Do Fiscal Deficits Stimulate Economic Growth in Nigeria? A Disaggregated VAR Analysis

Abstract

Fiscal deficits which emanates from the unbalancing of the annual budgets are mostly prescribed to developing countries by development apologists, given the acclaimed expansionary effects it has on output and employment. This study investigates the relationship between fiscal deficits and economic growth in Nigeria from 1970 to 2016. The data for the empirical analysis was sourced from secondary sources such as the CBN statistical bulletin. The study used GDP per capita (GDPP) to proxy economic growth whereas Overall Fiscal Deficits (OFDE), fiscal deficit financed by Domestic Borrowing (DBFD), fiscal deficit financed by External Borrowing (EBFD), and Domestic Credit to the Private Sector (DCPS) are used as the endogenous variables. The study employed descriptive statistics, unit root test, co-integration and VAR estimation methods to analyze the data. The results of the variance decomposition reveal that overall fiscal deficits (OFDE) and especially the size of fiscal deficits financed by external borrowing (EBFD) are the main shocks causing the variation in GDP per capita (proxy of economic growth). The study concludes that fiscal deficits have significant positive impact on economic growth. Thus, fiscal deficits especially when financed chiefly by external borrowing are capable of stimulating economic growth in Nigeria.  The study recommends that fiscal deficits should be moderated and financed chiefly through external borrowing and possibly bonds as empirical finding suggests that domestic borrowing options are relatively ineffectual in stimulating economic growth in Nigeria.

Keywords: Fiscal deficit, economic growth, external borrowing, aggregate demand, interventionist and crowding out.

DOI: 10.7176/JESD/10-11-03

Publication date:June 30^th 2019