External Deficit Research Articles

Effects of Budget Deficit Financing on the Economy of Nigeria

The study investigated the effects of deficit financing on the Nigerian economy using data that covered 41 years (1981 to 2021). Real gross domestic product (RGDP) was the dependent variable, while government budget deficit financing disaggregated into different sources of budget deficit financing represented the explanatory variables. The ordinary least squares (OLS) regression method was used for the tests and analyses. Results established that both non-bank public sources of deficit financing and banking system sources of deficit financing had positive and significant effects on growth. However, non-bank public deficit financing positively led the Nigerian economy and was followed by banking system deficit financing. Both ways and means and external deficit financing sources were negative and insignificant in influencing the Nigerian economy. Ways and means were third while external deficit financing was fourth in descending order of influence on RGDP growth. The study further applied the Augmented Dickey-Fuller (ADF) approach to unit root tests and observed that the variables were integrated at both levels and first difference, leading to the application of the Autoregressive Distributed lag (ARDL) approach to data estimation. The ARDL bounds tests showed that the model specified for the study followed a long-run path and that a long-run relationship existed between the dependent variable and the explanatory variables. The estimation of the long-run and error correction estimation indicated that the independent variables had a time-varying effect on the real gross domestic product of Nigeria. That ARDL estimation of the error correction mechanism also showed that RGDP adjusted rapidly to short-run discrepancies in the long run. Finally, the error correction mechanism showed that external sources of budget deficit financing, non-banking system public deficit financing, ways and means source of deficit financing, gross capital formation, real interest rate and exchange rate, all had robust effects on growth, though with varying directions of influence. Based on the foregoing, the study has recommended deficit financing, more especially non-bank public deficit financing and banking system deficit financing as better options for attaining the much desired rapid and sustainable economic growth of Nigeria as they have been proven to be non-inflationary in practice compared to ways and means and external source of deficit financing over the years.

Bilateral J-Curve Between Türkiye and Its Major Non-EU Trading Partners: Evidence from Both Linear and Non-Linear Approach

This research analysed the bilateral J-curve phenomenon in the Turkish economy. For this purpose, we applied both the linear and non-linear Autoregressive Distributed Lag (NARDL) co-integration methods, in addition to the asymmetric Toda-Yamamoto causality test, to examine whether the impact of Turkish lira appreciations differs from that of lira depreciation. The findings from the linear model indicate statistically significant coefficients for the long term, and J-curve effects were observed in the case of two countries: Russia and the UAE. This suggests that when the Turkish lira depreciates, it positively affects Turkey's trade balance with these partners; however, lira appreciations have a negative impact. In contrast, the non-linear model provides more evidence, with the results revealing that asymmetry cannot be ignored, as the positive and negative variables exhibit differences in signs, magnitudes, and levels of significance. We found the J-curve effect for only three countries (India, USA, and UAE) out of seven partners in this model. Third, the lira evaluation between the short and long run affected the external balance. Furthermore, the long-run error correction mechanisms converge to steady-state equilibrium faster. Lastly, there is a unidirectional or bilateral linkage between the FX rate and the external deficit for these four partners. Therefore, exchange rate policies are a determinant that should be considered in relationships with certain trading partners.

Analysis of the relationship between the general budget deficit and the trade balance deficit in Sudan for the period2000-2022 (Testing the Keynesian disability hypothesis and ricardian equivalence)

The study aimed to know the internal deficit (the general budget) and its relationship to the external deficit (the trade balance) statistically significant between the general budget deficit and the trade balance deficit in Sudan during the period 2000-2022. There is also a one –way causal relationship that goes from the general budget deficit to the trade balance in Sudan during the study period . the study used the descriptive approach to deficit concepts related to the general budget deficit ,the trade balance and theories .explaining the deficit and the quantitative approach was used to build a standard model the measure and analyze the relationship between the general budget deficit ,and the results of the study showed matching the Keynesian point of view with the existence of a causal relationship in two directions that goes from the budget deficit to the trade balance deficit and vice versa , and the rejection of the Ricardian equivalence hypothesis that says there is no relationship between the two deficits.

