Government Fiscal Deficits And Exchange Rate Variations In Nigeria, 1970-2013

Abstract

 This study examined the effects of government fiscal deficits on real exchange rate variations in Nigeria. The period covered by the study is 1970-2013. Secondary data sourced from Central Bank of Nigeria (CBN) Statistical Bulletin were used. Preliminary statistical tests were carried out using the techniques of Augmented Dickey-Fuller (ADF) and Philip-Peron (P-P). These tests established the existence of unit root among the variables. The Johansson cointegration technique was used to confirm that the variables have long-run relationship. After these preliminary tests, two stage- least -squares (2-SLS) regression analysis was used to test the hypothesis. The results obtained show that government fiscal deficits have insignificant but positive effect on exchange rates and balance of payments. The study recommended that government should reduce fiscal deficits to improve exchange rate variations or ensure that the deficits are for projects with positive NPV in order to stabilize the macro economy through adherence to the fiscal responsibility.