This study investigated the effect of fiscal deficit financing on economic growth in Nigeria. Data were collected from central bank of Nigeria (CBN) statistical bulletin from 1981 – 2016. The study employed the ordinary lest square (OLS), multiple regression, unit root and cointegration techniques in order to determine the effect of fiscal deficit financing in economic growth in Nigeria. The findings of the study revealed that fiscal deficit and capital expenditure has a huge negative significant effect on GDP in Nigeria while government recurrent expenditure has a positive effect on economic growth in Nigeria. the study therefore recommended that the government reduce the level of its fiscal deficit financing and there should be transparency, accountability in fiscal discipline on the part of the government officials charged with the responsibility of implementing and executing capital expenditure budget so as to ensure that it has a positive effect on real gross domestic product (proxy for economic growth).




1.1 Background of the Study

Fiscal policy plays a key role in the sustenance of economic growth and macroeconomic stability. The magnitude of government fiscal surplus or deficit is probably one of the most important statistics used to measure the impact of government fiscal policy on the economy (Siegal, 1979; Tanzi and Blejer, 1984). According to Maji and Achegbulu (2012), governments, whether military or civilian belief that one way of solving social problems is by increasing government 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 outstrips its availability, hence the recourse to deficit financing so as to fill the gap between expenditure needs and revenue availability. Technically, a deficit would arise whenever expenditure surpasses revenues.

Ola and Adeyemo (1998), while explaining the reasons for increasing public debt onthe part of the Nigerian government said that government borrowed to financeemergencies such as natural disasters, economic depression, and important capitalprojects such as water dams, agricultural development projects, river basindevelopment projects and current expenditure in anticipation of reasonable revenue collection.At a point in year 2003 it was estimated that Nigeria needed approximately US$3 billion yearly to fully service her external debt apart from her domestic debt and this is considered unthinkable to do as it will result in the economy getting almost grounded.

In addition, over the years, the ever increasing Nigerian population has put some pressure on the government to spend more on public goods and merit goods. The contribution or provision of infrastructural facilities which is termed total factor productivity and often the responsibility of the nation state has made borrowing on the part of government also inevitable.

Since most of these infrastructures cannot be left in the hands of the private sector judging from the experience of market failures in different countries where this has been experimented, the public sector is then seen as the one better at handling issues of social overheads or infrastructural facilities.

Essentially, the argument for the public sector activity is not because of its ability to run systems assigned to it efficiently but that the social marginal benefit derivable from state functions usually far exceeds their social marginal cost even if the ventures are run at a commercial loss.

Solomon (2012) observed that the trend in government expenditure showed an increase over the years especially on the oil sector. Government’s intervention in such area as provision of good roads, electricity, housing accommodation, and telecommunication etc. over the years has increased which are very important to create an Investment-friendly environment as well as also attract foreign direct investment thus increasing the country’s capital stock formation which is needed for economic growth and development. There has thus been an increased the public debt as well. The success and efficient management of these public debts to translate to national economic development is thus all that matters.Fiscal deficits in Nigeria were generally financed by the excessive borrowing from the banking sector and external sources (NCEMA, 2004). The Central Bank of Nigeria (CBN) accounted for a large proportion of the financing from the banking sector (CBN, 2004). For a period of over three and half decades (1970 – 2006), the fiscal operations of the Nigerian government resulted in surplus in only six (6) years. Specifically, these surpluses occurred in 1971, 1973, 1974, 1979, 1995 and 1996. As at 1986, the federal nominal fiscal deficit stood at N8.3billion or 11.3 per cent of GDP. The deficit/GDP ratio was 5.4 per cent in 1987, 8.4 per cent in 1988, and 6.7 per cent in 1989. The ratio jumped to 11.0 per cent in 1991 and 15.5 per cent in 1993. The fiscal deficit grew by 58 per cent between 1985 and 1986. Between 1991 and 1992, the deficit grew by 60.9 per cent, increasing to 86.2 per cent in 1998. Between 1999 and 2006, thedeficit/GDP ratios were 8.4, 2.9, 4.7, 5.6, 2.9, 1.7, 1.1 and 0.6 per cent, respectively. In absolute terms, these percentages were N285.1 billion, N103.6billion, N221.0billion, N201.4billion, N202.7billion, N172.6billion, N161.4billion and N101.3billion, respectively. Nigeria recorded agovernment debt equivalent to 11.5 percent of the country’s Gross Domestic Product in 2015. Government  debt  to GDP in  Nigeria  averaged 30.93percent  from 2000 until,  reaching  an all-time high  of 88.00percent  in 2001 and  a record low of  9.60percent  in 2009.