Limits to Fiscal and Monetary Policy in Small Open Economies

ABSTRACT In this paper we investigate the impact of the balance-of-payments constraint on output, income distribution and policy space in a small economy open to both commercial and financial flows. We do so by extending a Sraffian supermultiplier growth model to consider current and capital accounts and endogenous money. Expansionary fiscal policies increase output and its long run growth rate but have a negative impact on the balance-of-payments. Based on these results, we derive the value of government spending that maximises output while maintaining external equilibrium. Monetary policy also influences the balance-of-payments by attracting foreign financial flows through higher interest rates. This relationship is non-monotonic, since these flows can finance the external deficit resulting from a high output level but can also lead to a greater interest burden. This trade off allows us to find the level of the interest rate that maximises external space. It also implies that, with limits, raising interest rates might allow for higher real wages. Lastly, we examine the effects of the currency denomination of debt. We find that, in case of a depreciation, debt in domestic currency allows for a less contractionary adjustment than foreign currency-denominated debt but does not lead to higher economic growth.

Modelling the determinants and Sustainability of Current Account of Pakistan

Abstract The study investigated the determinants of the current account deficit from 1976 to 2020 for the economy of Pakistan, and its sustainability. The persistent deficit is necessary to be sustainable if it will be paid off shortly otherwise it will pile up external debt. The conventional methodology concluded that current account deficit (CAD) of Pakistan is unsustainable, albeit one measure suggests sustainability. There is cointegration among variables and domestic saving, external debt, fiscal deficit and trade deficit has positive whereas exchange rate and worker’s remittances have a negative relation with the current account, all the results are significant. The negative sign of the error correction term confirms restoration of equilibrium and it is also significant. Bidirectional causality is reported between the worker’s remittances, exchange rate and external debt with CAD. Unidirectional causality is seen from CAD to trade deficit and fiscal deficit. The diagnostic tests of the model confirm robustness. The government should favour an investment-friendly environment to increase economic activity in the country besides improving domestic savings and reducing the external deficit.

A preliminary review of India’s rural economic crisis: stagnant wages, piling debt and waning demand

ABSTRACT Aggregate growth numbers for India present a positive outlook as its economic momentum builds back and the economy displays full recovery following the Covid-19 crisis. It consequently reflects the Indian economy’s underlying resilience and ability to resuscitate its overall growth, driven by the rebound in private consumption despite the strong global headwinds and widening external deficits. However, its rural economy indicators point to a contradictory set of circumstances since this segment has been afflicted with persistently stagnant real wage growth in agricultural and non-agricultural occupations. It is further accompanied by the pileup of past debt for this section of the population, accumulated in the slowdown years of the post-demonetization phase, which has resulted in a continual weakening of rural consumption demand. The purpose of this research note is to provide a preliminary review of a deep-rooted crisis in India’s rural economy. This crisis is not merely an outcome of Covid-induced and inflationary factors, but rather dates back to the post-demonetization period. The data uncovers an enduring vicious spiral for the rural population group that not only questions the consumption stimulus to growth, but also imperils the resilience and economic prospects of the Indian economy.

Persistent external deficits and balance of payments crises

Persistent external deficits are a recurrent phenomena in low and middle income countries. We define a new empirical measure to study balance of payment crises related to the accumulation of persistent external deficits. Using a non-parametric difference-in-differences estimator we estimate a critical value for the accumulated current account deficits associated with a crisis. Countries that have increased their net external indebtedness by an accumulated amount of at least 26%–31% of the GDP in a time span of 3 to 5 years are more vulnerable to suffer a crisis, which includes a consumption fall of 3.1% and a current account reversal of 4.9 percentage points of GDP. These crises are far more severe than an average sudden stop. Thus, our empirical results suggest that fast accumulation of external debt though current account deficits is related to severe crises.

