Abstract
This study empirically evaluated the impact of deficit financing on economic growth of Nigeria between 1981 and 2017. Auto Regressive Distributed Lag (ARDL) model and Bounds Test were adopted as the estimating techniques to verify the existence of long-run relationship between deficit financing and economic growth in Nigeria. Real gross domestic product was used as the dependent variable, while government budget deficit, government total debt, exchange rate and government expenditure were used as the explanatory or independent variables. Data used were extracted from the Central Bank of Nigeria statistical bulletin of 2018. The empirical results of Auto Regressive Distributed Lag (ARDL) model revealed that all the variables except exchange rate had positive and significant impact on real gross domestic product. Exchange rate had a negative and significant impact on real gross domestic product. This study recommended that Budget deficit should only be employed as the last resort, when it is absolutely necessary to budget for a deficit, the government should try as much as possible to mitigate the proportion of the overall deficits financed from external or foreign sources and finance budget deficit with domestic debt since it has a positive and significant impact on real gross domestic product. This will reduce the amount of foreign debt and its negative consequences.
TABLE OF CONTENTS
Title
Page i
Declaration ii
Certification
iii
Dedication iv
Acknowledgements
v
Table
of Contents vii
List
of Tables ix
List
of Figures x
Abstract xiv
CHAPTER 1: INTRODUCTION 1
1.1
Background to the study 1
1.2
Statement of research problem 4
1.3
The objectives of the study 6
1.4
Research questions 6
1.5
Statement of hypotheses 6
1.6
Significance of the study 7
1.7
Scope of the study 8
1.8
Limitations of the study 8
1.9
Definition of terms 9
CHAPTER 2: LITERATURE REVIEW 10
2
.1 Conceptual framework 10
2.1.1
Concept and nature of deficit financing 10
2.1.2
Concept and nature of economic growth and stability 11
2.1.3 Deficit finance and inflation 12
2.1.4
Overview of deficit financing 12
2.2
Theoretical Review 14
2.2.1
The classical theory 14
2.2.2
The keynesian theory 15
2.2.3 Deficit financing and economic
growth theory 16
2.3
Empirical Review 17
2.4
Summary of Literature Review 30
2.5
Research Gaps 34
CHAPTER 3: METHODOLOGY 36
3.1
Research design 36
3.2
Source of data collection 36
3.3 Model specification 36
3.4
Apriori expectation 38
3.5 Data estimation technique 38
3.6
Description of modeled variables 40
CHAPTER 4: DATA
PRESENTATION, ANALYSIS AND
INTERPRETATION OF RESULTS 42
4.1
Profile of Nigeria’s deficit financing 42
4.2
Descriptive statistic 43
4.3
Correlation matrix 45
4.4
The unit root test summary 46
4.5
Inferential results 47
4.5.1
Bound test 47
4.5.2
Results of auto regressive distributed lag ARDL model 47
4.5.3
Cointegration and long run diagnostic 49
4.5.3.1
Cointegrating form of ARDL 49
4.5.4.1
Long-Run coefficients of the estimated ARDL model 50
4.5.5.1
Pair wise granger causality tests 51
4.6
Test of research hypotheses 53
4.6
Discussion of findings 56
CHAPTER 5: SUMMARY, CONLUSION AND RECOMMENDATION 58
5.1
Summary 58
5.2
Conclusion 60
5.3
Recommendation 61
5.4
Contribution to knowledge 61
REFERENCES
APPENDIX
LIST OF TABLES
4.1 Government Data for Budget Deficit 42
4.2 Descriptive
Statistics 44
4.3
Correlation Matrix 45
4.4 Unit Root Test Summary 46
4.5.1 Bound test 47
4.5.2 Results of auto regressive
distributed lag (ARDL) model 47
4.5.3.1 Cointegrating form
of (ARDL) model 49
4.5.4.1 Long-run
coefficients of the estimated (ARDL) model 50
4.5.5.1 Pair wise granger causality tests 51
LIST OF FIGURES
4.5.5.2
Plot of the residual of the estimated graph 52
4.5.5.3 Actual, fitted and residual model 52
LIST OF APPENDICES
Data used for analysis 69
Correlation matrix 71
Descriptive statistic 71
Pairwise granger causality tests 72
ARDL model 74
ARDL bound test 75
Unit
root test of EXR at level 76
Unit root test of EXR at
first difference 77
Unit root test of FGB at level 78
Unit root test of FGB at first
difference 79
Unit root test of FGD at level 80
Unit root test of RGDP at level 81
Unit root test of FGE at level 82
Unit root test of FGE at first
difference 83
ARDL cointegrating and long run form 84
Unit root test of RGDP at level 85
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Deficit
financing is a fiscal policy concept of using borrowed funds to finance the
budget deficit that exist as a result of government overall estimated
expenditure exceeding its anticipated revenue. Deficit financing is imperative
for government to use in financing the national budget and regulating the economy
in pursuant of key macro economic goals such as; reduction in unemployment
rate, inflation rate, achieving balance of payment equilibrium, price
stability, increase in capital formation, economic growth and improvement in
the well being of the citizens among others. (Ali, Mandara and Ibrahim, 2018).
