MACROECONOMIC IMPACT OF FISCAL DEFICITS IN NIGERIA (1970-2012)

Résumé

Few issues in public finance of developing countries have generated so much debate on fiscal deficits. Critics have rejected the claims that any positive contribution have been made to the economy. But proponents of fiscal deficits had seen them as catalyst of economic growth and development. There are no enough empirical studies to show the negative and positive effects of fiscal deficits on the Nigerian economy. The objective of this study is to investigate the impact of fiscal deficit on macroeconomic variables in Nigeria. This study has investigated the macroeconomic impact of fiscal deficits in Nigeria for a period of thirty-nine years. The study made use of two-stage least squared method. Four sectors block were estimated using 2SLS namely external sector, public sector, monetary sector and real sector block. The empirical results of the model showed that all the equations of the models have good fit as indicated by the adjusted R2 whose values ranged between 49% and 94%. The estimates of demand for money indicate that fiscal deficit is positively influenced to real demand for money. There is also an indication that fiscal deficits influenced real income, inflation and prices is statistically significant in explaining what is happening to them. From the estimation equations, in public sector block, the results have good fit as adjusted R2ranged between 51% and 90%. The results show that fiscal deficits have positive impact on inflation, positive impact on unemployment, export, import and gross domestic product. The results also show that fiscal deficits and money supply are positively related to exchange rate. From the simulation experiments, a ten percent increase in fiscal deficits caused appreciable increase in demand for money balances, price level, real income, import, gross domestic product, exchange rate, inflation, agricultural output, manufacturing and oil and gas. Other variables in the model have shown positive but relatively minor increases. Demand for money balances, price level, real income, monetary policy rate and other macroeconomic variables in the model showed marginal increase ranging from 0.0002% to 0.15%. Overall, the effects of decrease in fiscal deficits on the economy were relatively low for expansion in domestic credit which created excessive supply of money over demand and therefore led to foreign reserve outflow. It is therefore concluded that fiscal deficits have significant impact in Nigeria. The study therefore recommends among others the followings: Government should adopt appropriate exchange rate policies to ensure that even when these deficits are being paid for, the exchange rate for our domestic currency will not be affected. In order to curtail deficits, public spending growth rate must be reduced. The government spending should be more in the productive sectors of the economy such as the industrial and agricultural sectors of the economy. There should be reduction in fiscal deficit, which will help to improve balance of payments deficit. Government should aim at fiscal balance to achieve macroeconomic
stability and there is a need for budget restructuring and non-oil revenue must increase substantially. There should be improved revenue collection to reduce government borrowing and the negative effects on the economy. Fiscal and monetary policies must be properly coordinated or harmonized in Nigeria to achieve improved macroeconomic outcomes.