Deficit Financing and Economic Growth in Nigeria: A Preliminary Investigation

Abstract

The fact that Nigerian economy has experienced some setbacks over the last four decades despite the growth of public expenditure cannot be overemphasized. This study thus investigates the incessant rises in government expenditure and the implications of deficit financing on Nigerian economic growth. It traces various governmental efforts in revamping the economy between 1970 and 2010, a period of 41 years. From the literature, it was discovered that deficit financing has become an important tool to correct distortions in an economy if it is put into the most judicious use. However, in Nigeria the reverse is the case as the economy has perpetually being at disadvantages in terms of macroeconomic performance, making it a contentious phenomenon. Thus, there is need for a study to investigate this. The data for the study were obtained from the Central Bank of Nigeria Statistical Bulletin and were analyzed using the econometric technique of Vector Auto Regression (VAR). The findings show that deficit financing had not achieved the desired results in Nigeria as revealed by negative impact of deficit financing on economic growth. This can be adduced to the prevailing socio-cultural mal-adaptation coupled with perennial corrupt practices in the economy. The study recommends that government should reduce wastage in public spending, ensure greater budgetary discipline and adopt a financial structural transformation. In addition, reviewing and rationalizing the existing government parastatals with a view of pruning down the number to a reasonable level was also recommended among others. This is necessary for effective expenditure control purpose.