Global Journal of Human Social Science, E: Economics, Volume 22 Issue 7

Implication of Fiscal Deficit Financing on External Debt Sustainability in Nigeria Olayide O. Olaoye α & Sunday O. Odumeru σ Abstract- The accumulation of debt for developmental purpose has failed to yield the desirable transformation. So, the study investigated the impact of fiscal deficit financing on external debt sustainability in Nigeria. The dual gap theory formed the basis of the study. Using annual time series data from 1981 to 2020 and the Autoregressive distributed lag technique, the study found that lagged external debt, exchange rate and fiscal deficit significantly impacts external debt servicing in Nigeria. Therefore, it was recommended that government should use external loans productively; public policy should be geared towards export promotion; and interest rate should be very low. Keywords: fiscal balance, financing gap, sustainability, domestic resource gap, trade gap. I. I ntroduction iscal deficit is an important macroeconomic variable that gives signal about the level of vulnerability of the economy. Fiscal deficit exists when the planned total expenditure of government exceed the planned total revenue. Fiscal deficit is an indicator of the financial status of an economy. Therefore, the management of fiscal deficit is a crucial element of fiscal policy (Chukwu, Otiwu & Okere, 2020). In developing economies, fiscal deficit has followed haphazard trends. Table 1.1 presents a six period trend of fiscal deficit in Brazil, Ghana, South Africa and Nigeria from 1991 to 2020. Table 1.1 shows that Brazil had an average deficit budget of N1.33million from 1991 to 1995 and maintained a budget deficit up until 2020 although it experienced fluctuations during this period. Ghana had an average budget deficit of N1.50million between 1991 and 1995. This kept increasing until 2001 where it had an average budget surplus of N0.19million. The budget surplus declined to a deficit of N0.69million between 2006 and 2010 and continued decreasingup until 2020. South Africa also had an average budget deficit of N0.81million between 1991and 1995. This fluctuated over the years and sharply dropped to N1.13million between 2016 and 2020. Nigeria had an average budget surplus of N0.20million between 1991 and 1995 and it fluctuated and declined sharply to an average budget deficit of N0.25million from 2015 to 2020. Amongst these countries, Ghana had the highest average budget deficit of N1.50million between 1990 and 1995 while Nigeria had an average surplus of N0.20million. As at 2020, South Africa had the highest average budget deficit of N1.31million while Nigeria had the lowest deficit of N0.25million. Period/ Country 1991-1995 ( ₦ bn) 1996-2000 ( ₦ bn) 2001-2005 ( ₦ bn) 2006-2010 ( ₦ bn) 2011-2015 ( ₦ bn) 2016-2020 ( ₦ bn) Brazil -1.33 -0.37 -0.60 -0.34 -1.53 -1.13 Ghana -1.50 -1.74 0.19 -0.69 -0.66 -0.40 South Africa -0.81 -0.31 0.03 -0.76 -0.76 -1.31 Nigeria 0.20 0.96 1.89 1.14 0.56 -0.25 Source: World Development Indicator (2020) Goal 17 of the United Nations (UN, 2015) sustainable development goals (SDG) aims at partnership for the goals. In order to attain SDG 17 it is expected that the value of fiscal deficit must be low and sustainable. Even though Nigeria seems to be faring better than other developing countries in terms of fiscal deficit balance, fiscal deficit in Nigeria has been fluctuating at alarmingly rates (Musa, 2021). Fiscal balance growth rate increased from 13.29% in 1981 to 22.56% in 1990. Fiscal balance growth rate became negative (-100.81%) in 1995, but increased drastically to 2331.7% in 1996. Again, fiscal balance growth rate fell to 114.42% in 1997. Thereafter, fiscal balance rose sharply to 2353.23% in 1998. In 2000, there was a decline (-71.75%) and thereafter, fiscal balance growth rose to 82.69%. in 2009, fiscal balance growth plummeted to 1471.65% but fell drastically to 6.93% in 2010. As at 2020, fiscal balance growth stood at 20.88% and Nigeria has been consistently operating deficit financing since 2015 till date [Central Bank of Nigeria (CBN), 2021]. F © 2022 Global Journals Volume XXII Issue VII Version I 35 ( ) Global Journal of Human Social Science - Year 2022 E Author α σ : Department of Economics, Ajayi Crowther University, Oyo, Oyo State, Nigeria. e-mails: oo.olaoye@acu.edu.ng , olaoyeolayide@gmail.com