Deficit Financing and Economic Growth in Nigeria

Abstract

Despite huge external and domestic borrowings, Nigeria economic growth rate lags its country peers. Thus, the effect of external and domestic borrowings on economic growth has engaged the minds of academia and policy makers both at theoretical, measurement, methodological as well as empirical levels. In view of this, this paper evaluates the effect of external and domestic borrowings on economic growth. To achieve this objective, auto regressive distributed lag (ARDL) model was employed. The results of the empirical analysis were found to be mixed and diverging. This is because while 1% increase in external borrowings is accompanied by 0.43% and 0.17% decline in economic growth in the first and second period, 1% increase in domestic borrowing leads to improvement in economic growth by 0.42% and 0.17% in the two-lag period in Nigeria.   Based on these findings, the study recommended that the debt management office should review external borrowing policies to ensure total compliance with the established IMF/World Bank threshold of 30% GDP – external debt ratio so as Forstall its hurtful effect on the economic growth performance.