The Nigerian Government’s Debt to GDP from 2007 to 2015 are as follows:,12.8, 11.6, 9.6, 9.6,10.2, 10.4, 10.5, 10.6 and 11.5 percent  respectively.

Attaining macroeconomic balance has become a major goal to be pursued by most countries. While it is commonly agreed that persistently high deficits are bad for any economy (whether developed or not develop) there is little agreement as regards the precise effects of deficits on the various macroeconomic variables such as the domestic price level, domestic private consumption, domestic output, interest rate, capital formation, and the definite transmission mechanisms of the effect of deficits on the economy. This is notwithstanding the opposing view that government deficits have no effect on macro-economic variables of an economy.


Rapid and sustained output growth of the domestic economy of Nigeria has since the political independence in 1960 been of paramount importance to successive governments in the country. Consequently, governments have since implemented several national development plans and programmes aimed at boosting productivity, as well as, diversifying the domestic economic base.

The infrastructural and capital resources required for the attainment of these objectives have however been scarce. This has necessitated the interventions of the governments in the economy through the provision of the required huge capital outlay necessary for large-scale production in heavy industries and for the provision of other infrastructure. Government interventions were made possible by the oil boom of the early 1970s when Nigeria earned unprecedented amounts of foreign exchange from the export of crude oil (Sikkam, 1998). Government expenditures thus grew rapidly with a similar growth in the bureaucracy. However, the oil glut that followed meant that government revenues declined significantly (Akor, 2001), as governments were reluctant in reducing the bloated expenditures that had resulted during the oil boom, they were forced to seek alternative means of financing their expenditures. Governments thus resorted to fiscal deficits.

Large fiscal deficits are common features in most developing countries, such as Nigeria. The economic consequences of such deficits are inflation, devaluation, deteriorating economic growth rate, fiscal adjustment, which constitute important elements of the economic agenda. Fiscal deficits are often attributed to and caused by rising public spending over and above public revenue. Government has at its disposal various modes of financing its spending. These include: taxation, borrowing from public, borrowing from the banking system (credit creation), printing of money, and loans and grants. Borrowing from public is not a major source of fundingdeficit in developing countries since personal incomes are generally low. Credit creation has often been used by developing countries as an alternative mode of financing.

Fiscal deficits, a situation where current expenditure exceeds current expected income, have become a recurring feature of public sector financing in Nigeria.

According to Levy (1981) and Egwaikhide F.O (2005) large budget deficit increases growth in money supply and inflation.

In the 1980s, fiscal deficit was high due to increase in government expenditure as a result of precipitous fall in the international prices for crude oil products. From 1980, 1981 and 1982 fiscal deficits increased to N 1975.2 million, N3, 902.1 and N6104.1 million and the ratio to GDP were 2.05, 5.5 and 8.6 percent respectively. Also in 1983, 1984,1985,1986,1987,1988 and 1989, fiscal deficit recorded an increase of N3,364.5 million, N2,660.4 million, N3039.9 million, N8,254.3 million, N5,889.7 million and N15,134.7 million respectively. The ratioof fiscal deficit to gross domestic product for 1983-1989 was 5.10, 4.25, 4.45, 11.66, 8.29, 15.64 and 18.19 respectively.

