Funding Options for Budget Deficit in a Resource Rich Country

Abstract

This study investigates various funding options for Nigeria’s annual budget deficit, utilizing quarterly data spanning the period from 2011q1 to 2021q4. To achieve the study's objective, the Vector Error Correction model was employed, establishing the existence of a long-run relationship among the series. Findings indicate that tax revenue exhibits a higher rate of re-adjustment to equilibrium in the short run compared to other funding options, suggesting its greater effectiveness. This is followed by external borrowing and domestic borrowing. However, the Granger causality test reveals that tax revenue does not Granger-cause economic growth in Nigeria, implying inefficiency in Nigeria's tax revenue. This situation might necessitate broadening the tax base in the economy and improving overall government fiscal operations to narrow the persisting deficit in the budget.