Inflationary Impact of Funding Options for Budget Deficits in Nigeria

Abstract

This paper investigates the inflationary impact of the various financing options for the federal government budget deficit which has accumulated overtime. Using Auto Regressive Distributed Lag (ARDL) methodology and quarterly data over the period 2000Q1 to 2017Q2, the study found significant relationship between inflation and the current financing options of the Government. Overall, the result of our ARDL model affirm that the impact of fiscal spending in Nigeria on inflation is captured more in the short-run since none of the variables is significant in the long-run. In addition, the use of Banking System Financing to fund government deficits has better potentials as the optimal choice because its impact on inflation is insignificant. Federal Government Bonds as a tool for financing budget deficits is also considered an optimal choice because though it causes inflation to rise by the second quarter, but its impact on inflation is expected to fizzle out in the long-run. Ways and Means Advances on the other hand, was shown to have the highest inflationary impact and as such, its use as a tool for financing government deficit should be discouraged. We, therefore, recommend a couple of appropriate policy options for financing budget deficits in Nigeria namely monetary financing and the issuance of federal government bonds. On the policy side, more efficient public expenditure management. Capital market, co-financing arrangements with pension funds and issuance of project-tied bonds, would be beneficial.