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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Government, Military or Civilian believes that one way of solving social and economic problems is by increasing spending (Monogbe, Dornubari and Emah 2015). Government as an agent of the people requires revenue to provide education, employment, adequate health services, infrastructures and good roads but in the process of discharging this enormous responsibility the revenue and/or spending requirements of the government may sometimes outstrip its availability, hence the recourse to deficit financing so as to fill the gap between expenditure needs and revenue availability.Nigeria’s budget deficit experience dates back to 1961, and appeared justified during the immediate post-independence era, and since then till now 85% of Nigeria’s budget runs in deficit. Okoro (2013) stated that deficit financing arises largely because of the need to expand the economy, government’s inability to execute capital projects that expands the economy births deficit. This ignites the need for Government to finance these projects either through internal borrowing, external borrowing or implementation of monetary instrument to increase the flow of fund in the economy. However there is a repel effect on the economic performance of any country whom the state of its economic activities are financed through the prolonged debt from foreign countries because it frustrates sole investors due to the high interest rate.Deficit financing can be seen as the practice of seeking to stimulate a nation’s economy by increasing government expenditures beyond revenue sources (CBN, 2012). Budget deficit is a phenomenon that emanated due to the imbalance in the budget of a country;the imbalance could either be a surplus or a deficit. This phenomenon seems to have come to stay in many economies of the world, in which Nigeria is not an exception.The culture however became seemingly entrenched overtime from 1970, the country ran into fiscal deficits and sustained public sector spending boom. The fiscal deficits of 1970 were justified on the grounds that it was largely for war reconstruction. Backed with huge wealth from oil, Nigeria embarked on wasteful spending, the mismanagement of the oil boom of the early 1970’s led to the return of deficit financing in 1980. From 1982, the continuing decline in crude oil export earnings in 1983 once again led to the resumption of fiscal deficits which were financed through heavy borrowing after reducing the nation’s reserves.The need for adequate public expenditure program and management hastherefore become paramount, particularly at this period when the country is in recession and when various arms of government and the private sector are experiencing several financial  constraints. In view of the above discussion on deficit financing and economic growth further questions might be raised thus: Does deficit financial ‘’external and domestic debt’’ significantly affect  economic growth in Nigeria? If this is yes, to what extent or what is the nature of the relationship between deficit financing and economic growth in Nigeria? Does the Debt Service have effect on economic growth? Providing answers to these questions posed above, shall be the major focus of subsequent sections and by extension the entire work. Trends of Deficit Financing in Nigeria Under the fiscal system of Nigeria, the multi levels of government engage in fiscal management, preparing and implement annual budgets for the provision of services in their respective areas of jurisdiction (Anyanwu, 2003). The main objective of Deficit management over the years is that of promoting accelerated economic growth as a base for achieving higher per capita income and social welfare. The Nigeria government has been running huge deficits since the civil war years. The deficits as percentage of GDP have continued to be on the increase and one immediate result is the escalating public debt. Budget deficits have a deleterious effect on monetary policy. It has also been observed that large budget deficits cause increase in money growth and inflation (Levy, 1981; Egwaikhide, 2005). For the years 2000-2004 the fiscal operation recorded an increase. For instance, in 2000, 2001, 2002, 2003 and 2004 fiscal deficit stood at N103,800.0 million, N221,000.0 million, N301,400.0 million, N2202,700.00 million and N142,000.0 million respectively. The ratios of deficit financing to gross domestic product were 85.63, 174.94, 229.21, 148, 53 and 97.67 

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