Fiscal Deficit and Public Debt Sustainability in Nigeria: A Macroeconomic Evaluation (2015 – 2024)

Abstract

This study evaluates the macroeconomic relationship between fiscal deficit, government revenue, and public debt sustainability in Nigeria from 2015 to 2024. This study employs ex-post facto method which is an after the fact study. Nigeria's fiscal space has been strained by continued budget deficits, low tax-to-GDP ratios and the need to rely on fluctuating oil revenues, giving rise to significant debt sustainability issues. Autoregressive Distributed Lag (ARDL) model was used to analyze the data collected from the Central Bank of Nigeria, Debt Management Office, World Bank and IMF to capture the short and long run dynamic linkages.  The empirical results show that the fiscal deficit has a positive but not significant short run effect on public debt (i.e., β = +1.2771 and p = 0.160), whereas the long run effect is very powerful (i.e., Ω= +2.6256), meaning that the structural impact of persistent deficit financing over time is large. On the other hand, public debt exhibits a very significant positive correlation with government revenue (β= +6.4928 and p = 0.003), which is similar to a long run multiplier of +13.3489. This counterintuitive positive linkage reflects a nominal scaling phenomenon that resulted from the inflation and aggressive exchange rate liberalizations, which resulted in the mechanical revaluation of foreign liabilities in the form of debt holdings together with nominal revenues. The author suggest fiscal discipline, diversification of revenue and stabilization of exchange rates as the correct policies to be followed to achieve debt sustainability.