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 the 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 Government should setup monitoring teams that will make sure that the budget is well and carefully implemented and as well as loan borrowed in other to reduce corruption and wastage.
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 (Monogbe, Dornubari and Emah 2015). 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, government’s inability to execute capital projects that expands the economy births deficit. This ignites the need for Government to finance these projects either through internal borrowing, external borrowing or implementation of monetary instrument to increase the flow of fund in the economy. However there is a repel 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). 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 overtime from 1970, the country ran into fiscal deficits and sustained public sector spending boom. The 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 1970’s 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 program 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 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 the various developmental plans 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 and Akinbade, 2008). The infrastructural and capital resources required for the attainment of those objectives have however been scarce. This has necessitated the interventions of the governments in the economy through the provision of the required huge capital outlay necessary for large scale production in heavy industries and for the provision of other infrastructure. Government interventions were made possible by the oil boom of the early 1970’s when Nigeria earned unprecedented amounts of foreign exchange from the export of crude oil (Sikkan, 2008).
Government expenditures thus grew rapidly with a similar growth in the bureaucracy. But the oil glut that followed meant that government revenues declined significantly (Akor, 2001). As government were reluctant in reducing the bloated expenditures that had resulted during the oil boom they were forced to seek alternative means of financing their expenditures. Governments then resorted to fiscal deficits. Large deficits are common features of most developing countries, such as Nigeria. The economic consequences of such deficit are inflation, devaluation, deteriorating gross domestic product, fiscal adjustment, which constitute important element of the economic agenda. Deficits are often attributed to high government expenditure and caused by rising public spending over and above public revenue. My fact to this is that government has at its disposal various models of financing its spending. These includes: Taxation, printing of money and loans and grants. Borrowing from public is not a major source of funding deficits in developing countries since personal incomes are generally low, credit creation has often been used by developing countries as an alternative mode of financing. A major defect of this mode is however inflationary. Fiscal deficits; a situation where current expenditure exceeds current expected income, this have become a recurring feature of public sector financing in Nigeria. The Keynesian demandside economics emphasized the need for expansion in government expenditures even beyond current income, particularly during depressions when the economy suffers from an insufficiently of active demand, such as the Great Depression of 1929 to 1932 and more recently the 2008 Global financial and economic crisis. This will thereby increase the demand for productive output, resulting in unemployment being overcome (Anyanwu and Oaikhenan 2005, Ogboru, 2006). The policy of fiscal deficits has however posed challenges to the Nigeriaeconomy with regards to its effectiveness and the accumulation of debt, the justification from growth notwithstanding. Research has shown that some studies have been done on deficit financing in Nigeria, however, a presentable framework for the dynamic changes on economic growth in Nigeria have not been completely dealt with in these studies. Probably due to the various estimation techniques that have been used for the studies. So the question of the extent to which deficit financing modes affects growth still lingers in the heart of many. It is for this reason that this work has attempted to assess the effectiveness of deficit financing as a tool for the acceleration of economic growth in the Nigeria economy from 1981 to 2015, which covers a period of 34years. The time period incorporated is essential because it captures most policy reforms and changes over time, especially the economic meltdown of 2007/2008 and the current economic recession in the country.
1.3 Objective of the Study
The central purpose of this study is to empirically investigate the effect of deficit financing on the output of Gross domestic product (proxy for economic growth) in Nigeria over the period of 1981 to 2015. Thus the specific purpose includes;
- To examine the effect of external debt on Nigerian economic growth.
- To examine the effect of domestic debt on Nigerian economic growth.
- To examine the effect of total Debt Service on Nigerian economic growth.
1.4 Research Questions
In line with above stated specific objectives, this study is guided by the following research questions;
- To what extent has external debt affected economic growth in Nigeria?
- To what extent does domestic debt affect economic growth in Nigeria?
- How significant is the effect of Debt Service on economic growth in Nigeria?
1.5 Research Hypotheses
The study formulated three hypotheses in their null form as a guide to achieve the objectives of the study:
Ho1: External debt has no significant effect on Nigerian economic growth.
Ho2: Domestic debt has no significant effect on Nigerian economic growth.
Ho3: Debt service does not have any significant effect on Nigerian economic growth.
1.6 Significance of the Study
The importance of this study cannot be over emphasized because every sector of the economy stands to benefit one or two things from the researchers work. The major people who will benefit from this work are:
1. Policy Makers:
The study stands to enlighten them on the ways of finding the best policy to use when it comes to the issue of the Nations deficit financing techniques.
2. Investors:
The study will help them to realize the actual state of the economy, especially when the country’s budget is at deficit.
3. Researchers:
They will find it rewarding as it will add to the rich collection of work in available literature due to the expansion of years covered and modification of model.
4. Economy:
The study helps to reveal the stand of the economy in the face of deficit budgeting system.
1.7 Scope of the Study
The study is focused on examining the effect of deficit financing on the growth of Nigerian economy. The study will cover the scope of 34years from 1981-2015.
1.8 Limitations of the Study
The accuracy of this research work has been hindered by some factors such as: • Authenticity of data:- although the source of the data used is assumed authentic enough but the corrupt state of the country gives room for alterations of data in different parastatals of the country to suit selfish aims, so the result may not be completely accurate, which gives room for further study.
Chapter Five
Summary of Finding, Conclusion and Recommendations
5.1 Summary of Findings
The study investigates the effect of deficit financing on Nigeria’s economic growth. It adopts a time-series data spanning 1981 to 2015 on variables for the study. The estimation which started with ADF test reveals that all the variables were stationary at first difference, and this led us to conducting a co – integration test which indicated the existence of at most four co – integrating equation in the model. This however implies that there is a long run relationship between the variables in the model.
