FISCAL DEFICITS AND FOREIGN RESERVES EVIDENCE FROM NIGERIA

Abstract

The main aim of this study is the evaluation of fiscal deficits and its effects on external reserves in Nigeria over the period 1981-2012. Employing modern time series econometric techniques such as unit root test, cointegration and error correction techniques the study reveals intriguing results. The Johansen cointegration test revealed a long run relationship among the variables. The statistical significance of the one period lagged ECM supports this long run relationship and a satisfactory speed of adjustment. Results suggest that foreign exchange reserve is determined in the long-run by recurrent and capital expenditures. It is thus recommended that there should be sustainability of a fiscal deficit profile in order to stimulate growth in the nation’s economy