ABSTRACT

In Nigeria, despite the huge expansion of public expenditure based on the budget deficit status over the years, the expected level of economic growth as a result capital formation has not been achieved and it is against this backdrop, that this study investigated the effect of deficit financing on capital formation in Nigeria for the period 1981-2019 with the help of the ARDL model of estimation. Based on the issues covered in the literature review, empirical investigations were carried out on the effect of deficit financing on capital formation in Nigeria. Results showed that External Debt Stock (LNEXDBT) had a positive relationship with GCF_GDP in the current year, 1^st and 2^nd lagsbut statistically insignificant in the long run, Domestic Debt Stock (LNDMDBT) had a negative relationship with GCF_GDP in the current year, 1^st and 2^ndyear lags and long run, Aggregate Gross Savings (LNADBTS) had a positive significant relationship with GCF_GDP in the current year and in the long run, Aggregate Debt Service (LNADBTS) had a positive relationship with GCF_GDP in the current year and in the long run while Total external reserves had a negative relationship with GCF_GDP in the current year and in the long run. Based on the findings, the study recommended that the Government should demonstrate a high sense of transparency in its monetary and fiscal operations to curb high prevalence of external and domestic borrowing, improved gross savings to reduce the incidence of inflation which will translate to economic prosperity.