In light of the test being carried out, the following are the key findings to the study:
- The result of the Augmented Dickey Fuller Test (ADF) indicates that the data achieves stationary after the second differencing at the order of 1(2). The co-integration result reveals a long run relationship exist among the variables and its dependent counterpart.
- Domestic debt (DD) has a significant positive effect on economic growth in Nigeria.
- Findings reveal that deficit financing through External Debt (EXD) borrowing has a significantly positive effect on Nigeria’s economic growth.
- Debt Service (DS) has no significant effect on Nigeria’s economic growth.
5.2 Conclusion
In conclusion, the study which was aimed at studying the effect of deficit finance on Nigerian economic growth, found that deficit finance has a significant positive effect on the nations economic growth, in line with the apriori expectation and the findings of some researchers. Therefore, the study infers a significant relationship between deficit finance and economic growth in Nigeria. However, suffice to say that the various means of financing budget deficit such as external debt, domestic debt etc. have to be properly managed in order to achieve economic development of the nation in the long run.
5.3 Recommendations
- Government should setup monitoring team that will make sure that the budget is well carefully implemented and as well as loan borrowed in other to reduce corruption and wastage.
- Government must put a stop to unproductive loans, wasteful spending and unregulated money supply with government putting into structure strategies designed to achieving increased and sustained productivity in economic sectors.
- Government and policy makers should carefully study the present state of the economy before deciding on measures through which deficit will be financed.
- Finally, government should maintain optimum level of external debt as it is one of the mechanisms for economic growth but to an optimum level and that all external debt should be effectively utilized for the purpose for which it was obtained so as to promote economic growth.


The Complete Material Will Be Sent to You in Just 2 Steps
Quick & Simple…
![]()
Make Payment (Through Transfer) of ₦5,000 to the Account Below
![]() | Acc No: 0811003731 |
| Samphina Academy | |
| Current Account |
Or CLICK HERE To Pay With Debit Card
| FOR STUDENTS OUTSIDE NIGERIA | |
| CLICK HERE To Pay With Card ($15) | |
| FOR GHANA STUDENTS (GHS 100) | |
![]() | MTN MoMo |
| 0553978005 | |
| Douglas Osabutey | |
![]()
Send the Following Details on WhatsApp ( 07062590260 ) After Payment
- Payment Details
- TOPIC: Deficit Financing And Economic Growth: The Nigeria Experience
The Complete Material Will Be Sent To You On WhatsApp After Receiving Your Details
T & C Apply
Students Review
List of Related Works
Fiscal Deficit Financing And Monetary Synergy In Nigeria
A Study On Ship Financing In Nigeria
Impact Of Debt Financing On The Growth Of Manufacturing Firms In Nigeria
The Impact Of Capital Market Financing On Economic Development Of Nigeria
Financing Of Small Scale Business In Nigeria: The Role Of Union Bank Of Nigeria
Role Of The Nigerian Agriculture And Co-Operative Bank In Agricultural Financing
Export Financing In Nigeria: Problems And Prospects
Effect Of Mortgage Financing On Economic Growth In Nigeria
Financing Of Government Parastatals (A Case Study Of Power Holdings Plc)
The Role Of Commercial Banks In Financing Small Scale Business
Effect Of Equity Financing On The Organisational Performance In Transportation Industry In Nigeria
Problems Of Financing Small-Scale Industries And Possible Solutions To It
Agriculture Financing In Nigeria
Agricultural Financing And Food Production In Nigeria
Impact Of Institutional Financing On The Performance Of Small-Scale Manufacturing Industries
Aid Financing: Implication For Export Trade Volume
Small Scale Industries In Nigeria; The Financing Question
The Role Of Financial Institutions In Export Financing In Nigeria From 2006 – 2012
Equity Financing, An Alternative Source Of Funding Business Firm (A Case Study Of ABC Transport)
Inflation On Economic Growth Of Nigeria: Implication For Gross National Product
The Effect Of Financial Innovation On Monetary Policy From 1980–2023
Impact Of Trade Liberalization On Nigeria Economic Growth
The Impact Of Foreign Direct Investment On Nigeria’s Economy: 2000–2024
An Evaluation Of Monetary Policy In Nigeria And It’s Impact On Economic Growth (1984 – 2015)
Impact Of External Trade On Nigeria’s Economic Growth (1980-2013)
A Statistical Analysis Of Capital Market And Economic Growth
Effect Of Selected Macroeconomic Variable On Nigerian Economic Growth
Evaluating The Effectiveness Of Poverty Alleviation On Economic Growth In Nigeria
Effects Of FDI And Exchange Rate Fluctuations On Economic Growth In Nigeria
The Effect Of Trade And Finance On Economic Growth And Development In Nigeria
Contributions Of Small Scale Business Enterprises To The Economic Growth And Development
The Role Of Health On Economic Growth In Sub-Saharan Africa (1990-2011)
Impact Of Industrialization On Economic Growth In Nigeria
The Impact Of Inflation On The Economic Growth In Developing Economies
Impact Of Non-Oil Export In Nigeria Economic Growth
Effect Of Small And Medium Scale Business Enterprises On Economic Growth Of Nigeria
The Effect Of Bank Distress On Nigeria’s Economic Growth
Large Scale Production Of Rice And Beans And Economic Growth
Government Taxes And Economic Growth
Comparative Analysis Of Monetary And Exchange Rate Policy On Nigeria Economic Growth
Impact Of Tax Reforms On Economic Growth Of Nigeria


