Interest Rates and Fiscal Deficits in Nigeria: An Impact Analysis

Abstract

This study examined the impact of fiscal deficit on interest rate in Nigeria. Quarterly from 1990Q1 to 2020Q1, collected from the Central Bank of
Nigeria and National Bureau of Statistics was used. Fiscal deficit was represented by Domestic Debt, External Debt and Debt Servicing while
interest rate was proxied by Lending Rate. Autoregressive Distributed Lags and Cointegration techniques were employed as informed by the result of the Unit Root test. Findings showed that External Debt and Debt Servicing have significant impact on Interest Rate in both the short run and long run periods. While External Debt had direct impact on Interest Rate, Debt Servicing had an inverse impact. However, the Domestic Debt could not indicate any significant impact in both periods. The study therefore suggests that, since External Debt has direct impact on Interest Rate which dictates the tune of money supply and then inflation, there is need to tailor fiscal deficit in line with monetary policy objective in order to avoid policy conflict. Also, the government could better incur domestic debt instead of external debt since domestic debt has no significant impact on interest rate.