Fiscal Deficit Inflation Nexus in Nigeria

This study analyses the relationship between fiscal deficit and inflation in Nigeria using annual data covering the period 1980 to 2023. Specifically, the study seeks to: investigate the long and short-run effects of fiscal deficit and inflation in Nigeria; and also ascertain the causal relations between fiscal deficit and inflation in Nigeria. The study employs the Auto-Regressive Distributed Lag (ARDL) technique and the Granger Causality test to address the specific objectives. The study reveals that fiscal deficit has a direct and significant impact on inflation in the long run and an inverse insignificant relationship in the short run in Nigeria and there is no causal relation between fiscal deficit and inflation in Nigeria. The study recommends that the government should closely monitor fiscal deficit given its crowding out effect. To achieve this, there is need for the government to be cautious in reducing government spending (borrowing) which can help to free up funds for private investment. However, there should be caution, as this can negatively hurt economic growth. Furthermore, the government should closely monitor and support agricultural and real sectors because developing the agricultural sector has great potential to increase the supply of farm products and other necessities of life. The increased supply will reduce prices and increase employment generation. Also, establishing job-creating industries, will help to reduce the level of unemployment in the country, increase output, reduce prices of goods and services, and thus, reduce the level of inflation in the economy.