Impact Of Government Deficit Financing On GDP And Unemployment In Nigeria

Abstract

This study investigated the impact of government budget deficit financing on macroeconomic performance in Nigeria, focusing on economic growth (GDP) and unemployment (UNE) over the period 1986 to 2024. The study examines the effects of domestic government debt (DGD), foreign government debt (FGD), and exchange rate (EXR) on these key macroeconomic indicators. Employing the Dynamic Ordinary Least Squares (DOLS) estimation technique, the results reveal that domestic government debt has a significant positive impact on GDP, with a 1% increase in DGD associated with an 81.58% rise in output. In contrast, foreign government debt negatively affects GDP, reducing it by 43.02% per 1% increase. In terms of labor market outcomes, domestic debt significantly reduces unemployment by 3.42% per 1% increase, whereas foreign debt increases unemployment by 4.22%, and a 1-unit appreciation in the exchange rate raises unemployment by 0.60%. These findings suggest that internally financed deficits can stimulate economic activity and job creation, consistent with Keynesian theory. At the same time, overreliance on external borrowing may crowd out domestic investment and hinder growth, aligning with neoclassical and crowding-out perspectives. Based on the results, the study concludes that strategic domestic borrowing, efficient resource allocation, and prudent management of foreign debt are essential to enhancing Nigeria’s macroeconomic performance. Accordingly, it recommends prioritizing domestic deficit financing to support growth and employment objectives, monitoring external debt terms to avoid adverse economic effects, and implementing policies to stabilize the exchange rate and support labour market resilience.