnings, employment andinvestment towards economic development (Okey & Ovat, 2003). This is because the countryeven with its comparative advantage in tourism, shown by its numerous ethnic groups, richcultural background, natural awes, wildlife, and a signatory to the General Agreement on thetrade and services (GATS), which requires a very liberal policy on tourism, is in spite of allthese the least developed as compared to others like finance and telecommunicationservices and this has reflected in the large deficits indicated by tourism receipts andexpenditures over the 1994-1996 period (Ode, 2001), Nigeria accounted for an annualaverage of 17% of international tourism expenditures in Africa, spending a cumulative totalof US$2,794 million, it was second only to south Africa in international tourism. HoweverSouth Africa accounted for an annual average of 24.1% of international receipts on tourismin Africa over the same period, Nigeria’s annual average share was 0.73% (World TourismOrganization (UNWTO), 2011).
  34. 34. - 33 - The Nigerian tourism sector is structurally faulty and in need of a coherentmodification plan, this is based on the fact that the sector has only been able to attracttourist from low income countries, thereby exacerbating its low tourism receipts. In 2005Nigeria received more than 2.7 million tourists. The largest contingents came from Niger(620,658), Benin (393,215), Liberia (107,401), and Cameroon (107,108) (Library of Congress,July 2008). According to Fapohunda (1975), the informal economy is estimated to range between50 to 75 percent of the total economy. Hence most segments of the sector are swallowed inthe pervasive underground economy in Nigeria; this has rendered this vital sector out ofgovernment control and regulation. Thus tourists are left at the mercy of crooks and goons.3.2 PROSPECTS OF THE NIGERIAN TOURISM SECTOR In some countries, tourism and related recreation activities play a significant role inthe generation of income, foreign exchange, provision of employment opportunities and ahost of other indirect benefits. In fact, the tourism industry is one of the most crucialtradable sectors in the world. Furthermore, tourism plays a crucial role in the attainingmacroeconomic stability. The extent to which Tourism contributes to the socio-economic and politicaldevelopment of any country is still a subject of debate. The Tourism sector in Nigeria is anon-agricultural economic sector but has a substantial role to play in expanding anddiversifying Nigerias economic base. Arguably, Tourism stimulates the exchange ofeducational, recreational and cultural values in Nigeria. As mass tourists travel to distantplaces, they bring with them their own value system and learn the ways of life of Nigerians.As visitors travel to Nigeria to stay, they seek to meet and understand the different culturesand background of the various ethnic groups. As they meet with their host, an exchange ofeducational and cultural ideas takes place. Hence, the travels help to widen their horizonand appreciate other people’s culture 3.2.1 Employment Creation Tourism provides jobs in Nigeria, especially with the mass amount of unemployedyouths in the economy looking for jobs. The Tourism sector has proven itself to be a
  35. 35. - 34 -distinguished source of employment in the global scene. In the case of Nigeria, Tourismprovides a great deal of employment opportunities for a large majority of people, beinglabour intensive with higher capacity for employment generation. Fortunately, these jobscan be increased if the sector is expanded and enhanced. Abiodun & Odularo (2006)reckoned that a developed tourism sector has the potential to absorb a high percentage ofteeming millions of people who are not gainfully employed. This is because, the operationsin the Tourism Industry are mainly labour intensive, and the development of newinfrastructures provides opportunity for job creation. Indeed, the Tourism sector and itssub sectors employ a large number of people, and provide a wide range of jobs rangingfrom the unskilled to the highly specialized. The construction of roads, airports or airportmaintenance, water supply, electricity, construction and renovation of hotels and otheraccommodations units create jobs for thousands of workers, both skilled and unskilled. 3.2.2 Generation of Foreign Exchange The significance of tourism in Nigeria lies in its great potentials for foreign exchangegeneration. According to Dieke (1997), a country can retain most of the foreign exchange itreceives from tourism. According to the World Bank International tourism receipts inNigeria were reported to stand at $139 million in 2005, $90 million in 2006, $ 337 million in2007, $959 million in 2008 and $791 million in 2009. The UNWTO maintains that in 2010international tourism receipts increased slightly around 4 percent in Nigeria (World TourismOrganization (UNWTO), 2011). International tourism receipts are expenditures byinternational inbound visitors, including payments to national carriers for internationaltransport. These receipts include any other prepayment made for goods or services receivedin Nigeria. Globally, the number of tourist arrivals has been increasing, and Nigeria has beengetting its own fair share, going with the World Bank, international tourist arrivalsincreasing from 1010000 in 2005, to 1111000 in 2006, to 1212000 in 2007 and 1313000 in2008. The UNWTO records show that in 2009 international arrivals was 1414000, also for2010 the organisation claims that arrivals increased by 7 percent in Nigeria (World TourismOrganization (UNWTO), 2011). Nigeria has numerous tourist attractions located in thevarious parts of the country, although only a few of them are being exploited at present.When fully developed, the sub-sector has the potential of generating significant amounts of
