DEPARTMENT OF ECONOMICS

This study examine the relationship between financial sector development and income
distribution in Nigeria. Budget deficit financing, which involves borrowing to cover shortfall
between government expenditures and revenues, has been a common practice in Nigeria. This
research aims to analyse how different methods of deficit financing, including domestic and
external borrowing, impact key economic indicators such as GDP growth, inflation and
unemployment rate. The study employs econometric models to evaluate the relationship between
budget deficit financing and economic development. The findings reveal that while domestic
borrowing has a positive and significant effect on economic growth, external borrowing tends to
have a negative impact. Additionally, the study highlights that excessive deficit financing can
lead to higher inflation and increased unemployment rates, thereby hindering sustainable
economic development, For budget deficit financing to contribute positively to Nigeria’s
economic development, it must be managed prudently, with a focus on productive investments
and transparent fiscal policies. Recommendations include enhancing fiscal discipline, improving
revenue generation, and ensuring that borrowed funds are directed towards sectors that
stimulate economic growth and development.

This study examines Nigeria using annual time series data from 1996 to 2022. The study is anchored on the Institutional Economics Theory, particularly as advanced by North (1990), and the Keynesian Growth Framework. These theories provide the foundation for explaining how corruption influences economic performance through weak institutions, inefficient allocation of resources, and reduced investment incentives. The Autoregressive Distributed Lag (ARDL) model was employed to capture both short run and long run dynamics among the variables. The unit root test results indicate a mixed order of integration, justifying the use of the ARDL approach. The bounds test results show the existence of a long run relationship in the domestic investment model, while no cointegration is found in the economic growth model. The short run results reveal that corruption has no statistically significant effect on economic growth in Nigeria. For domestic investment, corruption shows a weak negative effect in the short run but becomes insignificant in the long run. Labour force is found to have a positive and significant effect on domestic investment, while government expenditure shows mixed effects across the models. Diagnostic tests confirm that both models are generally well specified, stable, and free from serial correlation and heteroskedasticity, although the GDP growth model exhibits non-normal residuals. The study concludes that corruption does not have a direct and significant effect on economic growth in Nigeria and only has a limited short-run effect on domestic investment. It therefore recommends that policy efforts should focus not only on anti-corruption measures but also on broader institutional reforms, labour productivity enhancement, and efficient public expenditure management to promote sustainable economic development.