CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
Macroeconomic challenges have remained one of the major obstacles to economic growth and
development in Nigeria. Over the years, the Nigerian government has implemented several fiscal,
monetary, and structural policies aimed at addressing problems such as inflation, unemployment,
poverty, exchange rate instability, low industrial productivity, and economic recession. Despite these
efforts, the country continues to experience recurring economic difficulties due to structural
weaknesses, corruption, overdependence on oil revenue, insecurity, and policy inconsistency.
This chapter reviews relevant literature on government responses to macroeconomic challenges in
Nigeria. It examines conceptual issues, theoretical frameworks, empirical studies, and policy measures
adopted by successive governments to stabilize the economy and promote sustainable development.
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2.2 Conceptual Review
2.2.1 Macroeconomics
Macroeconomics refers to the branch of economics that studies the economy as a whole. It focuses on
aggregate variables such as national income, inflation, unemployment, economic growth, balance of
payments, and fiscal and monetary policies. According to Mankiw (2019), macroeconomics seeks to
explain changes in economic output, employment, and prices at the national level.
Macroeconomic policies are designed to achieve objectives such as price stability, full employment,
economic growth, and equitable income distribution. Governments use different policy tools to regulate
economic activities and reduce economic instability.
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2.2.2 Macroeconomic Challenges in Nigeria
Nigeria has experienced several macroeconomic problems since independence. Some of the major
challenges include:
Inflation
Inflation refers to a persistent increase in the general price level of goods and services over time. High
inflation reduces purchasing power and negatively affects living standards. Nigeria has experienced high
inflation due to excessive money supply, exchange rate depreciation, insecurity, and rising production
costs.
Unemployment
Unemployment occurs when individuals willing and able to work cannot find jobs. Youth unemployment
has become a serious problem in Nigeria due to population growth, inadequate industrialization, and
poor economic planning.
Exchange Rate Instability
Nigeria’s exchange rate has remained unstable because of overdependence on oil exports, low foreign
reserves, and fluctuations in global oil prices. Currency depreciation has contributed to inflation and
reduced investor confidence.
Poverty
Poverty remains widespread despite Nigeria’s abundant natural resources. According to the National
Bureau of Statistics (NBS), a large percentage of Nigerians live below the poverty line due to
unemployment, poor governance, and unequal income distribution.
Economic Recession
Nigeria experienced economic recessions in 2016 and 2020 due to falling oil prices and the COVID-19
pandemic. Recession leads to reduced economic activities, unemployment, and declining national
output.
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2.3 Government Responses to Macroeconomic Challenges
The Nigerian government has adopted various policy measures to address macroeconomic instability.
These responses include fiscal policy, monetary policy, trade policy, and structural reforms.
2.3.1 Fiscal Policy Measures
Fiscal policy refers to government revenue and expenditure decisions aimed at influencing economic
activities. The Nigerian government uses taxation and public spending to manage the economy.
Government Expenditure
The government increases spending on infrastructure, education, healthcare, and agriculture to
stimulate economic growth and create employment opportunities. Capital projects such as roads,
railways, and power supply are intended to improve productivity and economic development.
Taxation
The government generates revenue through taxes and also uses tax policies to regulate economic
activities. Tax incentives are sometimes provided to encourage investment and industrial growth.
Budgetary Policies
Annual budgets are used as tools for economic management. Expansionary budgets are introduced
during recessions to stimulate demand, while contractionary budgets are used to reduce inflationary
pressures.
Despite these efforts, fiscal policy implementation in Nigeria has been affected by corruption, budget
deficits, and poor project execution.
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2.3.2 Monetary Policy Measures
Monetary policy involves actions taken by the Central Bank of Nigeria (CBN) to regulate money supply
and stabilize the economy.
Interest Rate Regulation
The CBN adjusts interest rates to control inflation and encourage investment. High interest rates are
used to reduce inflation, while lower rates stimulate borrowing and investment.
Open Market Operations
The CBN buys and sells government securities to regulate liquidity in the banking system. This helps to
control inflation and stabilize the financial sector.
Exchange Rate Management
The government and the CBN have adopted different exchange rate systems, including fixed and floating
exchange rate regimes, to stabilize the naira and manage foreign exchange shortages.
Cash Reserve Ratio (CRR)
The CBN uses the CRR to regulate the amount of money commercial banks can lend. This helps to
control inflation and maintain financial stability.