In 1990, fiscal deficit was N22, 116.1 million respectively 23.97 GDP ratio. In 1991, 1992, 1993 and 1994, increases in fiscal deficits stood at N35,755.2 million, N39,532.5 million, N107,733.3 million and N70,270.6 million respectively. The ratios of fiscal deficits to GDP for 1991-1994 were 37.94, 40.74, 108.16 and 69.62 respectively. These reflect expansion in fiscal deficits operation for the year. But in 1995 and 1996 fiscal deficits recorded a decrease of Nl,000.0 million and N32, 049.4 million and the ratio of fiscal deficits to gross domestic product were 0.97 and 30.6 respectively. The decrease recorded in fiscal deficits in 1995 and 1996 was attributed to improve revenue performance and on expenditure contraction with the general framework of fiscal discipline and prudence. Also, in 1997 and 1998 fiscal deficit recorded an increase of N5, 000.0 million andN133, 389 million respectively. The ratio of fiscal deficit to gross domestic product for 1997 and 1998 were 4.54 and 111.51 respectively as against decrease in deficit recorded for 1995 and 1996.

For the years 2000-2004, the fiscal operations also recorded an increase. For instance, in 2000, 2001, 2002, 2003 and 2004 fiscal deficit stood at N103,800.0million, $4221,000.0 million, N301,400.0 million, N2202,700.00 million and N 142,000.0 million respectively. The ratios of fiscal deficit to gross domestic product were 85.63, 174.94, 229.21, 148.53 and 97.67 respectively. These reflect `expansion in fiscal deficit operations for the years. But the low fiscal deficit recorded in 2000 (N103, 800.0 million) as compared with 1999 deficit of N285, 104.7 million was attributed to the increased revenue, particularly from the oil sector and the restraint on expenditure. The year 2001 recorded an increase in deficit of N221, 100.0 million as compared with deficit of 103,800.0 million in 2000. In 2002 deficit rose to N301.400.0 million as compared with deficit of 2001 due to a decline in actual oil revenue relative to the budget estimate for 2002 following the reduction of Nigeria’s export volume of crude oil. In 2003, deficit decline to N202, 700.0 million and compared with preceding year. This attributed to the increase revenue from crude oil sector and the due process of carrying out government business. In 2004 fiscal operations resulted a lower deficit of N172, 600.0 million as compared with the preceding year. This again was attributed to increase revenue in the oil sector and prudence in government expenditure. In 2005 fiscal deficit operations declined to N161, 400.0 million as compared with 2004 deficit of N172, 600 million. In 2006 fiscal deficit also declined to N101, 300.0 million as compared with the preceding year. These downward reductions in fiscal deficit operations in Nigeria were attributed to the stock of Nigeria’s external debt fell significantly from US $20.5 billion in 2005 to US $3.5 billion in 2006. Consequently, the consolidated public debt at the end of December 2006 declined to N2, 204.7 billion or 12.1 % of GDP, from N4, 221.0 billion or 28.3 and of GDP in 2005.

It is for this reason that this work has attempted to assess the effectiveness of fiscal deficits as a tool for the acceleration of economic growth in the Nigerian economy


The general objective of this study is to empirically investigate the effect of Fiscal Deficit Financing on Economic growth in Nigeria over the period of 1980 to 2015. The specific objectives are;

  1. To examine the effects of government deficit financing on real Gross Domestic Product.
  2. To establish if there exists a long run relationship between government deficit financing and economic growth.

In essence the study will seek to answer the following research questions

  1. What are the effects of government deficit financing on real Gross Domestic Product?
  2. Is there any long run relationship between government deficit financing and economic growth?

This study will empirically test the following hypotheses;

Ho1: There is no significant impact of government deficit financing on Economic Growth in Nigeria

H02: There is no long run relationship between government deficit financing and Economic Growth in Nigeria



The Long run implication of Fiscal deficit financing on Economic Growth in Nigeria is very important for policy decisions especially in achieving the Goals of Nigerian transformation agenda and the Millennium Development Goals (MDGs) so that the economy will be managed effectively to enable wealth creation for the benefit of all Nigerians.This research work, apart from achieving its main objectives, will contribute immensely in the following ways;

It will serve as a useful platform or tool for policy making.

It can be used by policy makers in developing the analysis of the implication of budget deficit financing on macro-economic variables.

It will provide an insight to the policy makers, in making policies that are related to budget deficit and entire economy.



The study covers the period from 1980-2015. The choice of the period is due to data available.