This study investigated possible causal relationships between fiscal deficit and exchange rate in Nigeria. The study adopted the vector autoregression (VAR) econometric technique to analyze the time series data obtained from the Central Bank of Nigeria and other sources. The study amongst other findings, found long run relationship between exchange rate and fiscal deficit, irrespective of how the deficit is financed. The study also found joint causality running from fiscal deficit to exchange rate with feedback. Also joint causality was found running from exchange rate to both the size of deficit finance through domestic and external borrowings, but without any feedback. Consequently, the variation in exchange rate are chiefly from both overall fiscal deficit financed through external and domestic borrowings. The study concluded that, fiscal deficit irrespective of how it is financed has significant negative effect on exchange rate in Nigeria and has contributed in worsening exchange rate volatility in Nigeria. The study recommends that the fiscal deficit should be scarcely deployed and moderated as a fiscal policy tool, as this causes shock and instability in price levels in general and exchange rate in particular.
This study investigated the relationships between fiscal deficit, financing options visa -viz domestic and external borrowing financed deficits and unemployment rate in Nigeria. The study adopted the vector autoregression (VAR) econometric technique to analyze the time series data obtained from the Central Bank of Nigeria and other sources. The study found long run relationship between unemployment and the other endogenous variables, namely; GDP per capita, overall fiscal deficit, domestic credit to the private sector, domestic borrowing financed deficit, external borrowing financed deficit and foreign direct investment. The study also found positive relationship between unemployment rate and fiscal deficits. However, the variation in unemployment is mainly from overall fiscal deficit financed through domestic borrowing. The study concluded that, fiscal deficits especially when financed through domestic borrowing components, have contributed in fuelling worsening unemployment problem in Nigeria. This is found to be empirically true as mounting public debt burden pose an obstacle to initiating new critical development projects that could generate employment. The study recommends that the rising trend of using domestic sources to finance fiscal deficit should be moderated and discouraged. If borrowing is absolutely necessary, external borrowing should be a better alternative. In the stead of public borrowing, fiscal managers should also undertake holistic tax reforms to improve tax revenue and use same to fund government expenditure expansions, especially new critical capital projects with positive linkages.
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