This study seeks to ascertain the impact of fiscal deficit on external debt in Nigeria with a focus on determining the long run relationship between fiscal deficit and external debt, as well as to ascertain the direction of causality between fiscal deficit and external debt. The model employed in this study is the Error Correction Mechanism; Granger causality test was used to ascertain the direction of causality. The time frame for this study spanned between the years 1981-2019. This study found that fiscal deficit is not a significant determinant of external debt in Nigeria. Also, the variables of gross domestic product, degree of openness, exchange rate was found to be insignificant factors determining external debt except inflation which was significant in determining external debt in Nigeria. Furthermore, there was neither a uni-directional nor bi-directional causality between external debt and fiscal deficit. Although, there is causality flowing from budget deficit and degree of openness as well as budget deficit and gross domestic product. However, it was suggested that policies be implemented that will enhance the channeling of funds from the external sector to productive sectors of the economy in order to ensure diversification and revenue generation thereby ultimately lessening the external debt burden that Nigeria is faced with. Finally, there is need for fiscal discipline and fiscal prudence if fiscal deficits would be a true determinant of the size of external debt accumulated in the country.
Citation: Shofade Oladapo Daniel and Kazeem Adebola Ibrahim (2021) Fiscal Deficit and External Debt: The Nigerian Experience, International Journal of Development and Economic Sustainability, Vol.9, No.3, pp.1-18
The study set out to investigate the effect of external debt on Nigerian economy. Time series data for twenty-two years that span from 1994 to 2015 were obtained and subjected to test using Ordinary least square regression (OLS) for the hypotheses formulated for the study. The study revealed some forms of long run relationship between Gross domestic product, on the one part and external debt, external debt service and export, on the other part but of particular importance is the long run marginal negative relationship between external debt and Gross domestic product. The study further confirmed causality, from predictors to dependent variable and recommended that there should be a ban on external debt in Nigeria, for some time. However, where external debt is unavoidably necessary for productive venture/investment that can boost export, it should be for such specific venture/investment and should be well managed to pay back the external debt and its associated service cost, thereby justifying the decision for such external debt without further stress on the economy.