Budget
deficit as a way of financing was established after the two world wars, oil
crises and current financial and economic crises. There are three ways to
finance the deficit; taxes, borrowing and monetization (inflation tax). The
most popular model of deficit finance is borrowing which is usually done by
issuing of government bonds (Stevan, 2010).
Stiglitz
(2005) sees deficit financing as a situation in which the federal government’s
excess funding of outlays over receipt of revenue for a given period is
financed by borrowed funds from the public. Nwaotka (2004) defines deficit
financing as a planned excess expenditure over income, dictated by government
policy, of creating fund to finance deficit by borrowing whether from local or
foreign sources which must be repaid with interest within a specific period of
time.
Attaining
macro economic 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), there is little agreement as regards the
precise effects of deficits on the various macro economic variables such as the
domestic price level, domestic private consumption, domestic output, interest
rate, capital formation, and the definite transmission mechanisms of the impact
of deficits on the economy. This is notwithstanding the opposing view that
government deficits have no effect on the macroeconomic variables of an
economy.
Deficit
financing arises each time the government has budget deficit. For the economy
to grow as planned in a budget, shortage of revenue resulting from excess
expenditure has to be financed by raising fund from other sources available to
the government.
The
various reasons for budget deficit are categorized as political considerations,
economic issues and social factors (Gbosi, 2012). As we cannot separate
politics from economics in both developed and developing nations today like
Nigeria, political considerations now outweigh economic considerations in most
government decisions. For instance, the aims of policy makers and political
leaders to meet the needs of the citizens as well as delivering dividends of
democracy have often driven up expenditure. In the long run, this will result
in deficits as the case in Nigeria in the recent time.
Besides,
social factors may also be responsible for deficit financing. In Nigeria like
other countries of the world, government is the major player in social sector.
When there is absolute need to raise expenditure over and above projected
revenue, deficit will arise. This may be as a result of natural disasters, such
as floods, earthquake, and famine. Other reasons such as poverty alleviation
programme, health education may also put pressure on government leading to
financing of fiscal deficit.
Whichever,
the reason for deficit financing, research findings such as Bello (2004) and
Agundu (2005) revealed that deficit financing has not shown any improvement in
economic infrastructure and activities. It has been observed that instead of
committing the additional funds arising from deficit financing into productive
investment to increase capital formulation, political leaders in Nigeria
convert such funds for their private use thereby undermining the objective of
deficit financing.
