Government Deficit Financing and Capital Formation in Nigeria

Abstract

This study empirically investigates the relationship between government deficit financing and capital formation in Nigeria over the period 1990–2024, using gross domestic savings as proxy for capital formation. Government deficit was proxied by external debt, Central Bank of Nigeria ways and means advances, deposit money bank loans to government, and treasury bills. The study employs descriptive statistics, the Augmented Dickey–Fuller unit root test, ARDL bounds cointegration testing, ARDL estimation, and post-estimation diagnostic checks. The unit root results reveal mixed orders of integration, with gross domestic savings integrated of order zero, I(0), while the deficit variables are integrated of order one, I(1). The ARDL bounds tests confirm the existence of long-run equilibrium relationships in the savings model. Long-run estimates indicate that deposit money bank loans to government have a negative but statistically insignificant effect on gross domestic savings. External debt displays positive but statistically insignificant effects on savings. Treasury bills positively but insignificantly affect savings, whereas ways and means advances show insignificant long-run effects in both savings. Based on these results, the study recommends among others, that the government borrowing from deposit money banks should be strategically channelled toward productive, investment enhancing sectors such as infrastructure, manufacturing, and technology.