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Abstract
Deficit financing seems to present a positive inflationary impact on developing economies particularly Nigeria. When there is a budget deficit, government finds ways of financing the deficit through borrowing from commercial and merchant banks or from the nonbanking public and through the issue of short-term bonds and monetary instruments. The use of deficit financing for the pursuit of fiscal policies often leads to increased danger in an economy. This paper examines the extent to which deficit financing has affected the Gross Domestic product (GDP) of Nigeria, its impact on the continuous rise in prices of goods and services of the country as a measure of the consequences of extra budgetary spending. It also reviews the effectiveness of the strategic options adopted to eliminate the constant reoccurrence of deficit financing in Nigeria. The paper suggests that Nigeria should reduce and possibly avoid extra-budgetary spending in order to cut the crowding out effects of deficit funding as well as avert future debt crisis.
Key Words: Inflation; Public expenditures; Deficit financing
JEL Classification: E 31, E 62, H 62, N17
Introduction
Budget deficit is a situation where total expenditure exceeds the revenue for a given period. When a deficit is involved, it is important to find remedy for financing such deficits so as to eradicate the negative effects. The growth and persistence of developing countries in recent times has brought the issues of fiscal deficits into sharp focus. The issues surrounding fiscal deficits are certainly not new, but the economic development of the past decade developing the interest in fiscal policy issues. In the developing countries including Nigeria fiscal deficits have been blamed for much of the economic crisis that beset them in the 1980s resulting in over indebtedness and the debt crisis, high inflation, poor investment performance, and growth. Attempts to regain stability at the macrolevel through fiscal adjustment achieved uneven success, raising questions about the macro- economic consequences of public deficit and fiscal deterioration.
Government expenditure in Nigeria has consistently exceeded revenue for more of the years since 1980. Deficit financing in Nigeria dates back to 1961, when the first deficit financing exercise was undertaken and subsequently it became presumably part of the budgetary process in the country. It is observed that deficit...