Deficit Financing and its Implication on Private Sector Investment : The Nigerian Experience

Abstract

Deficit financing is a recurrent decimal in Nigerian economy. Since independence, over 90% of Nigerians budgets are in deficit. Deficit financing seems to present a positive inflationary impact and a negative investment impact on developing economics particularly Nigeria. Usually when there is deficit, government fined ways of financing the deficit through borrowing from commercial banks or from non-banking public and through the issue of short-term bonds and monetary instruments. Prolong deficit financing have an overall negative impact on the economy by crowding out private investment. This paper examines the impact of government expenditures on private investment and also how the financing of budget deficit have not only affected the performance of private investment but also how it crowds out private investment in Nigeria. Secondary data from CBN statistical bulletin Bureau of statistics bulletin were used Econometric models were used in calculating the relative impact of deficit financing on private investment in Nigeria. The findings revealed a negative relationship between deficit financing and investment in the period under review i.e deficit financing in Nigeria crowds out private investment. The paper recommends that government should redirect it fiscal policy that would favor the private investor by discouraging high government expenditure and maintaining low fiscal deficit. Also, to avoid crowding out effect, it is recommended that deficit be financed through the capital market.