ABSTRACT

This study undertook an in-depth investigation on the effect of deficit financing on the Nigerian economy. The ex post facto research design was used since the data obtained for the variables of the study covered a past timeframe of 41 years - spanning from 1981 to 2021. Real GDP denoting economic growth served as the dependent variable, while government budget deficit financing disaggregated into external source of budget deficit financing, banking system source of budget deficit financing, non-banking public budget deficit financing, and ways and means, gross capital formation, real interest rate and exchange rate served as the explanatory variables. The Ordinary Least Squares (OLS) regression estimation that was used for the analysis established that external source of budget deficit financing and the ways and means for budget deficit financing had a negative and marginal effect on real gross domestic product of Nigeria. Also, the OLS results showed that banking system source of budget deficit financing and the non-banking public source of deficit financing both had a positive and statistically significant effect on real gross domestic product while gross capital formation had a positive but marginal effect on real gross domestic product. Both real interest rate and exchange rate were negative effect on real GDP but only the real interest rate was statistically significant, implying that the trend in the dynamics of real interest rate could undermine the potential economic enhancing effect of budget deficit financing. The study used the Augmented Dickey-Fuller (ADF) unit root test and observed that the variables were integrated at both levels and first difference, leading to the application of the Autoregressive Distributed Lag (ARDL) approach to data estimation was applied. The ARDL bounds test showed a long-run relationship existed between the dependent variable and the explanatory variables. The estimation of the long-run and error correction estimation indicated that the independent variables had a time-varying effect on real gross domestic product of Nigeria. The ARDL estimation of error correction mechanism also showed that RGDP adjusted rapidly to short-run discrepancies in the long-run. Also, the error correction mechanism indicated that external source of budget deficit financing, non-banking public budget deficit financing, ways and means source of deficit financing, gross capital formation and exchange rate all had an immediate effect on real gross domestic product of Nigeria. Based on the foregoing findings, the study concluded that deficit financing still remains the best option for attaining the much desired rapid and sustainable economic growth in Nigeria, provided the proceeds of the borrowed funds are deployed to infrastructural and productive activities of the country. It is therefore strongly recommended that policy makers in Nigeria should ensure that state-owned enterprises borrow through government guarantees to execute those critical projects that are most likely to yield future streams of income that would facilitate industrialization; and invariably, accelerate and engender sustainable economic growth.