Budget deficit and economic growth in Nigeria

Authors

A. D. Umaru, Central Bank of Nigeria
H. M. Aliero, Usmanu Danfodiyo University, Sokoto
M. Abubakar, Usmanu Danfodiyo University, Sokoto

Publisher

Central Bank of Nigeria

Keywords

Budget Deficit, Economic Growth, Linear and Non-linear, ARDL and TAR Models

Abstract

This paper examines the relationship between budget deficit and economic growth in Nigeria, from a linear and non-linear perspective, using annual time series data from 1981 to 2019. The linear model, which involves the use of an autoregressive distributed lag (ARDL) approach, was compared with a non-linear analysis, using a threshold autoregressive (TAR) model. The ARDL analysis reveals that the growth of national output is positively driven by the persistent budget deficit in Nigeria. This was substantiated by the TAR model which indicates that though budget deficit drives economic growth in Nigeria, the positive relationship holds only if the deficit does not exceed the optimal threshold, which is 2.02 per cent of GDP. Our analysis on the control variables shows that interest rate has negative and significant impact on economic growth, while exchange rate has no impact. We recommend that, government should lower interest rate and that expansionary fiscal policy should ensure that fiscal deficits do not exceed 2.02 per cent of the gross domestic product.

Author Bio

Umaru, A. D. is a staff of the Branch Operations Department, Central Bank of Nigeria, Abuja, while Aliero, H. M., and Abubakar, M., are Professors of Economics, Department of Economics, Usmanu Danfodiyo University Sokoto

Publication Title

CBN Economic and Financial Review

Issue

2

Volume

59

First Page

23

Last Page

41

Classification-JEL

C22, E62, F43

Recommended Citation

Umaru, A. D., Aliero, H. M., and Abubakar, M. (2021) Budget Deficit and Economic Growth in Nigeria, CBN Economic and Financial Review (EFR), 59(2), 23-41.