Budget Deficit Financing and the Nigeria Economy

Abstract

The disagreement over the impact of budget deficit financing on macroeconomic variable is a key part of the controversies between the classical cum monetarist and Keynesian economists. Besides, empirical studies on the issue are yet to settle the debate. This paper is an attempt to provide empirical evidence on the relationship between deficit financing and selected macroeconomic variables in Nigeria. The study examined the sources of financing the overall budget deficits and their impact on the selected variables. Thus, the study identify External loans (EXT), Domestic Banking System (DBS), Non-Bank Public (NBP) and Other Sources (OS) as the sources of financing budget deficit in Nigeria. The effect of deficits financed from these sources were examined on selected macroeconomic variables, namely: economic growth (proxied by real GDP); Inflation Rate (INFR) and Unemployment Rate (UNPR). Annual time-series data on these variables from 1981-2013 were obtained from central Bank of Nigeria (CBN) statistical Bulletin for 2013. The ordinary least squares (OLS) method of the multiple regressions analysis was used to estimate the model while our computing device was the statistical package for social sciences (SPSS). The following were the conclusions from the study: that deficits financed from external loans have insignificant negative influence on economic growth while deficits financed from domestic sources (e.g. DBS and NBP) stimulate economic growth in Nigeria; that irrespective of the source, deficit financing have no significant influence on inflation, and that, domestic sources of financing deficits aggravate unemployment in Nigeria. It is recommended, among other things, that Nigeria should diversify and broaden its revenue base so as to reduce the country’s vulnerability to negative shocks from oil revenue, and so as not to resort to deficit budgeting.

Keywords: Budget deficit financing, economic growth, inflation, unemployment