The Impact of Budget Deficit on Trade Balance in Nigeria: An Empirical Analysis, 1980 - 2011

Abstract

The paper empirically examines the impact of budget deficit on trade balance in Nigeria. The general objective is to examine the causality between budget deficit and trade balance. The specific objective is to measure the impact of budget deficit on trade balance in Nigeria using annual data as a means of determining the econometric relationship. The approach: In time series context, modern econometric techniques were used: the Augmented Dickey Fuller (ADF) Unit Root tests for stationarity, Johansen and Juselius cointegration for long term relationship and Granger causality tests were used to establish the direction of causality in the model relationships. The ordinary least square method (OLS) was used to measure the impact of budget deficit on trade balance. The findings of the study show that Granger causality test revealed a unidirectional relationship between budget deficit and trade balance in Nigeria, the direction is from trade balance to budget deficit. Similarly, budget deficit has a positive impact on trade balance. The implication is that economic policies that will minimise budget deficit will have to be addressed through demand management such as increase in tax and a reduction in government expenditure as a means of maintaining trade balance in Nigeria for the period under study.

Key words: Budget deficit, Trade Balance, Government Expenditure, Exchange Rate