Deficit Financing and Economic Growth: Empirical Evidence from Nigeria

Abstract

The impact of deficit financing on economic growth has long been recognized in the extant literature given that this type of financing is germane to accelerated and sustainable economic growth. Yet, Nigeria did not seem to have utilized deficit financing proceeds to invest in those related infrastructural facilities that would generate income and augment domestic savings, thereby helping to make and sell quality products and services that are internationally competitive, and ultimately stimulate economic growth. Rather, the seemingly weak governance in the country engaged in massive misappropriation of public funds and outright corruption thereby exacerbating unemployment, insecurity, and widespread poverty both in the urban and rural areas of the country. The main aim of the study therefore was to investigate empirically the impact of deficit financing on economic growth in Nigeria for the period 1981 to 2019. Secondary data for the study were sourced from the Central Bank of Nigeria and the World Bank Global Development Index. The fully modified ordinary least squares methodology of the econometrics was employed to analyze the data of the study. The major findings of the study showed that the federal government domestic debt variable, the federal government budget deficit variable, the foreign exchange reserves variable, and the broad money supply variable exerted positive impacts on economic growth, while the external debt variable exerted a negative and insignificant impact on economic growth in Nigeria. The study therefore concluded that public borrowing in Nigeria can only induce rapid and sustainable economic growth only and if only borrowed funds are massively invested in related infrastructural facilities that would generate revenue which would augment domestic financial resources. Accordingly, the study recommended that the federal government of Nigeria should carefully study the state of its economy to enable it invest in those infrastructural facilities that are thought germane to the achievement of sustainable economic growth.