Budget Deficit and Macroeconomic Variables in Nigeria

Abstract

This study examined the effect of budget deficit on selected macroeconomic variables in Nigeria from 1990 to 2023. The variables investigated include inflation rate, interest rate, broad money supply (M2), and real GDP growth rate. An ex-post facto research design was adopted, with annual secondary data sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin, National Bureau of Statistics, and the World Bank World Development Indicators. The Autoregressive Distributed Lag (ARDL) bounds testing approach of Pesaran, Shin, and Smith (2001), supported by Augmented Dickey-Fuller and Phillips-Perron unit root tests and pairwise Granger causality analysis, was employed for estimation. Unit root tests confirmed mixed integration orders, I(0) and I(1), validating the ARDL framework. Long-run cointegrating relationships were confirmed between budget deficit and all four macroeconomic variables. Findings revealed, prominent among others, that budget deficit has a positive and significant long-run effect on inflation rate (β = 0.0023, p < 0.01), interest rate (β = 0.0008, p < 0.05), and money supply (β = 6.3842, p < 0.01). The long-run effect on economic growth is negative and significant (β = −0.0004, p < 0.05), though a positive short-run demand-stimulus effect was also detected. Granger causality tests confirmed unidirectional causality running from budget deficit to all four variables. The study concludes that persistent fiscal deficits generate macroeconomic instability in Nigeria and recommends fiscal consolidation, elimination of deficit monetization through the CBN’s Ways and Means facility, and redirection of deficit-financed expenditure toward productive capital investment.