Nigeria’s persistent budget deficits are weakening the naira and contributing to higher interest rates, according to a study published in the Central Bank of Nigeria’s Journal of Applied Statistics.
The research, titled ‘Budget Deficit Dynamics and Macroeconomic Performance in Nigeria,’ examined the relationship between fiscal deficits and key economic indicators using annual data covering 1981 to 2024.
Authored by Ndubuisi E. Uguru, the study identified government fiscal imbalances as a major source of exchange rate instability, while warning that their effects could constrain monetary policy and discourage private investment.
Using a Vector Autoregressive framework, the research found that budget deficits account for a substantial proportion of exchange rate fluctuations and contribute to sustained depreciation of the domestic currency.
The findings also showed that fiscal deficits exert upward pressure on interest rates over time and can trigger a contraction in money supply, a development the researcher attributed to defensive monetary 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,” the study stated.
It added that fiscal imbalances could reinforce themselves, with budget deficits accounting for all their own variations initially and retaining about 53 per cent of their influence by the tenth period.
However, the research found no statistically significant direct relationship between budget deficits and inflation.
According to the study, inflationary pressures in Nigeria are influenced more strongly by supply-side shocks, structural bottlenecks and the transmission of exchange rate movements to domestic prices than by fiscal policy alone.
The researcher said the findings pointed to fiscal dominance, a situation in which government borrowing and spending pressures limit the central bank’s ability to independently pursue monetary stability.
To reduce the risks associated with persistent deficits, the study recommended introducing a legally binding fiscal rule that limits budget deficits relative to gross domestic product.
Such a framework, it argued, could help contain fiscal imbalances, reduce competition between government and private-sector borrowers for funds and ease upward pressure on interest rates.
The research also proposed establishing a non-oil Fiscal Stabilisation Fund and improving reserve management to strengthen the economy’s ability to withstand exchange rate shocks.
It called for policies that encourage domestic production and strategic trade management to reduce Nigeria’s dependence on imports and vulnerability to external pressures.
The study further advocated a transparent framework for coordinating fiscal and monetary policies, allowing the CBN to manage liquidity more proactively instead of resorting to abrupt monetary tightening when government spending expands.
Improving private-sector access to credit, lowering borrowing costs and stabilising inflation expectations were also identified as measures that could encourage investment and support long-term economic growth.
The findings come amid increasing government financing needs and a shift in monetary policy.
President Bola Tinubu presented the 2026 budget to the National Assembly in December 2025 with a proposed deficit of N23.85tn.
By April 2026, the Federal Government had increased its planned borrowing for the year to N29.20tn following an expansion of the proposed budget and fiscal deficit.
The developments underscore concerns about the implications of rising government borrowing for financial markets, exchange rate stability and private-sector financing.
Meanwhile, the CBN reduced its Monetary Policy Rate by 350 basis points to 23 per cent in September 2026, following the 307th meeting of the Monetary Policy Committee in Abuja.
The reduction was the largest cut in the benchmark interest rate since December 2006 and followed the MPC’s decision to retain the rate at 26.5 per cent in July.
Despite the monetary easing, the CBN study suggests that persistent fiscal pressures could continue to complicate efforts to stabilise the naira and lower borrowing costs across the economy.
SOURCE: PUNCH NEWS PAPER