Deficit Financing Components, Inflation and Capital Formation in Nigeria: Evidence from A Direct and Indirect Analysis

Abstract

Deficit financing occasioned by low domestic savings and low capital formation, have characterised the Nigerian economy since the 1970s with attendant increase in inflation. Empirical studies on Nigeria have shown that deficit financing directly affects inflation and capital formation when examined independently. However, little attention has been paid to a simultaneous investigation of the direct and indirect effects of deficit financing components on inflation and capital formation in Nigeria. Consequently, this study was designed to fill this gap through time series data and the instrumental variable approach. The study found that deficit financing components indirectly impacted on inflation and capital formation in Nigeria from 1970 to 2017; as against the direct effects reported in empirical studies. Also, inflation was found to have had adverse effect on capital formation. Hence, better synergy of fiscal and monetary policies to effectively tame inflation and ensure growth of capital formation was recommended.

Macroeconomic Factors and the Prospects of Economic Prosperity in a Developing Economy: Evidence from Dynamic ARDL Simulations

“…As the nominal exchange rate rises, the country's exports become cheaper in the international market. Although Nigeria operated a xed exchange rate regime till mid-1986, the perceptions about the country's export as being too expensive have seen the domestic currency (naira) undergo several liberalisation policies to date (Aladejare, 2022b). Subjecting the naira to the operations of market forces is expected to aid export demands, improve foreign earnings, and enhance the country's long-term productivity.…”

Macroeconomic Factors and the Prospects of Economic Prosperity in a Developing Economy: Evidence from Dynamic ARDL Simulations and KRLS Techniques

“…As the nominal exchange rate rises, the country's exports become cheaper in the international market. Although Nigeria operated a fixed exchange rate regime till mid-1986, the perceptions about the country's export as being too expensive have seen the domestic currency (naira) undergo several liberalisation policies to date (Aladejare, 2022b). Subjecting the naira to the operations of market forces is expected to aid export demands, improve foreign earnings, and enhance the country's long-term productivity.…”

“…This outcome implies that the supplementary funds derived through deficit financing to augment the use of revenue for infrastructural development have been income-diminishing. Extant studies such as Ebi and Aladejare (2022) and Aladejare (2022b) have observed that annually, an enormous share of Nigeria's deficit financing funds are often expended on import demands and subsidy payments. Such measures cannot promote a country's income growth and overall economic wealth.…”

“…Nigeria has been running a deficit budget since 1970 due to the inability of its revenue, predominantly from oil, to meet its development needs. Recent empirical findings by Ebi and Aladejare (2022) and Aladejare (2022b) have further shown that despite growth in deficit financing, they have not helped to generate the necessary wealth due to poor fiscal management. Foreign investment is another critical indicator of economic prosperity through job creation, primarily when they flow to the real sectors.…”

How Significant is Trade, Macroeconomic Management, and Economic Integration for Foreign Indebtedness in West African Countries?

“…The existing policy synergy between a country's monetary and scal authorities can accelerate or decelerate external debt. For instance, the scal authorities in developing countries often justify their need for borrowing on employment creation, economic growth, and infrastructure development needs (Aladejare, 2022b).…”