In the
Keynesian analysis, it has been advocated that deficit financing could be
adopted in order to tackle the problem of inflationary-unemployment in the
advanced nations when there is recession or depression. In the post Keynesian
analysis, it has also been advocated that deficit financing could be applied to
some of the problems of developing nations, especially the problem of
unemployment. The Keynesian school of thought advocates the expansion in
government expenditures even above current income, particularly during
depressions. According to Keynesian school, the main cause of depression is
lack of spending by the public sector when the economy suffers from lack of
aggregate demand such as the great depression of 1929 to 1932 and most
recently, the 2008 Global Financial and Economic crisis. This will increase the
demand for productive output and to reduce the level of unemployment (Anyanwu
and Oaikhenan, 1995, Ogboru, 2006, Iya, 2014). A lot of economic problems are
caused by deficitfinancing when it is in persistence, specifically; inflation. Money
creation via deficit financing results in an increase in the stock of money and
this is inflationary. Excessive monetary expansions produce an expansion of
imports and a contraction of exports so that the external reserve tends to
contract.
In Nigeria,
considerable attention has been focused on the consequences of deficit
financing because of the belief that the presence of these consequences in the
Nigeria economy might have informed the current thinking that the government
through its deficit financing has contributed greatly to the country's current
economic problem. For instance, Nigeria’s public debt rose by N 1.96 trillion,
or 8.74 percent, from about N22.43trillion as at September 30, 2018, to N24.39
trillion by December 31, 2018 (Debt Management Office, 2019). The concern is
not deficit perse, this is because budget deficit is not a crime but
when it exceeds the international bench mark of 3 percent of GDP is worrisome,
especially when it cannot be said to promote economic activities (Anyanwu,
1997).
All government
programmes must be financed, whether in form of expenditure on goods and
services or on the assets acquisition or through lending to the private sector.
The other part of the expenditure which has not been financed through income
tax, individual’s savings or domestic borrowing must be through deficit
financing.
1.2 STATEMENT OF
THE PROBLEM
However, deficit financing
is not without its problems, its several macroeconomic implications on the
output growth cannot be overemphasized. The question of whether deficit
financing had actually contributed positively or otherwise to economic growth
is thus pertinent in the field of finance. One wonders the reason why poverty
is vividly written in the face of individual citizenry in Nigeria with the sea
of evidence in the literature on the positive impact of deficit financing on
economic growth and investment? The outrageous macroeconomic instability and
imbalance in the Nigerian economy over the years had been attributed to the
growth in fiscal deficit.
The inflationary pressure
had been on an increase as a result of expansionary fiscal operations embarked
upon by the government with the attendant injection of liquidity into the
economy; the pressure on the balance of payments of the nation can all be said
to be a function of fiscal deficit and deficit financing embarked upon by the
government from time to time. With the consequential effect on both the real
sector as well as other sectors of the economy, the reason therefore arise for
the need to examine the implications of deficit financing on the growth
potentials of the Nigerian economy.
A lot of economic problems
are caused by deficits when it is in persistence specifically, deficit financing
adversely affects interest rate, investment and economic growth Money creation
via deficit financing results in an increase in the stock of money and this is
inflationary. Excessive monetary expansions produce an expansion of imports and
a contraction of exports so that the external reserve tends to contract. In
Nigeria, considerable attention has been focused on the consequences of deficit
financing because of the belief that the presence of these consequences in the
Nigeria economy might have informed the current thinking that the government
through its deficit financing has contributed greatly to the country's current
economic problem. Among the problems confronting the Nigerian economy are;
pressure on balance of payment, declining growth and heavy debt burden in which
we (Nigeria) had $18billion about 60 percent of the $30billion owed the Paris
Club written off (Debt Management Office, 2006). The concern is not deficit perse,
this is because fiscal deficit is not a crime but when it exceeds the
international bench mark of 3 percent of GDP is worrisome, especially when it
cannot be said to promote economic activities (Anyanwu, 1997).
Furthermore,
most of the studies conducted on this topic made use of variables like government
expenditure, government revenue, money supply, balance of payments, among
others as part of the explanatory variables (i.e., as measures of budget
deficits). The argument here is that these variables do not adequately measure
budget deficit financing. To fill this gap therefore, this study investigates
the impact of deficit financing on economic growth using the various sources of
deficit financing available to government as our explanatory variables, such
as: federal government budget, exchange rate, federal government debt and
federal government expenditure. .
