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