Fiscal Deficit Financing and Financial Market Development Nexus in Nigeria

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Saibu, O.M.
Alenoghena, R.O.
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Journal of Economics and Policy Analysis
This study investigates the implications of financing fiscal deficit from domestic sources on the development of the Nigerian financial markets and seeks to establish whether domestic debt crowds out private sector investment in Nigeria covering the period 1981 to 2014. The model was estimated using Granger Causality Test and the Auto-Regressive Distributed Lag Model (ARDL) Bound Co-integration Test in order to capture the long run equilibrium relationship between the variables. The findings reveal that external debt has been falling, and the share of bank credit (domestic debt) absorbed by the public sector has been rising rapidly. The structure of domestic debt holding indicates diversification of the investor base towards institutional investors and individuals and there has been an increase in the share of long-term instruments over time indicating some improvement in the maturity lengthening of the country’s domestic debts. The results from analysis showed that there is long run association running from fiscal deficits to financial market development. More specifically, budget deficit, domestic debt and government expenditure significantly impacted on the development of the Nigerian financial markets. Besides, in the long run, budget deficit had negative impact on financial development in the country. Furthermore, domestic debt significantly impacted negatively on private sector investment lending credence to the hypothesis that domestic public debt crowds out private sector investment in Nigeria in line with the classical theory. In general, findings in the study indicate that fiscal policy in Nigeria has a strong role in macroeconomic stabilization and the development of the domestic financial markets. The government is advised to curtail the massive and persistent budget deficit. Fiscal policies should play a more neutral role in the effort to stimulate private sector entrepreneurship and investment in the economy.
Scholarly articles
Budget deficit , Domestic debt , Private credit , Financial development , Research Subject Categories::SOCIAL SCIENCES::Business and economics
Saibu M.O and Alenoghena R.O (2017) Fiscal deficit Financing and Financial market Development Nexus in Nigeria Journal of Economics and Policy Analysis, Vol 2(1) pp 113-140 University of Lagos, Nigeria