Project Materials

THE IMPACT OF FISCAL DEFICIT ON ECONOMIC PERFORMANCE IN DEVELOPING COUNTRIES: A CASE STUDY ON NIGERIA

ABSTRACT

Fiscal deficit has been identified as one of the most essential parts of fiscal policy management. The primary goal of this research is to examine the effects of fiscal deficit on economic development in Nigeria, using basic percentages to analyse the variables. This simple table was used to calculate the effect of the fiscal deficit on the Nigerian economy’s growth rate, money supply, inflation, and deficit. As a result, it was advised that the budget deficit be decreased successfully in order for Nigeria’s economy to develop to a very high quality. Fiscal reforms must therefore be decisive, transparent, and equitable in order to gain public support and be successful.

Chapter one

INTRODUCTION

Background of the study

One of the most important aspects of fiscal policy is the management of the fiscal deficit, which refers to the excess of public sector spending over revenue; this fiscal deficit has been a driving force behind macroeconomic adjustment.

However, in the 1980s, fiscal adjustment was advised to developing countries [including all African countries] as a way to help them overcome their economic issues. It is widely acknowledged that fiscal deficit, a major fiscal indicator, influences economic growth.

Good fiscal management protects access to foreign lending and avoids crowding out private investment, while economic growth stabilises the budget and improves the country’s fiscal situation.

The virtuous circle of growth and excellent fiscal management is one of the most compelling arguments for a low-deficit strategy.

Most economic development historians consider the 1960s and 1970s to be the “Golden Years” for emerging countries. This is due to the fact that these countries’ development rates were not only strong, but also primarily self-generated, resulting in increasing investment with less reliance on foreign sources.

From the 1970s to the early 1980s, the majority of less developed countries’ economic growth was debt-laden, as they increasingly maintained a current account deficit [World Bank 1999].

In Nigeria, to accelerate economic growth following an international oil glut, the government was forced to spend more of its resources. This prompted the government to join other countries such as Columbia and Ghana, which are also experiencing fiscal deficits.

According to Anyanwu [1997], Nigeria’s deficit was contracted for a variety of reasons, including trade finance, project execution, and meeting residents’ social and economic demands, such as infrastructure, education, and health facilities.

Taxation and oil have been the primary sources of revenue. The experiences of nations such as Mexico in 1982 and Nigeria after 1981, however, have signalled the end of an era in which trust in the non-detrimental nature of an unrelieved current account deficit has taken on essential importance.

Slow growth in Sub-Saharan Africa in general, and Nigeria in particular, has been attributed to a number of issues, including perpetually decreasing terms of trade, high inflation, insufficient investment, ineffective domestic policies, and subsequent credit rationing [Mankin and Ball, 1998].

Several attempts have been made to stem this deteriorating tendency, which has resulted in the implementation of numerous domestic economic policies and fiscal policy management by Nigeria.

The International Monetary Fund and the World Bank have launched a number of projects, including the Structural Adjustment Programme (SAP). Despite all of these efforts, the Nigerian economy has continued to overheat due to the expansion of the fiscal deficit.

STATEMENT OF THE PROBLEM

In the case of Nigeria, it is evident that a lack of fiscal discipline is the scourge of the economy, since realised receipts are frequently higher than budgetary estimates, and extra-budgetary expenditure has risen dramatically, resulting in a massive fiscal imbalance.

The ill position is largely due to the massive debt service duty, expenditures, particularly the financing of ECOMOG in Liberia and Sierra Leone, and other factors.

The budget deficit has grown unsustainable. There is growing anxiety about the situation. Persistent and significant government deficits have usually resulted in increased government debt as a ratio of GDP to total private wealth, raising growing concerns about their negative impact on the productive capital stock.

Indeed, it is believed that an increase in public debt would continue to feed on itself, as the government borrows from itself to fund interest payments, and debt will eventually become excessive in relation to macroeconomic variables.