  36. 36. - 35 -foreign exchange, which would be quite critical in the nations stride to economicindependence, through a stable and reliable currency stance. 3.2.3 The Issue of Poverty Alleviation Poverty has become one of the most compelling challenges of our time. It is morethan a lack of income and it is multidimensional and complex phenomenon with an intricaterelationship to issues such as disease, illiteracy, infant mortality, environmental degradationand many other aspects. Presently, Tourism in Nigeria has been focused at the macro level, on internationalpromotion, attracting inward investment, major hotel and resort developments and onnational and regional master planning. However this has not been effective in bring about asignificant improvement in the lives of ordinary Nigerians. The development of appropriatecomplementary products in accordance with the pro-poor tourism (PPT) philosophy, whichis tourism that generates net benefits for the poor, can increase the attractiveness of Nigeriaand increase tourist spending (Okech, 2010). This is because it makes tourists feel closer tonature and better understand how they are connected to it so that they make a moreproactive stand for sustainable tourism while accruing benefits to the millions of poor localsliving in or close to the Tourist Destination Areas (TDAS). 3.2.4 Generation of Revenue Sindiga (1999) in a review of quantitative data on governments’ direct earnings fromtourism and found that qualitative generalisations can be made concerning benefits fromtourism. Apart from injecting foreign exchange earnings into the economy, tourismgenerates government revenue through various taxes. Such include customs and exciseduties for imports; sales tax and value added tax for goods bought in the local market;accommodation taxes and training levies on hotel guests; concession or rental fees paid bygame lodges and camp sites; and trade licenses and company taxes paid by variousenterprises. The government also charges income tax on the personal earnings of theemployees in the tourism sector In Nigeria, government earns some proportion of its revenues from tourism.However, revenues can be enhanced by introducing positive measures to encourage the
  37. 37. - 36 -growth of both domestic and international tourism. Use of selective taxes, sales tax, etc, arenow common. By encouraging a wider tourism sector, government will be expanding its taxbase, and therefore allow itself the possibility of increasing revenues. Another measure is toadopt a balanced approach so that tourism activity is not stifled by an excessive tax. Also adual tax structure can be implemented, where residents pay a lower charge to that imposedon foreign tourists, or pay no charge at all. This approach will help to encourage domestictourism but might antagonise foreign visitors. According to the Central Bank of Nigeria(CBN), the significance of tourism as an export product in Nigeria is gradually increasingfrom a meagre 0.38% in 2005 to an estimated 1.3% in 2009 and much higher by 2010,particularly given the stabilising democratic dispensation in the country (Central Bank ofNigeria(CBN), 2009) Furthermore, tourism is a great economic force in Nigeria (Abiodun & Odularo, 2006).Tourism enthusiasts argue that tourism is a catalyst to economic development. Itencourages the financial flow of funds from developed and developing countries intoNigeria. Another major benefit of Tourism is it capacity to stimulate infrastructuraldevelopment. Perhaps, the benefits from infrastructural development justify the primaryreasons for implementing Tourism programmes and activities in most states in Nigeria. Likethe former Governor of Cross River State, Donald Duke, undertook the development of newinfrastructures and the improvement of the existing infrastructures such as airports, roads,water supply, electricity, hotels and business village like Tinapa and the ranch resort (ObuduCattle Ranch). Also it provides opportunities for the establishment of new products,fertilities and services and expansion of existing businesses which would not otherwise bejustified solely on the resident population. Thus, we can sum the potentials or contributions of tourism development in Nigeriaas posited by Abiodun & Odularo (2006) as follows; • Tourism serves as a valuable training ground for the creation and development of local entrepreneurs in several areas of economic activity e.g. hospitality management.
