Government Deficit and The Inflationary Process In Nigeria, 1986-1998

Abstract

This research investigates empirically the relationship between government deficit and inflation in Nigeria. The study aimes at determining the nature of causality between deficit and inflation; the dynamics of inflation; and the role of deficit in the process of inflation, among others. Both descriptive and analytical techniques have been used to carry out the study. Specifically, ratios, charts, growth rates and a macro econometric model have been used to analyse relevant statistics. The model of the study was estimated using the Two-Stage Least Squares (2SLS). Two-way causality was found between the variables mentioned earlier. Inflation was found to be a contributory factor to the deficits and tended to be self-generating, due to its effects on government expenditures and revenues. Expenditures adjusted to changes in domestic price level faster than did revenues, and so government revenues persistently lagged behind expenditures, making deficit a recurring feature of government‟s fiscal operations. In addition, the surges in money supply during the period were found to be partly due to the loss of control over expenditures. In financing the excess expenditure, Government 16 over-relied on money creation (especially CBN Monetary accommodation), which increased base money and consequently, inflation. One implication of these findings is that anti-inflation policy must target in part, government expenditures, to be effective. Past inflation stabilization plans failed partly because they could not achieve this. In order to improve, the adjustment of revenues to income and price, early retrieval of revenues, indexation and overall improvement of revenue collection machinery of government are obvious necessities. To regain macro economic balance the government should strive to balance its budgets or restrict deficits to magnitudes that are amenable to less inflationary financing.