CBN study links Nigeria's budget deficits to naira weakness

A study published in the Central Bank of Nigeria (CBN) Journal of Applied Statistics has linked Nigeria's persistent budget deficits to the weakening of the naira and to later upward pressure on interest rates.

The research, titled "Budget Deficit Dynamics and Macroeconomic Performance in Nigeria," was written by Ndubuisi E. Uguru and used annual data from 1981 to 2024.

For ordinary Nigerians, the finding matters because a weaker naira makes imports and fuel more expensive, while higher interest rates make loans for businesses and households costlier.

What the study found

Using a Vector Autoregressive framework, the study found that budget deficits were a major source of exchange rate swings, accounting for a large share of movements in the immediate period and contributing to a sustained fall in the currency's value.

It also found that deficits push interest rates up with a delay and can cause money supply to shrink, which the researcher linked to defensive tightening by the monetary authority.

The study said fiscal imbalances can feed on themselves: deficits explained all of their own variation at first and still held about 53 per cent of it by the tenth period.

However, it found no statistically significant direct relationship between budget deficits and inflation. Price pressures, it said, are driven more by supply shocks, structural bottlenecks and exchange rate pass-through than by fiscal policy alone.

The study described its findings as evidence of fiscal dominance, where government borrowing and spending limit the CBN's room to pursue monetary stability independently.

Borrowing plans and rate cuts

The findings come as government borrowing needs grow. President Bola Tinubu presented the 2026 budget to the National Assembly in December 2025 with a proposed deficit of ₦23.85 trillion.

By April 2026, the Federal Government had raised planned borrowing for the year to ₦29.20 trillion after the proposed budget size and deficit were increased, according to official documents.

On the monetary side, the CBN's Monetary Policy Committee cut the Monetary Policy Rate (MPR) by 350 basis points to 23 per cent in September 2026 at its 307th meeting in Abuja. It was the biggest cut since December 2006, after the committee held the rate at 26.5 per cent in July.

Despite that easing, the study suggests persistent fiscal pressure could still complicate efforts to steady the naira and bring down borrowing costs.

To address the risks, the study recommended a legally binding fiscal rule capping the budget deficit as a share of gross domestic product (GDP). It also proposed a non-oil Fiscal Stabilisation Fund, better reserve management and trade policies that encourage domestic production.

It further called for a transparent framework for coordinating fiscal and monetary policy, so the CBN can manage money supply more proactively instead of resorting to abrupt tightening when government spending rises. Improving private-sector access to credit and stabilising inflation expectations were also recommended.