Effects of Fiscal Variables on External Sector Deficit of Nepal with Reference to Indian Factors

The basic intent of this paper is to examine the effects of fiscal variables on trade and the current account deficit of Nepal considering the Indian factors. Using the time series data of 48 years of the study period from 1975 to 2022, Engle-Granger’s co-integration and error correction models are used to examine the fiscal effects on the trade deficit, and the ARDL model is used to examine the effects on current account deficit. The basic variables used in the analysis are government expenditure to GDP ratio, budget deficit to GDP ratio, trade deficit to GDP ratio, broad money supply to GDP ratio, trade openness, real exchange rate, and real per-capita Indian GDP. Data are taken from the Ministry of Finance, Nepal Rastra Bank, and World Development Indicators. The findings show that the government expenditure to GDP ratio and trade openness positively affect the trade deficit as domestic factors, while real per-capita Indian GDP positively affects the trade deficit as an external factor. Also, the budget deficit to GDP ratio has a positive effect, while the broad money supply to GDP ratio has a negative effect on the current account deficit as domestic factors. The real exchange rate is negatively and real Indian per-capita GDP are positively driving the Nepal’s current account deficit as external factors. This study identifies the real exchange rate with Indian rupees, Indian real per-capita GDP, and financial development as novel explanatory variables of current account deficit and therefore provides additional evidence on external deficit in the context of Nepal.

Exchange rate misalignment and external imbalances: What is the optimal monetary policy response?

How should monetary policy respond to excessive capital inflows that appreciate the currency and widen the external deficit? Using the workhorse open-macro model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, and solve for the optimal targeting rules under cooperation. The optimal monetary stance is expansionary if the exchange rate pass-through (ERPT) on import prices is complete, contractionary if nominal rigidities attenuate ERPT. Excessive capital inflows, however, may lead to currency undervaluation instead of overvaluation for some parameter values. The optimal stance is then invariably expansionary to support domestic demand.

A Dynamic Analysis of the Twin-Deficit Hypothesis: the Case of a Developing Country

The main economic challenge is rising aggregate demand, which leaves the economy short on resources and leads to expanding fiscal and external account deficits. The current study uses autoregressive distributed lag (ARDL) model to evaluate the twin deficit hypothesis in the context of Pakistan in an effort to find an answer to this question. The study uses augmented ARDL, popularized by McNown et al. (Appl Econ 50:1509–1521, 2018) and Sam et al. (Econ Model 80:130–141, 2019), to address the degenerate problems that might arise while applying the ARDL approach. Two separate models were estimated, one with the current account balance as the dependent variable and the other with the balance of trade. In the long run, both models confirm the conventional interpretation of twin deficit hypothesis in Pakistan, with the causality running only from the fiscal deficit to the balance of trade. Other control variables in both models are crucial in understanding the current account balance and balance of trade. According to models, an increase in the exchange rate, as measured by the log of the nominal effective exchange rate, improves both current account and trade balance, verifying the elasticity approach in the long run. The openness of the economy is found to worsen current account balance, and the result is statistically significant. Contrarily, openness has been improved trade balance, but the result is statistically insignificant. To control a large and persistent external deficit, the government has to reduce its fiscal deficit, and such a strategy would be successful when monetary policy is accommodative.

Emigration and External Imbalances in Sub-Saharan Africa: Do Migrants' Skills Matter?

Abstract The external deficits in SSA countries are a major concern and may be connected to emigration from these countries to advanced economies. According to the life cycle theory, by decreasing labour force, emigration induces a fall in savings and a deterioration in the external balance in the countries of origin. Migrants' remittances may dampen or even counterbalance this effect, depending on migrants' skills that matter for their propensity to remit. Empirical investigation for SSA countries over the period 1990–2014 shows that low-skilled emigration improves the current account balance, whereas high-skilled emigration worsens it because highly skilled emigrants have higher saving potential but tend to remit less than low-skilled ones. Therefore, incentives for the financing of home economies by skilled migrants would be beneficial.

Republic of Madagascar

The COVID-19 pandemic and extreme weather events have aggravated Madagascar’s fragility. The poverty rate is estimated to be above 80 percent. After a stronger-than-expected recovery in 2021, growth is estimated to have decelerated in 2022 mostly due to climate shocks and a worsening global environment. Fiscal performance has deteriorated with weak revenue performance and increasing crossliabilities with oil distributors. While fiscal and external deficits have widened, fiscal and external sustainability are preserved in the medium term.

