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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.
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 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.
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