Persistent budget deficits are weakening the naira, pushing up borrowing costs and constraining the Central Bank of Nigeria’s ability to manage the economy, according to new research published in the CBN Journal of Applied Statistics.
The study, Budget Deficit Dynamics and Macroeconomic Performance in Nigeria, by Ndubuisi E. Uguru, analysed annual data from 1981 to 2024 and found that fiscal imbalances are a major source of exchange-rate volatility. It concluded that government borrowing and spending pressures can undermine currency stability and limit monetary-policy independence.
What the study found
Using a Vector Autoregressive model, the research found that budget deficits accounted for a substantial share of exchange-rate movements in the immediate period and contributed to a sustained depreciation of the naira.
It also found that deficits create delayed upward pressure on interest rates and can trigger a contraction in money supply—what the author describes as a defensive monetary-policy response to fiscal expansion.
Other findings include:
- Deficits can reinforce themselves: they account for 100% of their own variance initially and retain about 53% by the tenth period.
- Investment is largely self-driven in the short term but becomes increasingly influenced by inflation and money supply over time.
- The study found no statistically significant direct link between deficits and inflation, suggesting that prices are shaped more by supply shocks, structural bottlenecks and exchange-rate pass-through than by fiscal policy alone.
Why it matters
The findings arrive as Nigeria’s borrowing needs continue to rise. President Bola Tinubu proposed a N23.85 trillion deficit in the 2026 budget presented to the National Assembly in December 2025; by April 2026, the Federal Government had raised planned borrowing for the year to N29.20 trillion.
The CBN cut its Monetary Policy Rate by 350 basis points to 23% in September 2026—the largest reduction since December 2006—after holding it at 26.5% in July.
Recommended response
The study recommends a legally binding fiscal rule that caps the budget deficit as a share of GDP. According to the author, this would help contain fiscal imbalances, reduce crowding out of private investment and ease pressure on interest rates.
It also proposes:
- Strategic reserve management and proactive trade policies.
- A non-oil Fiscal Stabilisation Fund.
- Incentives for domestic production to reduce vulnerability to deficit-driven exchange-rate shocks.
- A transparent framework for fiscal and monetary coordination, enabling the CBN to manage money supply proactively rather than react with abrupt tightening.
For investment, the research calls for improved private-sector access to credit, lower borrowing costs and more stable inflation expectations to support capital formation and long-term growth.