Hungary

While the economy was recovering from the COVID-crisis, a succession of shocks and loose fiscal policy intensified inflation and fueled a large external deficit. Appropriately, the central bank significantly tightened monetary policy and the government plans a large fiscal adjustment. However, regulatory measures undermine the tighter fiscal and monetary policy mix. Growth is expected to slow sharply with still-elevated inflation and sizable risks can worsen the outlook.

The impacts of imports and trade liberalization in Brazil: Insights from an aggregate cost function

AbstractBrazil has faced and continues to struggle with difficult economic challenges, including achieving noninflationary economic growth and a manageable external deficit. This paper presents the results of the estimation of an aggregate translog cost function with inputs of domestic capital and labor and imports and outputs of consumption and investment goods. The resulting calculated elasticities give insights into the relationships among the inputs, as well as the possible impacts of further reducing international trade barriers. The findings suggest that all of the inputs are substitutes for one another and that an increase in imports may have at least short‐run negative effects on the demand for domestic capital and labor. However, imports appear to be particularly important in the production of investment goods, so an increase in imports may result in a more than proportionate increase in the output of those products and enhance the long‐term growth of the economy. The responses to current challenges facing Brazil will affect its future economic growth as well as have a broader impact on the international scene. The results described here may help to inform policy makers as they address these issues, particularly with respect to international trade policies.

Republic of Madagascar

Madagascar has not yet recovered from the pandemic and is struggling with the aftermath of a severe cyclone season and the fallout of Russia’s war in Ukraine. After a sharp contraction of GDP in 2020 (-7.1 percent) and a modest recovery in 2021 (4.3 percent), growth is projected to stall in 2022. Lower demand from trading partners, higher fuel and food prices, and recent weather events are weighing on economic activity and leading to widening fiscal and external deficits in the short term.

Economic Uncertainty and its Effects in Bolivia

The paper's primary finding reveals that there are three factors related to the level of Bolivian economic uncertainty. These were interpreted as: i) uncertainty of economic expectations; ii) uncertainty of monetary and exchange rate policy; iii) political and social uncertainty. The contribution of each factor was found to account for approximately one-third of the total uncertainty; however, due to the incidence of the searches, the uncertainty factor in the monetary exchange rate policy showed greater contemporaneous synchronization with the general level by using multivariate techniques monthly for the period from January 2004 to December 2020. The estimated index captured negative variations for uncertainty during times of economic boom and growth, and it reflected positive variations of uncertainty in times of economic slowdown, low commodity prices, persistent fiscal and external deficits, as well as drops in net international reserves. Finally, by estimating a structural VAR model (SVAR), a direct relationship was found between global (external) economic uncertainty and domestic (internal) economic uncertainty, which slows national economic activity by -0.65%, interpreted as a retarding factor for economic growth.

BRICS: The 2008 financial crisis and economic performance

The 2008 global financial crisis (GFC) resulted in a deterioration of the economic condition in developing countries with lower growth of per capita GDP, a decline in the share of exports of goods and services in GDP, and a worsening of the external balance. After a limited initial impact, growth rates declined in all the economies and were substantially lower in all the BRICS countries in the period 2015–2019 than before the crisis. Two of them, Brazil and South Africa, experienced a drop in per capita GDP during 2015–1019. Export performance suffered and the external balance worsened for all BRICS countries. The BRICS share of world GDP increased mainly because of the rapid growth in China and to a lesser extent in India. The relative size of per capita GDP in Brazil, Russia and South Africa decreased between 2001–2007 and 2015–2019. Furthermore, the average per capita GDP in Brazil and South Africa decreased compared to that of the world. BRICS, however, fared better in trade. Both their share of world trade and the share of trade in their GDP increased. The BRICS countries have strong trade links with other developing countries and have become more stable after the GFC, thereby contributing to the performance of the global economy. There are strong growth linkages among the member countries. Trade relations are dominated by China. BRICS, however, failed to comply with G20 commitment made at the 2014 Brisbane summit to raise the rate of growth by 2% by 2018. The authors undertook a time series analysis to investigate the relationship between growth of per capita income, the share of gross fixed investment in GDP, the share of exports of goods and services in GDP, and the share of external balance in GDP. We found out that usually, but not for all BRICS countries, capital formation had a positive effect on growth, while the external deficit had a negative effect.

