The Effects of Deficit Financing on Economic Growth in Nigeria.

ABSTRACT

The main objective of the study was to examine the effect of financing budget deficit on economic growth in Nigeria. To achieve this, three hypotheses were formulated for testing and data were collected from the Central Bank of Nigeria annual statistical bulletin from 1981 to 2019. A multiple regression model was specified while the Vector Error Correction approach to cointegration (VECM) was used as the data estimation technique at 5% significance level. Descriptive analysis, Unit root and cointegration tests were conducted. Findings from the VECM result shows that Budget deficit has a significant effect on economic growth in Nigeria while causality, running from budget deficit to economic growth was found in the Budget deficit and economic growth model. The finding also revealed a long-run effect of budget deficit on economic growth in Nigeria. The study recommends that government should set up a monitoring team to supervise the budget loan borrowed to ensure its careful implementation in other to cut back on corruption and wastage. Meanwhile, government must put a stop to unproductive loans, wasteful spending and unregulated money supply while the government put in place strategies designed to achieving increased and sustained productivity in the productive sectors. In addition, Government should maintain an 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. To reduce the budget deficit, the government should widen the “tax net” to increase revenue and cut government spending.

Keywords: Budget deficit, Deficit financing, Vector Error Correction Model, Economic Growth, Nigeria.