Deficit Financing and Economic Growth: The Nigeria Experience

Deficit Financing and Economic Growth: The Nigeria Experience.

ABSTRACT

The general objective of the study is to analyze the effect of deficit financing on Nigeria’s economic growth. Secondary data emanated from the publication of the Central Bank of Nigeria Statistical Bulletin, vol. 26, 2015 was utilized.

The data collected spanned from the year 1981-2015. Augmented Dickey-Fuller (ADF) unit root test, Johanson Co-integration test and Error Correction Model (ECM) were employed for the analysis and the finding shows that all the variables were integrated of order 1(2) long-run relationship existed among them.

The study, therefore, concluded that long-run equilibrium relationships exist between dependent and independent variables. The research findings revealed that deficit financing through External debt borrowing has a significant negative effect on Nigeria’s economic growth.

Also, Domestic debt has a positive significant effect on Nigeria’s economic growth, while Debt service has no significant effect on Nigeria’s economic growth.

The study, therefore, recommends that the Government should set up monitoring teams that will make sure that the budget is well and carefully implemented and as well as loans borrowed in other to reduce

Keywords; Deficit financing, Domestic debt, External debt, Debt service, Real gross

 

 CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Government, Military or Civilian believes that one way of solving social and economic problems is by increasing spending.

Government as an agent of the people requires revenue to provide education, employment, adequate health services, infrastructures, and good roads but in the process of discharging this enormous responsibility, the revenue and/or spending requirements of the government may sometimes outstrip its availability.

Hence the recourse to deficit financing so as to fill the gap between expenditure needs and revenue availability.

Nigeria’s budget deficit experience dates back to 1961 and appeared justified during the immediate post-independence era, and since then till now 85% of Nigeria’s budget runs in deficit.

Okoro (2013) stated that deficit financing arises largely because of the need to expand the economy Governments’ inability to carry out or execute capital projects most times is what births deficit.

This ignites the need for the Government to finance these projects either through internal borrowing, external borrowing, or implementation of the monetary instruments to increase the flow of funds in the economy.

However, there is a repelling effect on the economic performance of any country whom the state of its economic activities are financed through the prolonged debt from foreign countries because it frustrates sole investors due to the high-interest rate.

Deficit financing can be seen as the practice of seeking to stimulate a nation’s economy by increasing government expenditures beyond revenue sources (CBN, 2012).

The budget deficit is a phenomenon that emanated due to the imbalance in the budget of a country; the imbalance could either be a surplus or a deficit. This phenomenon seems to have come to stay in many economies of the world, in which Nigeria is not an exception.

The culture however became seemingly entrenched over time from 1970, the country ran into fiscal deficits and sustained public sector spending boom.

fiscal deficits of 1970 were justified on the grounds that it was largely for war reconstruction. Backed with huge wealth from oil, Nigeria embarked on wasteful spending, the mismanagement of the oil boom of the early 1970s led to the return of deficit financing in 1980.

From 1982, the continuing decline in crude oil export earnings in 1983 once again led to the resumption of fiscal deficits which were financed through heavy borrowing after reducing the nation’s reserves.

The need for adequate public expenditure programs and management has, therefore, become paramount, particularly at this period when the country is in recession and when various arms of government and the private sector are experiencing several financial constraints.

In view of the above discussion on deficit financing and economic growth further questions might be raised thus: Does deficit financial ‘’external and domestic debt’’ significantly affect economic growth in Nigeria?

If this is yes, to what extent or what is the nature of the relationship between deficit financing and economic growth in Nigeria? Does the Debt Service have an effect on economic growth?

Providing answers to these questions posed above shall be the major focus of subsequent sections and by extension the entire work.

1.2 STATEMENT OF THE PROBLEM

Rapid and sustained output growth of the domestic economy of Nigeria has since the political independence in 1960 been of paramount importance to successive governments in the country.

Consequently, governments have since implemented several national development plans and programs aimed at boosting productivity, as well as diversifying the domestic economic base.

The goal of this has been the attainment of high levels of economic development that would translate into an improvement in the living standards of the populace and hence a reduction in poverty through an increase in the domestic output and the creation of employment and thereby the maintenance of a favorable balance of payments position (Ariyo, 2007 and Ojo, et al, 2008).

 

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