Budget Deficits and Current Account Disequilibrium in Nigeria: an Econometric Investigation, 1970 - 2010.

Topics: Macroeconomics, Balance of payments, Current account Pages: 20 (5441 words) Published: June 25, 2013
Budget Deficits and Current Account Disequilibrium in Nigeria: An Econometric Investigation (1970-2010)

BY

Iyeli I. Iyeli, (Ph.D), Clement Utting and Jacob O. Owan
Department Of Economics
University Of Calabar
Calabar, Nigeria
e-mail:reiyeli@yahoo.com; Tel: +2348036558316

Abstract

This study on budget deficits and current account disequilibrium in Nigeria seeks to investigate the effects of budget deficits on current account within the time frame of 1970-2010. Data on this study were sourced from the publication of CBN and NBS. The study discovered that apart from inflation which caused a reduction in the current account balance of Nigeria, the rest of the variables particularly budget deficits stimulates an increase in Nigeria’s current account. The study was conducted using the techniques of co-integration and error correction mechanism. However, some policy recommendations have been made believing that government through these recommendations will consider it appropriate for the growth of the Nigeria economy and curtail unnecessary fluctuations in her balance of payments.

Keyword: Budget Deficits, Current Account Balance, Disequilibrium, macroeconomic policy and macroeconomic management

1Introduction
The major problem of macroeconomic management in the third world countries including Nigeria has been the persistence of budget deficit and current account disequilibrium, which normally leads to the overall balance of payments disequilibrium. In these developing economies, the phenomenon is characterized by undue hardship, decline in external reserves, external debts problems, low per-capita income, inflation, corruption to mention but a few.

Consequently, the major preoccupation of macro-economic policy makers is the maintenance of healthy and sustainable balance of payments stability.
Budget deficit which is an excess of expenditure over revenue has some macroeconomic links with balance of payments deficit which is the excess of the values of the credit items in the current account. It should be noted that this continuous disequilibrium over the years might have been caused by some economic and political factors.

The movement of budget deficit and current account balance in the 1960’s show case frequent divergence between the early days of independence, Nigerian government in its fiscal operations recorded to a large extent frequent budget surplus from 1960-1969. In the same vein, the current account balance in this period shows more of deficit (CBN, 1995). The first occurrence of twin deficit in Nigeria’s fiscal operations and current account balance was in 1970 where budget deficit was 8.6% of GDP and the current account deficit was 0.9% of GDP. Also in 1972 deficit occurred in both country’s fiscal operation and current account position. Co – existence of surplus was recorded in the fiscal balance and current account balance in 1973 and 1974, this period mark the time of windfall revenue in the sales of oil in the international market (CBN, 1997).

The twin deficit reoccurred in Nigerian economy between 1981-1983 following several government finances that increased its expenditure and also the volatility of oil price in the international market. Several government policy measures in the post SAP period also resulted to the occurrence of deficit in the budget and current account balance from 1986-1989. Co-movement of the budget deficit and current account deficits are also visible in the periods of 1992-1994.

The period 1997 and 1998 also show a simultaneous deficits in the country’s fiscal and current account balance where the budget deficit and current account deficit averaged 5.3 and 2.8% of GDP respectively.

The years of 1998-2000 were also period of deficits in the country’s fiscal operations and current account (A.E.O, 2008). The size of this fiscal and current account imbalance has been a concern to policy makers and investors coupled with the fact that there...

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