Nigeria’s rising budget deficits are a serious driver of trade fee depreciation and exert delayed upward stress on rates of interest, based on a study printed within the Central Bank of Nigeria (CBN) Journal of Applied Statistics.
The study, titled “Budget Deficit Dynamics and Macroeconomic Performance in Nigeria,” was authored by Ndubuisi E. Uguru and examined the connection between fiscal deficits and key macroeconomic variables utilizing annual information from 1981 to 2024.
Its findings recommend that persistent fiscal imbalances can weaken trade fee stability, constrain financial coverage and create stress on funding, though the study discovered no statistically vital direct relationship between budget deficits and inflation.
Budget deficits weaken naira stability
Using a Vector Autoregressive (VAR) framework, the study discovered that budget deficits had been a serious supply of trade fee fluctuations, accounting for a considerable share of actions within the instant interval and contributing to sustained foreign money depreciation.
It additionally discovered that fiscal deficits exert delayed upward stress on rates of interest and may set off a contraction in cash provide, which the study linked to defensive financial tightening.
- “The results revealed that budget deficits are a primary driver of exchange rate depreciation, accounting for a substantial share of exchange rate fluctuations in the immediate period and triggering a sustained currency decline, while also exerting delayed upward pressure on interest rates and paradoxically inducing a significant contraction in the money supply likely reflecting defensive monetary tightening,” the study discovered.
Other findings from the analysis embrace:
- Budget deficits account for 100% of their very own variance initially and retain about 53% by the tenth interval, indicating that fiscal imbalances can reinforce themselves.
- Investment is basically self-determined within the quick time period however turns into more and more influenced by inflation and cash provide over the long run.
- The study famous “the study finds no statistically significant direct link between budget deficits and inflation, suggesting that price levels are driven more by supply-side shocks, structural bottlenecks, and exchange rate pass-through than by fiscal policy alone.”
It described the findings as proof of fiscal dominance, the place authorities borrowing and spending pressures can undermine trade fee stability and restrict financial coverage autonomy.
Study recommends fiscal and financial reforms
To deal with the dangers recognized, the study really useful a binding fiscal rule that units a authorized restrict on the budget deficit relative to gross home product (GDP). It argued that this might assist comprise fiscal imbalances, scale back the crowding-out impact on personal funding and ease stress on rates of interest.
- It additionally proposed strategic reserve administration and proactive commerce insurance policies, together with the institution of a non-oil Fiscal Stabilisation Fund and incentives for home manufacturing, to scale back the financial system’s vulnerability to deficit-related trade fee shocks.
- The study additional referred to as for a clear framework for financial and financial coordination, permitting the CBN to handle cash provide extra proactively fairly than counting on abrupt restrictive measures in response to fiscal enlargement.
For funding, it really useful bettering private-sector entry to credit score, reducing borrowing prices and stabilising inflation expectations to assist capital formation and long-term financial progress.
Nigeria’s borrowing plans and rates of interest
The study’s findings come amid elevated authorities borrowing necessities and modifications in financial coverage.
On the financial coverage aspect, the CBN in September reduced the Monetary Policy Rate (MPR) by 350 basis points to 23% following the 307th assembly of the Monetary Policy Committee (MPC) in Abuja.
The discount was the largest lower in Nigeria’s benchmark rate of interest since December 2006. It adopted the MPC’s July 2026 assembly, when the committee retained the rate at 26.5%.