  38. 38. - 37 - • Tourism aids the process of income redistribution since it impacts more positively on the bulk of low income earners. • Tourism is the most effective means through which structural transformation can be attained in the rural areas. • It serves as a veritable avenue for attracting FDI. There has been an increasing role of Tourism in foreign direct investment flows, making those enterprises to enter international markets. • Tourism has a better capacity to reduce poverty, inequality and social vices. • The contribution of Tourism in the Nigerian economy to GDP has relatively been on the increase since independence. • Tourism provides a good preparatory ground for the development of indigenous entrepreneurs; which drives the wealth creation process at all levels. 3.3 REASONS FOR NIGERIA’S UNDERDEVELOPED TOURISM SECTOR Over the years scholars have tried to bring about justifications for the present stateof the tourism sector in Nigeria. Even with its inclusion in UNESCO’s World Heritage List andother prominent tourist catalogues, Nigerian tourism record on the whole has beenunsatisfactory. Insecurity and Infrastructural absence and collapse have been attributed tothis present difficulty. According to Ojowu inadequate infrastructure support whichembodies institutional arrangement, communication, transportation and information for thetourism sector is the prime cause (Ode, 2001) According to Adeleke (2008), the investing environment for tourism is not there. Forinternational tourism to boom, a nation needs to be peaceful and safe. For most of its postindependence history, Nigeria has been a byword for political instability, violence, ethnicrivalry, and crime. Thus Nigerian system seems not to be suitable for tourism investmentsbased on this criterion. The challenges of marketing Nigeria’s tourist credentials are laid bare by the U.S.State Department advisory for the country, which gives even the most intrepid travellerpause. U.S. citizens are warned of the dangers of “violent crime in Lagos and other largecities as well as on roads between cities,” the prevalence of “armed muggings, kidnappings
  39. 39. - 38 -and carjacking,” and the risk of ethnic conflict. They are urged to avoid “all but essentialtravel” to the Niger Delta, the scene of years of violence among local citizens, internationaloil companies, and the Nigerian military (Gilpin & Honey, 2009). An important barrier to tourism is the absence of organization and institutionalcapacity at a national level. For most of its history, Nigeria has not had a national tourismstrategy, and government departments overlap at the national and regional levels regardingresponsibility for the sector, making it difficult to devise a coordinated plan. Thegovernment does not even possess reliable figures on the numbers of international arrivalsto and departures from the country (Gilpin & Honey, 2009). Corruption is another seriousdeterrent, as it undermines government efficiency, deters potential investors in the tourismindustry, and scares off visitors (Tanzi, 1998). According to Christie & Crompton (2001) the dearth of academic literature concerningtourism in Nigeria is also a huge obstacle to the development of the tourism sector. The lackof appropriate empirical studies on tourism in Nigeria and Africa as whole is responsible forthe inadequate policy formulation by policy makers, thus the needed guidance to theindustry is never achieved by government policy. 3.4 FISCAL POLICY IN NIGERIA In Nigeria, total government spending and revenue comprise of certain interrelatedand interacting elements, these elements form the fiscal system, which is the arrangementof institutional framework which exists for making budgetary decisions of raising revenue,incurring expenditure and engaging in debt borrowing operation, consists of the federal(national), and sub national governments (state and local).The sub national governments(state and local) derive revenues mainly by receiving allocations from a common pool offederally collected revenues, most of which come from petroleum exports. These allocationsare supplemented by a small amount of internally generated revenues, mainly locallycollected taxes. The federally collected revenues are usually smaller than the federalretained revenues because of the allocations given to sub national governments. Accordingto the ministry of finance (2006) the federally collected revenues was N 5.9 trillion but thefederal retained revenue was N 1.8 trillion.
