Effect of Budget Deficit Financing on Inflation in Nigeria

Abstract

The study examines the effect of budget deficit financing on inflation rate in Nigeria from 2008 to 2024. The dependent variable was proxied by inflation rate, while the independent variable was proxied by domestic debts and foreign aid. Using Ex post facto research design, quarterly time series data were extracted from the Central Bank of Nigeria's statistical bulletin 2024. Johansen Cointegration test and Vector Error Correction estimation test was also used based on the unit root test result. The result showed that domestic debts had a positive significant effect on inflation rate in Nigeria, while foreign aid had a negative significant effect on inflation rate in Nigeria. The study recommends that the government should adopt a more structured approach to domestic borrowing. This includes lengthening the maturity profile of domestic debt, avoiding excessive short-term issuances, and aligning borrowing with productive investments that expand supply and reduce inflationary bottlenecks. Foreign aid has the capacity to reduce inflation in the short run. Government should strengthen relationships with development partners and prioritize concessional external financing tied to infrastructure, human capital, and productivity improvements. This can mitigate inflationary pressures associated with deficit financing while supporting long-term growth.