Also, changes
in government fiscal policy and the emergence of new set of empirical data
(occasioned by the passage of time) might have rendered the findings of some of
the previous studies obsolete; Hence, the need to confront the issue with fresh
empirical data that will reflect current economic realities in the country.
1.3 OBJECTIVES OF THE STUDY
The
main objective of this research is to determine the impact of deficit financing
on economic growth of Nigeria. The specific objectives are to:
i.
Evaluate the impact of
budget deficit on economic growth in Nigeria.
ii.
Determine the impact of
government expenditure on economic growth in Nigeria.
iii.
Investigate the impact of
exchange rate on economic growth in Nigeria.
iv.
Determine the causal
relationship existing between government total debt and economic growth in
Nigeria.
1.4 RESEARCH QUESTIONS
i.
What is the impact of budget
deficit on economic growth in Nigeria?
ii.
To what extent does
government expenditure impact on economic growth in Nigeria?
iii.
How does exchange impact
on economic growth in Nigeria?
iv.
What is the nature of the
causal relationship between government total debt and economic growth in
Nigeria?
1.5 HYPOTHESES
This study is
guided by the following null hypotheses:
HO1: Budget deficit has no significant impact on
economic growth in Nigeria.
HO2: Government expenditure has no significant
impact on economic growth in Nigeria.
HO:3 Exchange rate has no significant effect on
economic growth in Nigeria.
HO:4 There is no causal relationship between
government total debt and economic growth in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
Although this work is mainly for academic purpose, it will be
of great importance to policy makers by aiding them to understand and grasp the
impact that deficit financing has on economic growth in Nigeria and its effect
on key macro economic indicators such as inflation, unemployment, economic
growth, balance of payment amongst others. This study will also provide insight
and knowledge to them policy makers on how to use deficit financing to regulate
the Nigerian economy to achieve key fiscal policy objectives which include;
reduction in inflation rate, full employment level, price stability, moderate
money supply, increase economic growth and stability of the economy as a whole.
This study will further add to other existing studies on
deficit financing and also fill the gap that may exist in previous studies which
has been undertaken to establish whether deficit financing would lead to
economic growth in Nigeria.
Also, this study will be of immense importance to body of
academics by serving as a guide for further researchers in area of deficit
financing and economic growth which this study did not cover.
1.7 SCOPE OF THE STUDY
This study will cover the period 1981-2017. Using data
extracted from Central Bank of Nigeria Statistical Bulletin of 2017. The impact
of deficit financing on economic growth in Nigeria will be the focal point.
This study
investigates the impact of deficit financing on economic growth using the
various sources of deficit financing available to government such as government
total debt as our explanatory variables. The rationale for commencing this
study from 1981 is as a result of availability of data. Data for budget deficit
published by Central Bank of Nigeria shows 1981 as the earliest year or
inaugural year for which data for deficit financing (budget deficit) was
published. Hence, the reason why 1981 was chosen, this will also give us a
holistic analysis of the impact of deficit financing on economic growth of
Nigeria.
1.8 LIMITATIONS
OF THE STUDY
It is uncommon in a
research study to not have certain factors that may militate against its accuracy.
The major limitation encountered in this study is the disparity in facts and
figures. Despite these challenges, the findings of this study remain valid and
reliable.
1.9 OPERATIONAL DEFINED TERMS
Deficit financing = deficit financing can
be defined to mean financing undertaken by a corporation or government to make
up for a shortfall in revenue.
Budget
deficit =
Budget deficit occurs when expected expenditure of government exceeds its
anticipated revenue.
Government
external debt = This is the total debt a country owes to foreign creditors.
Exchange rate = This is the price of a nation’s
currency in terms of another country’s currency. In other words, it is the rate
at which one currency would be exchanged for another country.
Economic
growth = An
increase in the capacity of the economy to produce goods and services.
Government total debt = This is the total debt a country owes
to both domestic and foreign lenders.
Government total expenditure = This
refers to the use of government public expenditure on goods, services and
infrastructure to regulate the economy.
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