Public Sector Financial Management and Economic Growth

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Published on International Journal of Economics & Business
ISSN: 2717-3151, Volume 3, Issue 1, page 56 – 65
Publication Date: March 8, 2019

Festus Oladipupo Olaoye & Oladipo Niyi Olaniyan
Department of Accounting, Faculty of Management Sciences, Ekiti State University
Ado Ekiti, Nigeria

Journal Full Text PDF: Public Sector Financial Management and Economic Growth (Study in Nigeria).

This study examined public sector financial management and economic growth of Nigeria. It specifically investigated the relationship between total public expenditure, total federally-collected revenue, public borrowing, public debt services and real gross domestic product of Nigeria from 1986 to 2016. This study adopted the ex-post facto research design. Relevant data regarding the variables under-study were extracted from the Central Bank of Nigeria (CBN) statistical bulletin while error correction model was used to analyze the data. The study revealed among other things that; there is presence of co-integration (long-run relationship) among the variables in the model, actual public debt service and total public borrowing has 0.815209 and -1.112798 percent (p=0.0933, 0.0965) significant relationship with economic growth of Nigeria, while total public expenditure and total federally-collected revenue (0.248994, 0.986219 P=0.4415, 0.1149) are not significantly related to economic growth of the country in the long run. The study concluded that there is a significant relationship between public financial management and the economic growth of Nigeria, depending on the variable of interest. Likewise, the study recommended among other things that government should ensure efficiency and effectiveness in the public financial management due to the insignificant influence of public expenditure on economic growth both in the long run and short run which is a pure indication of poor public financial management in the country. Also, the component governments in Nigeria should reduce its public borrowing as it has a significant inverse effect on the economic growth of the country in the long run.

Keywords: Capital, economic growth, financial management, interest rate, public borrowing, public debt service, public sector.

1. Introduction
Financial System in the public sector is guided by regulations, rules, and policies that sharpens the planning, budgeting, forecasting, coordinating, and directing of the inflow and outflow of funds in the quest to maximize national goals and objectives. In order to ensure the efficiency and effectiveness in this system, public financial management is put in place. Financial management in the of public sector covers the management of government spending, public debts, taxation borrowing, foreign reserves, level of liquidity in the economy foreign exchange system, and audit of public finance (government activities regarding the efficient and effective mobilization and utilisation of public funds (Simson, Sharma & Aziz, 2016; Pere & Buseni, 2013; Nwezeaku, 2010).
The financial management system is absolutely critical to improving the quality of public service outcomes, as affects how funding is used to address national and local priorities, the availability of resources for investment and the cost-effectiveness of public service (Simson, et al., 2016).
Effective public financial management systems maximize financial efficiency improve transparency, accountability, and also contribute to long-term economic success (Pretorius & Pretorius, 2008). Management of the resources of an economy leads to poverty reduction, improvement in the standard of living of its citizens, mitigation of inequalities in income distribution and improve the general wellbeing and productivity of the economy (Omopariola, 2002). Iheanacho (2016) argues that the design and implementation of financial management in the public sector provides quantifiable indicators to judge economic growth. This is because the sustainability of an equitable economy is clearly a predominant objective of public programs, public financial management ensures effective delivery of public services to enhance economic growth, due to the fact that it plays important roles in the physical and human capital formation of any country (Lotto, 2012).
Public financial management system supports the efficient and accountable use of public resources helps underpin both macro and fiscal stability and guides allocation of resources to address national priorities furthermore, financial management system is quite wide and encompasses resource mobilization, prioritization of governmental efforts, resource allocation, formulation of detailed plans, setting up information systems that assist decision making, having meticulous budgeting, accounting and procurement systems, monitoring and reporting arrangements and creation of robust internal and external accountability mechanisms Nwokorie,(2017).
In Nigeria, public financial management is absolutely critical to improving the quality of public service outcomes. It affects how funding is used to address national and local priorities, the availability of resources for investment and the cost-effectiveness of public service (Nwokorie, 2017). However, in spite of the visible attempts by the various governments to manage the vast financial and other resources in the country, there exists extreme poverty. Based on the above, this study examines the extent to which the Nigerian government utilizes public sector financial management in the advancement of the country’s economic growth. This study is organized into five sections. Section one which is the present section gives a general idea of the research, section two centers on the literature review, the section contains the methodological framework of this study, while section four deals with the empirical results of this study and its’ interpretation and model specification. Section five encompasses the conclusion and policy recommendations of this study.

2. Literature Review
2.1. The Concept of Public Sector Financial Management
Prakash and Cabezon (2008) conceptualized public financial management as a critical instrument in the implementation of economic policy and further stated that it works by controlling the sharing and use of public resources by overall fiscal policy and the budget. Well-Functioning financial management of public sector system provides the assurance that the funds released via appropriation processes and revenue generation as well as from debt cancelation mechanism would be productively used in a transparent and effective way. Ola and Offiong (2008) noted that public financial management are measures put in place by government to control public funds.
Okoro (2013) stated that PFM strategy covers fiscal and macro stability, guide the allocation of public resources to national priorities, and support the efficient delivery of services for poverty reduction and economic development, and make possible the transparency and scrutiny of public funds. This implies that public sector financial management is planning, procurement, organizing and utilization of financial resources of government as well as the formulation of appropriate policies so as to meet up with the hopes and aspirations of such society. Financial management in the public is aimed to manage limited resources to ensure accountability and efficiency in the delivery of outputs required to achieve desirable outcomes that will serve the needs of the society. Effective Public Financial Management is a vital component for good governance and allows governments to make best use of its resources to improve quality of life in the people (Kafela & Nwokah, 2009).

2.2. Public Financial Management Framework in Nigeria
Developing countries and Nigeria with economies in transition have a special responsibility to organize an effective financial management system for implementation of policies with a view to promoting national socio-economic development goals. Public financial management in Nigeria constitutes all or part of the processes and functions of planning, programming and budgeting, budget execution and accounting, auditing and evaluation.(Anyawu, 2017). All these activities are aimed at ensuring that, to the maximum practical extent, the government’s financial resources are utilized in accordance with law, efficiently, effectively and rationally to yield optimum results, and with transparency and accountability to the legislature and the population at large.
In Nigeria, financial management capabilities have been eroded by the pursuit of financial populism, ineffective and distorted budgetary mechanisms and the breakdown of the existing financial management institutions. A central concern for all countries is how to harmonize methods of strategic management and control of aggregate financial variables with processes for changing expenditure priorities and enabling effective and innovative management of service delivery institutions.

2.2.1. Policy Formulation
This is one of the most important stages in public financial management structure. The change of society’s hope into reasonable policies with well identified financial consequence is at the centre of financial management. Issues not stated during policy formulation can be of great importance during execution and may regularly help to achieve major change to an opposite direction in the pursuit of policies or major reduction in the rate that may lead to opposite results. This involves a clearly stated structured and clear system that moves to promote cost awareness in the use of efficient is necessary that government should have an expected revenue and expenditure to accomplished their set goals and objectives

2.2.2. Budget Formulation:
The budget formulation is the step that entails the sharing of available resources before the presentation to the legislature for review and final approval. According to Appah (2009) the budget formulation in Nigeria involves clear and distinct of the fiscal, monetary, political, economic, social and welfare goals of the government by the president, based on these (i) the department initiates policies and process flow which form the basis of circulars to Ministries/Departments presenting their inputs and needs for the fiscal periods; (ii) accounting officers of responsibility units are mandated to request and collate the needs of their units; and accounting officers of ministries, in this case the Permanent Secretaries, are also mandated to collate these proposals which must be defended by unit heads before the supervising minister.