However, monetary policy effectiveness in Nigeria is often limited by weak institutions, corruption, and
external economic shocks.
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2.4 Structural Adjustment Programme (SAP)
The Structural Adjustment Programme (SAP) was introduced in 1986 under the administration of
General Ibrahim Babangida following economic crisis and declining oil revenue. SAP was supported by
the International Monetary Fund (IMF) and the World Bank.
The objectives of SAP included:
1. Diversification of the economy
2. Reduction of dependence on oil exports
3. Promotion of local industries
4. Privatization of public enterprises
5. Currency devaluation to encourage exports
Although SAP improved some sectors of the economy, it also led to inflation, unemployment, and
increased poverty due to subsidy removal and currency depreciation. Many scholars argue that SAP
worsened the living conditions of Nigerians.
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2.5 Theoretical Framework
Keynesian Theory
This study is anchored on the Keynesian theory developed by John Maynard Keynes. The theory
emphasizes government intervention in the economy to correct market failures and stabilize economic
activities.
According to Keynes (1936), government spending and taxation can be used to manage aggregate
demand and reduce unemployment during economic downturns. Keynes argued that private sector
activities alone cannot guarantee economic stability; therefore, government intervention is necessary.
The Keynesian theory is relevant to Nigeria because the government frequently uses fiscal and monetary
policies to address inflation, unemployment, and recession. Public expenditure on infrastructure and
social services is intended to stimulate economic growth and improve living standards.
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2.6 Empirical Review
Several studies have examined government responses to macroeconomic challenges in Nigeria.
Adebayo (2020) examined the impact of fiscal policy on economic growth in Nigeria and found that
government expenditure positively influenced economic growth, although corruption reduced policy
effectiveness.
Okonkwo and Eze (2019) studied the relationship between inflation and monetary policy in Nigeria. The
study revealed that monetary policy instruments such as interest rates and open market operations
significantly affected inflation rates.
Ojo (2018) investigated unemployment trends in Nigeria and concluded that poor industrial
development and inadequate government policies contributed to rising unemployment levels.
Similarly, Yusuf and Lawal (2021) analyzed exchange rate instability and economic performance in
Nigeria. The study found that fluctuations in exchange rates negatively affected foreign investment and
industrial productivity.
Another study by Ibrahim (2022) revealed that government intervention through agricultural financing
and youth empowerment programmes contributed to poverty reduction in some rural areas. However,
inadequate implementation limited the overall impact of such programmes.
These studies indicate that government policies have produced mixed outcomes due to implementation
challenges and structural weaknesses in the Nigerian economy.
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2.7 Challenges Facing Government Responses
Government efforts to address macroeconomic problems in Nigeria have faced several limitations,
including:
Corruption and mismanagement of public funds
Policy inconsistency
Overdependence on crude oil exports
Weak institutions
Poor infrastructure
Insecurity and political instability
External economic shocks
These factors reduce the effectiveness of government policies and hinder economic development.
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2.8 Summary of Literature Review
This chapter reviewed relevant literature on government responses to macroeconomic challenges in
Nigeria. The study examined concepts such as inflation, unemployment, poverty, and exchange rate
instability. It also discussed fiscal and monetary policy measures, the Structural Adjustment Programme,
and the Keynesian theory. Empirical studies reviewed showed that government policies have had both
positive and negative effects on the Nigerian economy. However, corruption, policy inconsistency, and
structural weaknesses continue to limit the effectiveness of these responses.
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References
Adebayo, A. (2020). Fiscal Policy and Economic Growth in Nigeria. Lagos: Harmony Publishers.
Ibrahim, M. (2022). Government Intervention and Poverty Reduction in Nigeria. Journal of Development
Studies, 6(2), 45–58.
Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan.
Mankiw, N. G. (2019). Principles of Economics (8th ed.). Boston: Cengage Learning.
National Bureau of Statistics (NBS). (2021). Poverty and Unemployment Report in Nigeria. Abuja: NBS
Publications.
Ojo, T. (2018). Unemployment and Economic Development in Nigeria. Nigerian Economic Review, 10(1),
22–39.
Okonkwo, C., & Eze, P. (2019). Monetary Policy and Inflation Control in Nigeria. African Journal of
Economic Research, 5(3), 60–74.
Yusuf, R., & Lawal, K. (2021). Exchange Rate Instability and Economic Performance in Nigeria.
International Journal of Economics and Finance, 8(4), 88–101.