IMPACT OF FISCAL DEFICITS ON MACROECONOMIC VARIABLES IN NIGERIA

Abstract

This paper examines the implications of federal government fiscal deficits on the macroeconomic variables in Nigeria. Using Auto-Regressive Distributed lag (ARDL) approach, the study found that there is significant long run relationship between fiscal deficit and selected macroeconomic variables in Nigeria. It established that federal government deficit does not have significant impact on external reserve in Nigeria in the short-run period, and also that there is no significant influence of federal government deficits on inflation in Nigeria within the period under study. This presupposes that increase in fiscal deficit will stimulate aggregate demand, output, and reduction in long-run inflation, although, real interest rate may rise to bring securities market into balance. The test conducted to examine if there is casual relationship between federal government deficits and lending rate in Nigeria shows a significant causal relationship between federal government deficits and lending rate, indicating the crowding out effect of fiscal deficit on the private sector credit in Nigeria. Furthermore, investment may also have been crowded out and output further reduced, and changes in the real exchange rates over the years could also be attributed to fiscal policy actions. Therefore the outcome of this paper underscores the imperative of fiscal deficit in the Nigeria economy.