Deficit Financing and Its Inflationary Impact on Developing Economies : Nigerian Economy in Perspective

IntroductionBudget deficit is a situation where total expenditure exceeds the revenue for a given period. When a deficit is involved, it is important to find remedy for financing such deficits so as to eradicate the negative effects. The growth and persistence of developing countries in recent times has brought the issues of fiscal deficits into sharp focus. The issues surrounding fiscal deficits are certainly not new, but the economic development of the past decade developing the interest in fiscal policy issues. In the developing countries including Nigeria fiscal deficits have been blamed for much of the economic crisis that beset them in the 1980s resulting in over indebtedness and the debt crisis, high inflation, poor investment performance, and growth. Attempts to regain stability at the macrolevel through fiscal adjustment achieved uneven success, raising questions about the macro- economic consequences of public deficit and fiscal deterioration.Government expenditure in Nigeria has consistently exceeded revenue for more of the years since 1980. Deficit financing in Nigeria dates back to 1961, when the first deficit financing exercise was undertaken and subsequently it became presumably part of the budgetary process in the country. It is observed that deficit financing is not just a problem to Nigerian economy alone, but it appears to be a worldwide phenomenon1. Countries like the U.S.A., Sweden, Europe and other developed countries have, from one time to another, experienced deficit financing. For instance, in the European Union, members try to ensure that budget deficits when incurred do not exceed three per cent expressed as a ratio of their Gross Domestic product (GDP) for that period2.Economic research over the years has shown that deficit financing results in a number of economic consequences, particularly for economic growth and development. Also numerous macro-economic aggregates are affected in the process of deficit financing. For instance, interest rates, exchange rates, money supply, public debt, etc have consequences and burdens on both the present and future generation and determination of payment position3. Economic studies have also found a high degree of linkage between deficit financing and inflation. The Keynesian analysis ascribes inflation to be the result of excess of aggregate expenditure over national income at full employment level.The aim of this paper is to consider the inflationary effect of deficit financing in Nigeria and ascertain the measures that are put in place by government to eradicate the negative impart of deficit financing in Nigeria. The work covers the period between 1980 and 2005 as this period was exposed to an analytical review of deficit financing in Nigerian and reveals different changes in deficit budget in Nigerian fiscal operations. The paper answers several similar questions, which are related to deficit financing in Nigeria and its possible inflationary impact on the economy. It is intended that this report would benefit policy makers and other government and non-government bodies who would be concerned about inflation and deficit financing as the report brings to light the revelation and causative effects of deficit financing in Nigeria.Concept of Deficit FinancingA budget deficit can be defined as the situation that arises when government expenditure is greater than estimated government revenue (usually from taxation and charges for government service). The main concern with budget deficit is its financing aspect4. If borrowing from the private sector finances government deficit, it is just a realization of resources in the economy. The government can also finance its fiscal deficit either by raising additional tax or it may incur debts. This form generally is the least expansionary, but due to the problem encountered in generating more revenue from taxation in Nigeria, the government usually resorts to creating debt, which is inflationary. …