Impact of Foreign Sourced Deficit Financing on External Sector Performance of the Nigerian Economy: Evidence from 1990-2023

Abstract

This study examines the impact of foreign-sourced deficit financing (FSDF) on external-sector performance of the Nigerian economy for the period 1990–2023. The study is anchored on the Keynesian economic theory and the Jack Wiseman and Allan Peacock’s Displacement Effect Hypothesis. Annual secondary data sourced from the Central Bank of Nigeria (CBN), Debt Management Office (DMO), National Bureau of Statistics/World Bank and international commodity-price data were utilized and the EViews software was used in the descriptive analysis, unit-root and structural-break diagnostics, ARDL bounds testing, long-run estimation, error-correction modelling (where cointegration is supported), multivariate multiple regression, Granger-causality analysis and residual diagnostics. The available 1990–2023 estimation indicates mixed I(0)/I(1) behaviour with no reported I(2) variable. The ARDL bounds test shows a long-run impact for the balance-of-trade equation, while the equations for exchange-rate and foreign reserve are inconclusive at the 5% level. In the preliminary long-run BOT equation, FSDF has a coefficient of −19.897 with an error-correction coefficient of −0.333 (p=0.016). The multivariate multiple-regression test reveals a statistically significant joint multivariate impact of FSDF on the variables of exchange rate, balance of trade and reserves (Wilks’ λ=0.5822; F=6.697; p=0.0015). The Granger-causality analysis shows that FSDF predicts EXR, BOT or FER at 5%, while EXR predicts FSDF at 5%. The findings indicate that the consequences of using foreign-sourced deficit financing on the external sector of the Nigerian economy during the period under review are multidimensional and depend on such factors like financing use, oil-price conditions, inflation, exchange-rate dynamics and foreign-currency obligations.