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

Besides, in Nigeria, recurrent expenditure forms the larger chunk of fiscal deficit - 80 percent, while capital expenditure accounts for the remaining 20 percent (CBN, 2021). This condition seems to be at variance with the goal of achieving sustainable economic development. Fiscal deficit could be financed locally or externally (Greg & Okpoiarikpo, 2015) through taxation, borrowing and monetization (Eke & Akujuobi, 2021). These sources of financing pose both short-run and long-run effects on the economy (Momodu & Monogbe, 2017). In both developed and developing countries, several measures have been taken in terms of policies to resolve fiscal imbalances (Amwe & Wuyah, 2015). However, many policies and programmes of government have resulted in tax increase and persistent public borrowing in order to meet budgetary demands (Momodu & Monogbe, 2017). One of such is the structural adjustment programme (SAP), which was embraced by many African countries in the 1980s. Notwithstanding, these economies have not experienced the desired level of economic transformation. Borrowing could be from domestic or external sources (Adegboyo, Efuntade, & Efuntade, 2020). However, in case of developing countries where domestic saving is relatively low, governments have opted for external borrowing. Comparing the debt-to- GDP ratio in Nigeria with similar economies like Brazil (6.3%), India (9.5%), and South Africa (15.7%), it would be noted that the debt burden in Nigeria has worsened in recent years. The debt-to-GDP ratio increased from 16.3% in 2016 to 22.3% in 2020, while debt repayments-to-revenue reduced from 50.3% in 2016 to 83.0% in 2020 [Central Bank of Nigeria (CBN), 2021]. External debt burden incurred as a result of deficit financing reduces the purchasing power of citizens. This is because external debt is serviced in foreign currencies thereby increasing the units of local currencies that will exchange for a unit of foreign currencies; leading to an unfavourable exchange rate condition. Thus, fiscal deficit creates imbalance in the current account which triggers exchange rate appreciation and balance of payments disequilibrium. Hence, macroeconomic challenges such as huge debt burden, high inflation rate, heavy import dependence, high unemployment rateare generated (Amwe & Wuyah, 2015). For example, fiscal deficit rose by 137% from ₦ 2.36 trillion in 2017 to ₦ 5.60 trillion in 2021 and debt service rose by 17% from N2,678.81 billion in 2020 to N3,124.38 billion in 2021 (CBN, 2021). Considering the risk of borrowing and debt repayment in foreign currencies, the impelling goal should be to reduce debt burden. However, due to the alarming rate of widening of fiscal deficit and debt repayment obligation, the sustainability of the Nigerian economy in terms of external debt is questionable. Therefore, this study aims at examining the level of influence of fiscal deficit on external debt in Nigeria. Specifically, the current study aims at: i. Ascertaining the strength of the relationship between fiscal deficit and external debt in Nigeria; ii. Determining the directional link between fiscal deficit and external debt in Nigeria; iii. Examining the impact of fiscal deficit on external debt sustainability in Nigeria. Previous studies in this area are mainly focused on the relationship between fiscal deficit or external debt with other macroeconomic variables such as real gross domestic product (GDP), private and public investment and economic development. For instance Akanmobi & Unachukwu (2021) explored the impact of budget deficit on gross domestic product (GDP) growth in Nigeria; Musa (2021) examined the effect of deficit financing on GDP in Nigeria; Eke & Akujuobi (2021) investigated the effect of public debt on economic growth in Nigeria; while Greg and Okoiarikpo (2015) examined the impact of political considerations and institutional quality under different administrative regimes on the growth- performance of fiscal deficit. This study stands out by examining the impact of fiscal deficit on external debt sustainability and possible feedback effects from external debt to fiscal deficit. The study covered forty-year period; from 1981 to 2020. The start year enabled robust study of the impact of relevant policy interventions on the Nigerian economy and the end year afforded the researcher an up-to-date investigation. Time series data obtained from the Central Bank of Nigeria Statistical Bulletin (2021) and the World Development Indicators (2021) was used. The study is divided into five sections. After this introductory section, Section Two contains the review of literature. Section three handles the theoretical framework and model specification, while section four presents the results and discussion of findings. Finally, section five concludesthe study with policy recommendations. II. R eview of L iterature Fiscal deficit occurs when public expenditure on goods and services exceeds public revenue from taxation and all other sources in a particular year (Akanmobi & Unachukwu, 2021). Fiscal deficit differs from public debt; which arises from the accumulation of fiscal deficits. Usually government borrows to finance the gap between public expenditure and public revenue. Thismay lead to serious economic issues like crowding-out effect, higher interest payments and huge debt burden (Boyce, 2020). Fiscal deficit (budget deficit) implies that in a fiscal year, government plans to spend more funds than she intends to generate. On the other hand, budget surplus, which is a plan to generate more public revenue than expenditure within a fiscal year, seems to be more Volume XXII Issue VII Version I 36 ( ) Global Journal of Human Social Science - Year 2022 © 2022 Global Journals E Implication of Fiscal Deficit Financing on External Debt Sustainability in Nigeria