Cost of Governance and Fiscal Deficit in Nigeria: Evidence from State Government Data

Authors

P. Ekeocha, Central Bank of NigeriaFollow
A. Ikenna-Ononugbo, Central Bank of NigeriaFollow

Publisher

Central Bank of Nigeria

Keywords

Fiscal Deficit, Governance, Heterogeneity.

Abstract

Fiscal deficit has remained a predominant occurrence at both the Federal and state government levels, and this has become a source of concern for economic managers. At the individual state level, a quarter of the state governments consistently ran deficit for more than six consecutive years, from the period 2007 to 2014. More importantly, the combined overall fiscal balance of the state governments has resulted frequently in deficit in the past two decades. Fiscal deficit is not bad in itself, but most of the state governments are running fiscal deficit to sustain recurrent expenses, rather than infrastructure development. Available studies on the determinants of fiscal deficit have not considered cost of governance as an important determinant. Thus, the authors investigated the effect of cost of governance and other determinants, on fiscal deficit across the Nigerian states for the period 2008-2015. Using the dynamic panel of the Arellano-Bond (Difference) GMM Estimators in the Keynesian framework, the results revealed that cost of governance had fueled fiscal deficit at the state level in Nigeria. It also showed that inflation, population size and economic growth had significant impact on fiscal deficit across the Nigerian states. The authors underscored the need for strengthening public financial management reforms, particularly, the Fiscal Responsibility Act, the Medium Term Expenditure Framework, and the treasury single account, at the sub-national level to ensure fiscal discipline. This will enable the state governments to be more prudent and ensure that fiscal deficit is geared towards infrastructure development.

Author Bio

The authors are staff of the Research Department, Central Bank of Nigeria.

Publication Title

CBN Economic and Financial Review

Issue

1

Volume

55

Recommended Citation

Ekeocha, P. and Ikenna-Ononugbo, A. (2017). Cost of Governance and Fiscal Deficit in Nigeria: Evidence from State Government Data. CBN Economic and Financial Review. 55(1), 111-136.