Governments’ Deficits and Private Savings in Nigeria: An Empirical Analysis

This study explores effects of governments’ deficits measured as federal, state, local and quasi-fiscal on private sector savings in Nigeria over period, 1981 to 2022, utilizing the Autoregressive Distributed Lag (ARDL) model. The analysis undertook to ascertain significant implications for fiscal policy. The outcomes suggest nuanced short-term dynamics. Federal and state deficits exhibited positive lagged effects on private savings, indicating that the impacts of these deficits are not immediately realized but materialize over time. This delayed response could reflect changes in economic conditions i.e., higher interest rates or increased government spending, which may encourage private savings in later periods. Conversely, quasi-fiscal deficits showed substantial negative short-term impact on private deposits, suggests that contingent liabilities, like government-backed loans that default can induce financial instability and diminish economy-wide private sector confidence. Over the long run, the results showed negative association by federal and state deficits with private sector savings, driven by concerns over fiscal sustainability and the crowding-out effect of increased government borrowing. However, local government deficits are positively correlated with private savings, possibly due to their more localized economic impact. Interestingly, while quasi-fiscal deficits harm private savings in the short term, they are associated with higher private savings in the long run. This may be due to the stabilization of financial systems and liquidity improvements over time. With the model explaining 78% of the variation in private savings, the study underscores the importance of managing fiscal deficits prudently while promoting local government-driven economic growth to foster private savings in Nigeria.