Fiscal Deficit and Inflationary Trend in Nigeria

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CBN ECONOMIC & FINANCIAL REVIEW, VOL. 37 N o 2

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FISCAL DEFICITS AND INFLATION DYNAMICS IN NIGERIA: AN EMPIRICAL INVESTIGATION OF CAUSAL RELATIONSHIPS

Emmanuel Ating Onwioduokit Government expenditure in Nigeria has consistently exceeded revenue for most o the years beginning from 1980. This paper investigates the causal relationship f between infation andfiscal deficit in Nigeria from 1970 to 19194. It was empirically confirmed that althoughfiscal dejkit causes inflation, there was nofeedback between inflation and fiscal deficit. However the findings showed that feedback existed between inflation and fiscal deficit deflated by the GDP The Structural model of inflation revealed that, it takes about two years for the fiscal deficit to impact on inflation in Nigeria. The study concluded that what should be cfprrramount concern to policy makers as regards inflation should not so much be the level offiscal deficits but the sources of its financing as well as the absorptive capacity of the economy. Thus,policies to tame inflation should have inbuilt ability to increase the productive capacity of the economy.

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INTRODUCTION:

The growth and persistence of fiscal deficits in both the industrialized and developing countries in recent times have brought the issue of fiscal deficits into sharp focus. The issues surrounding fiscal deficits are certainly not new, but the economic development of the past decade has rekindled the interest in fiscal policy issues. In the advanced countries, the growth of United State Federal deficit provided the impetus for a reassessment of the effect of fiscal deficits on economic activities (Islam and Wetzel, 1991). In the less developed countries induding Nigeria, fiscal deficits have been blamed for much of the economic crisis that beset them in the 1980s: over indebtedness and the debt crisis; high inflation and poor investment performance; and growth. Attempts to regain stability at the macro-level through fiscal adjustment achieved uneven success, raising questions about the macroeconomic consequences of public deficits and fiscal deterioration or fiscal stabilization (Easterly and Schmidt-Hebbel, 1993). Mr. E. A . Onwroduokit is an Economist in the international Economic Relations Department, Central Bank o Nigeria. f The vzews expressed, are those o the author and do not necessarily reflect the oficial positron o the Central Bank o f f f Nigeria.

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CBN ECONOMIC &FINANCIAL REVIEW, VOL. 37 No.2

Government expenditure in Nigeria has consistently exceeded revenue for mo of the years beginning from 1980. The symptoms of such fiscal imbalance are, o course, budget deficits. While budget deficits are nothing new in the country history, the recent size of the deficit has been a cause of concern to many peop including academics, policy makers, and investors. It is, however, pertinent to no that much of the debates over the deficits has been more related to the effects o unacceptable large deficits rather than with the causes of the deficits. For exampl higher interest rates, real exchange rate depreciation, increased public spending a frequently mentioned. Others point the direct relationship between fiscal defici and inflation, with the causal link generally assumed to be deficit financing b means of credit creation through the banking system. Even though convincin empirical evidences pointing to a significant relationship between deficits and thes variables are few, there has been renewed interest on the issue of deficits reductio in recent times. However, proposals that do not address the basic causes of defic growth will not likely achieve the desired results of deficit reduction on a sustainab basis. In Nigeria, a lot of work has been done on inflation. However, the causali between deficit and inflation has not been investigated. This study seeks empirically verify the existence of a causal relationship between fiscal deficits an inflation in Nigeria and present a...
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