FISCAL DEFICIT AND ECONOMIC PERFORMANCE IN NIGERIA

Abstract

Despite several efforts to improve economic performance, Nigeria continues to face significant
challenges, including high fiscal deficits and sluggish economic growth. While extensive
empirical research has analysed the effect of fiscal deficit on economic growth, limited studies
have specifically investigated their nuanced effects on Nigeria’s economic performance. This
study examined the effects of fiscal deficit on Nigeria’s economic performance from 1987 to
2022. Fiscal deficit is incorporated as the independent variables, while interest rate, inflation
rate and gross fixed capital formation are included as control variable. Economic performance
is measured using GDP growth rate. Preliminary analysis shows that the unit root results
indicate variables were integrated at orders zero and one, with none integrated at order two,
making the series suitable for (ARDL) estimation approach. The ARDL analysis conducted at
a 5% level of significance revealed that in the short-run the current year’s fiscal deficit (β=
0.0004, t= 0.9262) had a positive but insignificant effect on economic performance. However,
fiscal deficits from one and two years prior had positive and significant effects. In the longrun, fiscal deficit (β=-1.0001, t=-1.8600) exhibited a negative but insignificant effect on
economic performance. Diagnostic residual tests confirmed that the model’s residuals were
normally distributed and appropriately specified. The study concluded that the fiscal deficit has
a negative and insignificant effect on Nigeria’s economic performance. It is recommended that
the government should not focus solely on fiscal deficits to improve economic performance,
but also consider other macroeconomic variables.