  40. 40. - 39 - McDonald (2003) classified Nigeria’s government revenue into two groups Oil andNon Oil sources, as he assessed the issues concerning government revenue generation. In2000 Oil accounted for about 70 percent of the Federal Government revenue. (Central Bankof Nigeria (CBN), 2000) And its percentage share in government revenue has continuallygrown since 1970 (Adedipe, 2004). Also since 1970, revenue has been very volatile whileincreasing over time. In periods with high oil prices, such as in 1979-82, 1991-92, 2000-02and also in 2006-07, revenue has increased sharply. The implication of this boom-bust inrevenue include the transmission of oil volatility to the rest of the economy as well asdisruptions to the stable provision of government services (Baunsgaard, 2003) However this condition has led to the over reliance on the oil sector by governmentfor receipts and the renunciation of the agricultural and manufacturing sectors which wereformally prized. Thus invigorated the collapsed of these sectors, even under the structuralAdjustment programme (SAP), the high priority given to the promotion of non-oil exports,did not result into any significant change in the situation, rather it was worsen Similarly Baunsgaard (2003) reckoned that the progress of the Nigerian economy inthe 21st century solely depends on its ability to increase the productivity of the non oil-sector; because it is only through it that a cushion against the transmission of oil pricevolatility from the rest of the world can be provided. Links between government revenue and output growth has traditionally beenassociated with tax policy. According to Obi (2007) a major difficulty exist in isolating theimpact of taxation on output growth, which arises because key non-tax variables such aspublic expenditure that are often not independent of tax policy can also affect outputgrowth. Also, the complex interactions among the fiscal and other macroeconomic variablescreate difficulties. 3.5 FISCAL POLICY PATTERN IN NIGERIA BETWEEN 2000-2009 The fiscal policies in Nigeria for the last ten years have retained certain common goalsand policies, namely: • Alleviate poverty by fostering opportunities for job creation
  41. 41. - 40 - • Achieve high economic growth through better mobilisation and prudent use of economic resources • Build a strong economy by encouraging private sector participation • Ensure good governance by transforming development administration into a service and result-oriented system. The policy objectives of the year 2000 budget were designed to foster growth in the realsector of the economy and maintain macroeconomic stability. The policy thrust of thebudget was to achieve low inflation rate, lay solid foundation for private sector-ledeconomic growth, improve education and agricultural production and reduceunemployment. The fiscal policy measures included a low income tax regime, generous taxincentives and relieves. The total federally collected revenue for the year was N1,906.2 billion made up N1,591.7billion as oil revenue and N314.5 billion non-oil revenue. Total expenditure by thegovernment amounted to N701.1 billion of which N461.6 billion or (65.8%) was recurrentwhile N239.5 billion was capital expenditure. The fiscal operations resulted in an overalldeficit of N103.8 billion (2.9% of GDP) which was largely financed by borrowing from thebanking system and the non-bank public (Central Bank of Nigeria, 2010). The policy thrusts of the 2001 budget were restructuring of the Nigerian economy tomake it market-oriented, private sector- led and technology driven; reducing unemploymentand raising productivity; improving the performance of major infrastructures and enhancingtransparency and accountability in governance to ensure value for money in publicexpenditure. Fiscal measures included tax relieves and allowances, a low income tax regimeand exemption of public pensions from taxation, and exemption of locally produced basicfood items from the Value Added Tax (VAT) to encourage production. The total federally collected revenue for the year 2001 was N2,231.5 billion made upN1,707.6 billion as oil revenue and N903.5 billion, non-oil revenue. Total expenditure by thegovernment amounted to N1,018.0 billion of which N579.3 billion or (57%) was recurrentwhile N438.7 billion was capital expenditure (Central Bank of Nigeria, 2010). The fiscal
  42. 42. - 41 -operations resulted in an overall deficit of N221.0 billion (4.7% of GDP) which was largelyfinanced by borrowing from the banking system and credit from the domestic economy. The fiscal policy of the 2002 budget were derived from a macro-economic framework,which sought to maintain disciplined fiscal policy, continue the liberalization of theeconomy to attract support from the international community and the multilateralinstitutions as well as sustain transparency, accountability and obtain value for money ingovernment expenditures. Other broad objectives were to eradicate poverty by fosteringopportunities for job creation; achieve high economic growth rate through bettermobilization and better use of economic resources; build a strong economy by encouragingprivate sector participation while continuing the reforms. In 2002, the total federally collected revenue was N1, 731.8 billion. Total expenditurewas N1, 018.2 billion, while the overall fiscal operations resulted to a deficit of N301.4billion. This was 3.9 % of GDP and was financed mainly by the Central Bank of Nigeria. The main fiscal policy thrusts of the 2003 Federal Government budget were to pursue agrowth strategy that would achieve fiscal stability; improve non-oil sector competitiveness;reduce inflation; maintain a fiscal deficit of not more than 2.5% of GDP; deepen and broadenfiscal incentives to further encourage industrial and manufacturing sector; attract foreigninvestment; highlight tariff reform and liberalization in line with regional incentives; Thesegoals were to be achieved through the diversification of the productive base of the economy,concentration of public sector investment in a few priority sectors where production wouldbe supported and welfare of the people optimized. However, the total government revenue during 2003 was N2, 575.1 billion, made up ofN2, 074.3 billion from oil and N500.8 billion non-oil sources, respectively. Actualgovernment expenditure was N1, 226 billion, made up of N984.4 billion recurrent andN241.7 billion capital expenditures, respectively. The fiscal operations of the FederalGovernment resulted in an overall deficit of N202.7 billion, which was financed mainly fromthe domestic banking system (Central Bank of Nigeria, 2010).
