Abstract:

Over the years fiscal operations in Nigeria have been characterized by massive deficits alongside massive infrastructural deficiency and weak economic fundamentals. This has not only weakened the conventional argument that governments engage expansionary fiscal policy to enhance economic growth and development but has extended the debate on whether deficit financing is the cause or result of weak economic fundamentals. In this study, the impact of selected economic indicators on fiscal deficits is examined. The study covers the period 1981-2016 and model estimation is based on the method of fully modified ordinary least squares (FMOLS). The result shows strong negative impact of external debt and money supply on fiscal deficits. It also shows that exchange rate depreciation and inflation exert strong positive influence on fiscal deficits in Nigeria. However, there is no evidence from the study that lending rate and output (GDP) growth rate significantly determine deficit financing in Nigeria. The study recommends that inflation and exchange rate targeting should be a major concern to the monetary authorities in the formulation and implementation of monetary policy. We suggest that future research in the area should incorporate institutional and political factors to ascertain whether or not they significantly determine the use of deficit financing in Nigeria.