Implications of Public Sector Budget Deficit Financing On Economic Growth in Nigeria: 2003-2018

This term paper titled: “Implications of public sector budget deficit financing on Economic growth in Nigeria” was carried out with the intention of ascertaining which financial options out of many financial alternative is the best for the Nigerian government. The research work gave considerations to the cost and risk associated to each finance option over the period 2003-2018. After review of several literatures and appropriate theories, the empirical analysis was carried out. The work employed regression analysis using log-linear of real GDP as the dependent variable and explanatory variables (Bank credit to government- BCG, Non-bank public credit - NBP, ways and means - WM, and external deficit financing - EXDF). The result revealed that budget financing through bank credit and Non-bank public are positively proportional to the growth rate of Nigerian economy. It further showed that financing through ways and means is inversely related to real GDP growth. The result for external financing exhibited inverse relationship with the growth rate of Nigerian economy but the coefficient of EXDF was not statistically significant. It was recommended that government should weigh the risks associated with external borrowing as well as consider the medium and long term repercussions of a possible default on debt servicing

IMPLICATIONS OF PUBLIC SECTOR BUDGET DEFICIT FINANCING ON ECONOMIC GROWTH IN NIGERIA: 2003-2018

This term paper titled: “Implications of public sector budget deficit financing on Economic growth in Nigeria” was carried out with the intention of ascertaining which financial options out of many financial alternative is the best for the Nigerian government. The research work gave considerations to the cost and risk associated to each finance option over the period 2003-2018.After review of several literatures and appropriate theories, the empirical analysis was carried out. The work employed regression analysis using log-linear of real GDP as the dependent variable and explanatory variables (Bank credit to government- BCG, Non-bank public credit - NBP, ways and means - WM, and external deficit financing - EXDF). The result revealed that budget financing through bank credit and Non-bank public are positively proportional to the growth rate of Nigerian economy. It further showed that financing through ways and means is inversely related to real GDP growth. The result for external financing exhibited inverse relationship with the growth rate of Nigerian economy but the coefficient of EXDF was not statistically significant. It was recommended that government should weigh the risks associated with external borrowing as well as consider the medium and long-term repercussions of a possible default on debt servicing.

The influence of three different test positions and thigh asymmetry on measurements of isometric hip flexion strength in men and women

Purpose: The aim of this study was to compare muscle strength at 90° hip and knee flexion as measured in three different positions and to investigate whether an internal or external deficit in the range of rotation in the hip joint affects flexor muscle strength. Methods: We measured the peak muscle torque of rotation in the hip joint, using isometric torquemeter, and hip ROM in healthy participants N = 40, aged 21.6 ± 1.9, in three different measurement positions. We tested for differences between the positions, and for the potential influence of participant’s sex and ROM asymmetry. Results: The measured peak muscle torque was affected not only by sex and the value of hip flexion affect, but also by the position in which it is measured. Subjects with restricted external rotation of the hip joint (CERD) had significantly higher flexor peak muscle torque compared to subjects with restricted internal rotation (CIRD), in all but the supine position. For CERD, the results were: Supine (SuP) 1.02 ± 0.26; Sitting (StP) 1.32 ± 0.58; Standing (SP) 1.53 ± 0.47; and for CIRD, the results were: Supine (SuP) 1.05 ± 0.17; Sitting (StP) 1.05 ± 0.40; Standing (SP) 1.47 ± 0.53. Conclusions: Overall, measurement position and passive ROM significantly influence the peak muscle torque in isometric conditions. Moreover, an imbalance in thigh rotation movement significantly determines the magnitude of muscle torque of the hip flexion movement. Individuals with increased internal-toexternal rotation achieved significantly higher values for flexor muscle torque force moments. Overall, these findings are of importance for interpreting or comparing any reported values for muscle torque force moments