  43. 43. - 42 - The main thrust of the 2005 federal budget was to build the physical and socialinfrastructure necessary for job creation and maintain fiscal discipline. The governmentsought to maintain a fiscal deficit of 2.9% of GDP, pay contractor debt arrears and completeon-going projects. The emphasis was on involving the private sector in the management ofpublic investment and also provides safety-nets targeted mainly at the youth, women andchildren to cushion the impact of the reforms. The budgeted total revenue was N3, 619 billion made up of N2, 902 billion from oil andN563 billion from non-oil sources. After making allowance for Federation accountsallocation, the Federal Government retained revenue was estimated at N1, 304 billion. Totalestimated expenditure was N1, 618 billion, which resulted in a projected deficit of N314billion. The actual gross revenue earned by the country was N5, 547.5 billion, out of whichoil accounted for N4, 762.4 billion (85.84%) while non-oil revenue was N785.1 billion(14.15%). Federation account revenue was N2, 657.2 billion, while Federal governmentretained revenue was N1, 660.7 billion. Total expenditure was N1, 822.1billion, made up ofN1, 223.7 billion for recurrent and N519.5 billion for capital expenditures, respectively. Thefiscal operations of the Federal Government led to a current account surplus of N437.0billion and an overall deficit of N161.4 billion or1.1% of GDP. This deficit was financedthrough domestic non-bank sources. (Central Bank of Nigeria(CBN), 2009) The 2006 budget was a continuation of the NEEDS reform agenda which started in2004.The fiscal policy thrust for the year was anchored on giving a boost to infrastructuraldevelopment in order to empower the private sector to create wealth and protect the poor inNigeria. Measures were focused on diversifying and strengthening the economy in order toimprove the well being of Nigerians. This would be achieved given that the budget wascrafted in the context of a Medium Term Expenditure Framework that is forward looking.The projected total revenue was N3.7 trillion made up of N2.8 trillion from crude oil sales,oil taxes and income from gas (76.1%), N230 billion from Companies Income Tax (6.3%),N197 billion from Customs and Excise Duties (5.4%); and N450 billion from Value Added Tax(12.2%). The larger receipts from Value Added Tax were based on an increase in the rate. Theprojected revenue from the Federation Account was N1.57 trillion while the estimated
  44. 44. - 43 -federal disposable revenue was N1.52 trillion as a result of provisions made for certainstrategic projects and government agencies. (Central Bank of Nigeria(CBN), 2009) The projected aggregate expenditure in 2006 was N1.88trillion, comprising StatutoryTransfers (N86billion), Domestic and External Debt Service (N290billion), and Spending ofMinistries and Agencies (N1.5trillion). A total amount of N290billion was budgeted fordomestic and external debt service. In all, the projected fiscal deficit was N357 billion,representing 2.4 percent of GDP. Financing of the deficit was expected from sale ofgovernment properties, privatization proceeds and domestic borrowing In 2007, The Federal budget focused on the theme: “to accelerate Investments in BasicPhysical and Human Resource Capital”. Thus, government expenditure was to be channelledtowards completing on-going projects in the power, water, roads, security, education andhealth sub-sectors. These investments aimed at improving the quality of life of Nigeriansand addressing the infrastructural deficiencies that constrained the ability of indigenousbusinesses to optimize their operations and generate employment. The Federal Government in 2007, proposed to spend the sum of N2.3 trillion in 2007compared with N1.9 trillion in 2006. The Ministries, Departments and Agencies ( MDAs)were allocated the sum of N1.8 trillion while Statutory Transfers, and Debt Service wereallocated the sum of N102 and N326 billion, respectively. The Federal Budget provided for adeficit of N0.5 trillion, an equivalent to 2.9 per cent of GDP, which was to be financed fromproceeds of sale of Government properties and Domestic borrowings. In 2007 the tax system was reformed through measures including the restructuring ofthe Federal Inland Revenue Service (FIRS) to improve revenue collection, broaden the taxbase and address tax evasion and avoidance. Efforts were also made to strengtheninteragency co ordination on revenue collection as well as to simplify and harmonise taxprocedures. The auditing powers of the FIRS were also strengthened. This policy measurehelped to contribute to the domestic-revenue mobilisation in 2008. In 2008, tax revenuerose to 5.8% of GDP and it further rose to 6.9% of GDP in 2009. (Central Bank ofNigeria(CBN), 2009)

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