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1.1 BACKGROUND OF THE STUDY
Government, Military or Civilian believes that one way of solving social and economic problems is by increasing spending. Government as an agent of the people requires revenue to provide education, employment, adequate health services, infrastructures and good roads but in the process of discharging this enormous responsibility the revenue and/or spending requirements of the government may sometimes outstrip its availability, hence the recourse to deficit financing so as to fill the gap between expenditure needs and revenue availability.
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Nigeria’s budget deficit experience dates back to 1961, and appeared justified during the immediate post-independence era, and since then till now 85% of Nigeria’s budget runs in deficit. Okoro (2013) stated that deficit financing arises largely because of the need to expand the economy Governments’ inability to carry out or execute capital projects most times is what births deficit. This ignites the need for Government to finance these projects either through internal borrowing, external borrowing or implementation of monetary instrument to increase the flow of fund in the economy. However there is a repel effect on the economic performance of any country whom the state of its economic activities are financed through the prolonged debt from foreign countries because it frustrates sole investors due to the high interest rate.
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Deficit financing can be seen as the practice of seeking to stimulate a nation’s economy by increasing government expenditures beyond revenue sources (CBN, 2012). Budget deficit is a phenomenon that emanated due to the imbalance in the budget of a country; the imbalance could either be a surplus or a deficit. This phenomenon seems to have come to stay in many economies of the world, in which Nigeria is not an exception.The culture however became seemingly entrenched overtime from 1970, the country ran into fiscal deficits and sustained public sector spending boom. The fiscal deficits of 1970 were justified on the grounds that it was largely for war reconstruction. Backed with huge wealth from oil, Nigeria embarked on wasteful spending, the mismanagement of the oil boom of the early 1970’s led to the return of deficit financing in 1980. From 1982, the continuing decline in crude oil export earnings in 1983 once again ledto the resumption of fiscal deficits which were financed through heavy borrowing after reducing the nation’s reserves.
The need for adequate public expenditure program and management has therefore become paramount, the particularly at this period when the country is in recession and when various arms of government and the private sector are experiencing several financial constraint.
In view of the above discussion on deficit financing and economic growth further questions might be raised thus: Does deficit financial ‘’external and domestic debt’’ significantly affect economic growth in Nigeria? If this is yes, to what extent or what is the nature of the relationship between deficit financing and economic growth in Nigeria? Does the Debt Service have effect on economic growth? Providing answers to these questions posed above, shall be the major focus of subsequent sections and by extension the entire work.
1.2 STATEMENT OF THE PROBLEM
Rapid and sustained output growth of the domestic economy of Nigeria has since the political independence in 1960 been of paramount importance to successive governments in the country. Consequently, governments have since implemented several national development plans and programs aimed at boosting productivity, as well as diversifying the domestic economic base. The goal of this has been the attainment of high levels of economic development that would translate into an improvement in the living standards of the populace and hence a reduction in poverty through an increase in the domestic output and the creation of employment and thereby the maintenance of a favorable balance of payments position (Ariyo, 2007 and Ojo, et al, 2008).
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The infrastructural and capital resources required for the attainment of those objectives have however been scarce. This has necessitated the interventions of the governments in the economy through the provision of the required huge capital outlay necessary for large scale production in heavy industries and for the provision of other infrastructure. Government interventions were made possible by the oil boom of the early 1970’s when Nigeria earned unprecedented amounts of foreign exchange from the export of crude oil (Sikkan, 2008). Government expenditures thus grew rapidly with a similar growth in the bureaucracy. But the oil glut that followed meant that government revenues declined significantly (Akor, 2001). As government were reluctant in reducing the bloated expenditures that had resulted during the oil boom they were forced to seek alternative means of financing their expenditure. Governments then resorted to fiscal deficits.
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Large deficits are common features of most developing countries, such as Nigeria. The economic consequences of such deficit are inflation, devaluation, deteriorating economic growth rate, fiscal adjustment, which constitute important element of the economic agenda. Deficits are often attributed to and caused by rising public spending over and above public revenue. Government has at its disposal various models of financing its spending. These includes: Taxation, printing of money and loans and grants. Borrowing from public is not a major source of funding deficits in developing countries since personal incomes are generally low, credit creation has often been used by developing countries as an alternative mode of financing. A major defect of this mode is however inflationary.
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Fiscal deficits; a situation where current expenditure exceeds current expected income, this have become a recurring feature of public sector financing in Nigeria. The Keynesian demand-side economics emphasized the need for expansion in government expenditures even beyond current income, particularly during depressions when the economy suffers from an insufficiently of active demand, such as the Great Depression of 1929 to 1932 and more recently the 2008 Global financial and economic crisis. This will thereby increase the demand for productive output, resulting in unemployment being overcome (Anyanwu and Oaikhenan 2005, Ogboru, 2006). The policy of fiscal deficits has however posed challenges to the Nigeria economy with regards to its effectiveness and the accumulation of debt, the justification from growth notwithstanding.
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It is for this reason that this work has attempted to assess the effectiveness of fiscal deficits as a tool for the acceleration of economic growth in the Nigeria economy from 1981 to 2015, which covers a period of 34years. The time period incorporated is essential because it captures most policy reforms and changes over time, especially the economic meltdown of 2007/2008 and the current economic recession in the country.
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Research has shown that some studies have been done on deficit financing in Nigeria,however, the relationship between deficit financing and economic growth in Nigeria and a presentable framework for the dynamic changes on economic growth in Nigeria have not been completely dealt with in these studies.Consequently, this study is designed and intends to fill this knowledge gap by exploring the implication of deficit financing and economic growth in Nigeria.
1.3OBJECTIVE OF THE STUDY
The central purpose of this study is to empirically investigate the effect of deficit financing on the output of Gross domestic product in Nigeria over the period of 1981 to 2015. Thus the specific purpose includes;
1.4 RESEARCH QUESTIONS
In line with above stated specific objectives, this study is guided by the following research questions;
1.5 RESEARCH HYPOTHESES
The study formulated three hypotheses in their null form as a guide to achieve the objectives of the study:
Ho1: External debt has no significant effect on Nigerian economic growth.
Ho2: Domestic debt has no significant effect on Nigerian economic growth.
Ho3: Debt service does not have significant effect on Nigerian economic growth.
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1.6 SIGNIFICANCE OF STUDY
The importance of this study cannot be over emphasized because every sector of the economy stands to benefit one or two things from the researchers work. The major people who will benefit from this work are :
1.7 LIMITATION OF THESTUDY
The accuracy of this research work has been hindered by some factors such as:
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