Greener Journal of Economics and Accountancy Vol. 6 (2), pp. 043-064, September 2017
ISSN: 2354-2357 © 2017 Greener Journals
Manuscript Number: 090517121
Fiscal Deficit, Financing Options and Macroeconomic Stability in Nigeria: A Disaggregated Approach
Nwaeze, Nnamdi Chinwendu
Department of Economics, Abia State University, Uturu.
The study examines empirically the relationship between fiscal deficits and macroeconomic stability 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 Inflation Rate (INFL) and Exchange Rate (EXCR) to proxy macroeconomic stability whereas Overall Fiscal Deficits (OFDE), fiscal deficit financed by Domestic Borrowing (DBFD), fiscal deficit financed by External Borrowing (EBFD), Interest Rate (INTR), Money Supply (MS), Foreign Direct Investment (FDI) and External Reserve Balance (EXTR) 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 Interest rate (INTR), overall fiscal deficits (OFDE) and the size of fiscal deficits financed by domestic borrowing (DBFD) are the main shocks causing the variation in inflation (INFL), while overall fiscal deficits (OFDE), the size of fiscal deficits financed by external borrowing (EBFD) and the size of fiscal deficits financed by domestic borrowing (DBFD) are the main shocks causing the variation in exchange rate (EXCR) in Nigeria. The study concludes that fiscal deficits have significant negative impact on macroeconomic stability vis-a-viz inflation and exchange rates in Nigeria. The study recommends that fiscal deficits should be moderated and financed chiefly through bonds as empirical finding suggests that both domestic and external borrowing options are detrimental to the macroeconomic stability on the Nigerian economy.
Keywords: Fiscal deficit, domestic borrowing, external borrowing, macroeconomic stability, inflation rate, exchange rate and expansionary effect.
Abiola, A. G and T. Folorunso (2000). The long run determinants of inflation in Nigeria. The Nigerian Journal of Economics and Social Studies Vol.42, No.1.
Ali, D.U and U. G Ahmad (2014). Effect of Fiscal Deficit and Government Expenditure on Economic Growth in Nigeria. JORIND 12 (1); www.transcampus.org/journals
Anyanwu, J.C. (1993). Monetary Economics: Theory, Policy and Institutions. Onitsha: Hybrid Publishers LTD.
Anyanwu, J. C. (1998). Do Fiscal Deficits Produce High Interest Rates? The Case of Nigeria, Ghana and the Gambia. CBN Economic and Financial Review, Vol. 36, No. 1.
Audu N. P. (2012). The impact of fiscal policy on the Nigerian economy. International Review of Social Sciences and Humanities Vol. 4, No. 1 (2012), pp. 142-150 ISSN 2248-9010 (Online), ISSN 2250-0715; Retrieved from www.irssh.com.
Central Bank of Nigeria. Annual Report and Statement of Account: Various Issues; Abuja Nigeria
Central Bank of Nigeria (2009). Statistical Bulletin: Central Bank of Nigeria. Abuja.
Central Bank of Nigeria (2015). Statistical Bulletin: Central Bank of Nigeria. Abuja.
Chimobi, O. P & Igwe O. L. (2010). Budget deficit, money supply and inflation in Nigeria. European Journal of Economics, Finance and Administrative Sciences ISSN 1450-2275 Issue 19 (2010) © Euro Journals, Inc. 2010 http://www.eurojournals.com
Cooper, J.P and Fisher, S (1997). Stabilization policy and lags. Journal of Political Economy Vol.3 No.1.
Debt Management Office (2010). Federal Government domestic debt outstanding by instruments; June, Abuja Nigeria.
Debt Management Office (2017). Federal Government Public debt outstanding; December, 2016, Abuja Nigeria.
Deepak et al (2001). Fiscal deficit financing options in Open Economies. Working Paper, Department of Economics, University of Bern Switzerland.
Dewett, K.K. (2009). Modern economics theory (Revise edition). New Delli S. Chand & Company Ltd.
Federal Ministry of Economic Planning (2009). The Nigerian Vision 20: 2020: Economic transformation blueprint. Abuja Nigeria.
Federal Ministry of Finance (2010). Harmonized Appropriation Act 2010. Abuja Nigeria
Gale, W. G. and O. Peter (2003). Economic Effects of Sustained Budget Deficits. National Tax Journal Vol. 56 No. 3, 2003, pp. 463-485.
Greene, W. H. (2000). Econometric Analysis. Fourth edition. New York: Prentice Hall.
Gujarati D.N and Porter D.W (2009). Basic econometrics: New York, McGraw-Hill/Irwin International edition.
International Monetary Funds (2003). The State of Public Finances: Outlook and Medium-Term Policies. Washington D.C
International Monetary Funds (2017). World Economic Outlook: Washington D.C.
Isah, I. P (2012). Deficit Financing and its Implications on Private Sector Investment: The Nigerian Experience. Arabian Journal of Business and Management Review (OMAN Chapter) Vol. 1, No.10; May 2012.
Isenmila, A.P and O. O Augustine (2008). Deficit financing and its inflationary impact on developing economies: Nigerian economy perspective. Journal of Financial management and analysis, 2I (1):2008:S8-68.
Isiwu, G.D. (2004). Fundamentals of thesis writing in Economics. Enugu: Afrika-Links Books.
Jhinghan M.L (1997). Macro-economic theory: Vihar, Vrinda Publications (P) ltd, 10th revised and enlarged edition.
Jhinghan M.L (2012). The Economics of Development and Planning: Vihar, Vrinda Publications (P) ltd 40th revised and enlarged edition.
Johansen, S. (1995). Likelihood-based Inference in Co-integrated Vector Autoregressive Models. Oxford, Oxford University Press.
Keynes, J.M. (1936). The General Theory of Employment, Interest Rate and Money: London: Macmillian.
Mohanty R. K (2012). Fiscal deficit-economic growth nexus in India: A Co-integration analysis. Centre for Economic Studies & Planning, School of Social Sciences, Jawaharlal Nehru University; New Delhi- 110067.
National Bureau of Statistics (2012). Annual Abstract of Statistics. Abuja Nigeria: NBS Press.
Obi B. and A. Nurudeen (2008). Do fiscal deficits raise interest rates in Nigeria? A vector autoregression approach. Journal of Applied Quantitative Methods, Vol.4 No.3 Fall 2008.
Oluba, M.N. (2008). How years of fiscal deficits emasculated the Nigerian economy. Economic Reflections, 1(5): 6-10.
Taiwo, M. & Abayomi, T. (2011). Government expenditure and economic development: empirical evidence from Nigeria. European Journal of Business and Management ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol 3, No.9. Retrieved from www.iiste.org.
Udaba, S.I (2002). Introduction to Nigerian Public Finance. Enugu. Linco Press Nig. Ltd.
Uduakobong, I. (2014). Budget Deficit and Inflation in Nigeria: An Empirical Analysis (1970-2010).Journal of Economics and Sustainable Development. ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.5, No.2, 2014; Retrieved from www.iiste.org.