IMPACT OF FISCAL DEFICIT ON EXTERNAL DEBT IN NIGERIA

ABSTRACT

The aim of this study is to ascertain the impact of fiscal deficit on external debt in Nigeria with a focus on determining the direction of causality between fiscal deficit and external debt. Secondary aim of this study includes determining the long run relationship between fiscal deficit and external debt, as well as to ascertain the degree of dependence of external debt on other independent variables of exchange rate, degree of openness and inflation rate. The model employed in this study is the Autoregressive distributed lag model (ARDL), Granger causality test was used to ascertain the direction of causality. The time frame for this study spanned between the year 1981-2019. This study found that fiscal deficit is a significant variable in determining external debt in Nigeria. Also, the variables of exchange rate, degree of openness, gross domestic product was found to be significant factors in determining external debt in Nigeria except inflation rate. Furthermore, no causality was found to exist between external debt and fiscal deficit. 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