Nexus on Fiscal Deficits and Economic Development in Nigeria: An Autoregressive Distributed Lag (ARDL) Analysis

Abstract

This study examines the dynamic relationship between fiscal deficits and economic development in Nigeria using annual time-series data for 1990–2023 and the Autoregressive Distributed Lag (ARDL) framework. Economic development is proxied by GDP growth (GDPG), while fiscal deficit (FD), GDP per capita growth (GDPPCG), human capital development (HCAP), inflation (INF), natural resource dependence (NRD), and population growth (POPG) are included as explanatory variables. The analysis applies descriptive statistics, the Augmented Dickey–Fuller unit-root test, ARDL bounds testing, long-run estimation, an Error Correction Model (ECM), and post-estimation diagnostic and stability tests. The unit-root results show a mixture of I(0) and I(1) variables, with none integrated of order two, while the bounds test indicates a long-run relationship among the variables. Fiscal deficit is negative but statistically insignificant in both the long run and the short run. GDP per capita growth and population growth are positive and statistically significant, while human capital development is positive and statistically significant only in the short run. Inflation and natural resource dependence are negative and statistically insignificant. The error-correction coefficient is negative and statistically significant, indicating rapid adjustment towards long-run equilibrium. Diagnostic results show no evidence of serial correlation or heteroskedasticity, and the stability tests indicate parameter stability; however, residual normality is rejected. The findings suggest that deficit financing alone is insufficient to support economic development without efficient and productive public expenditure.