Fiscal Dominance and Inflationary Pressure: Empirical Evidence from Nigeria

Abstract

In light of Nigeria’s high inflationary environment characterized by rising commodity prices and a growing public debt, this study aims to examine fiscal dominance hypothesis in Nigeria. Specifically, we investigate whether the borrowing activities of the fiscal authorities impede the Central Bank of Nigeria (CBN) in achieving price stability. To conduct this analysis, we utilize annual data on the budget deficit as a percentage of gross domestic product and the change in monetary base, covering the period from 1981 to 2022. The data for these variables were sourced from the Central Bank of Nigeria (CBN) official website and Statistical Bulletin. Our empirical analysis employs econometric methods, including unit root tests and the Toda and Yamamoto (T-Y) Granger non-causality approach. The results from our Granger causality test reveal the presence of bidirectional causality between the budget deficit and the growth of the monetary base, thereby violating the conditions for fiscal dominance. These findings suggest that the pursuit of price stability objectives by the Central Bank of Nigeria (CBN) is not constrained by the government's borrowing activities. Consequently, conventional policy tools can be effectively utilized to address inflationary pressures without compromising the government's ability to service its debt obligations. Overall, our study provides evidence that fiscal dominance does not appear to be a significant concern in Nigeria. This implies that policymakers can focus on implementing appropriate monetary policy measures to combat inflation, while ensuring that government borrowing activities do not hinder the achievement of price stability. Keywords: Fiscal Dominance, Budget Deficits, Monetary Base, Inflation