ASSESSING THE NEXUS BETWEEN DEFICIT FINANCING AND ECONOMIC GROWTH IN NIGERIA

This study examines the relationship between deficit financing and economic performance in Nigeria from 1990 to 2023. Deficit financing was proxied by Federal Government domestic borrowing, African Development Bank loans, International Monetary Fund loans, World Bank loans, and total debt service, while gross domestic product serves as a measure of economic performance. Data were sourced from the World Bank’s World Development Indicators (WDI) and the Central Bank of Nigeria (CBN) Statistical Bulletin. Employing the Augmented Dickey-Fuller (ADF) unit root test and the Autoregressive Distributed Lag (ARDL) model, the study ensured stationarity and established both short-run and long-run dynamics. The empirical evidence reveals that deficit financing significantly influences Nigeria’s economic performance in the long run. Specifically, domestic borrowing and African Development Bank loans exhibits positive and significant contributions to Gross Domestic Product, highlighting their catalytic role in capital accumulation and growth. Conversely, International Monetary Fund loans demonstrates a negative but significant effect on Gross Domestic Product in both the short and long run, suggesting the potential crowding-out effect and structural rigidities associated with conditional lending. World Bank loans, however, shows a positive and significant impact in the short run, while total debt service negatively and significantly constrained Gross Domestic Product, reflecting the debt overhang effect. The study concludes that while strategic deficit financing can foster economic growth, unsustainable debt servicing undermines long-term productivity. It therefore, recommends that the Federal Ministry of Finance, Debt Management Office, and National Assembly ensure that borrowed funds are judiciously invested in productive sectors such as infrastructure, health, and education to maximize growth dividends.