Effects of Budget Deficits on the Current Account Balance in Nigeria: A Simulation Exercise

"This paper examines the effect of budget deficit on the current account balance in Nigeria, covering the period from 1973 to 1993. This is motivated by the fact that the magnitude of government has increased with amazing rapidity since the early 1980s. Simultaneously, the current account balance recorded deficits, to the extent that there is a high correspondence between these variables. A macroeconometric model that captures the salient interrelationships between government budgetary developments, credit creation and the current account balance is constructed. Quantitative evidence suggests that budget policy affects the current account balance in Nigeria. In particular, simulation experiments show that budget deficit, engendered by increased expenditure, leads to a deterioration of the current account, whether it is financed through bank credit or external borrowing. It is argued that budget discipline is necessary for the achievement of external balance in Nigeria."