Effects of macroeconomic shocks on public debt in Nigeria: a nonlinear structural VAR approach

Abstract

This study employs a public debt identity in a nonlinear structural VAR to appropriately track Nigeria public debt's evolution. It considers effects of shocks to fiscal policy, inflation, output growth, and debt interest rate on the public debt path. We find that shocks to primary deficits and debt interest rate significantly raise the debt-to-GDP ratio, while output growth and inflation significantly reduce it. All shocks to debt are persistent, but their gradual decay suggests a stable, non-explosive debt path. Future debt projections indicate a sustained increase, averaging 23.3% of GDP between 2017 and 2020. Beyond 2020 debt growth begins to slow, eventually stabilising at 28% - the steady state. Given the evidence of persistent effects of macroeconomic shocks on the debt ratio, we recommend combining a macroprudential framework and effective fiscal rules to mitigate exposure to fiscal shocks and promote a low debt profile.