Fiscal Policy and Public Debt Sustainability in Nigeria

Inibehe Nya

doi:10.7176/jesd/10-19-02

Abstract

The study investigated fiscal policy and public debt sustainability in Nigeria between 1990 and 2017, by employing an error correction model and IMF/World Bank debt burden indicators such as solvency and liquidity ratios. The results from IMF/World Bank debt burden indicators revealed that Nigeria’s debt has been sustainable over the last 8- 10 years using the solvency ratios. Also, the liquidity indicator (debt service/export earnings) showed that Nigeria was able to meet its short term liabilities, as the debt burden indicators were below the indicative threshold of 20%. On fiscal policy sustainability, the empirical result using cointegration test revealed that the fiscal variables were cointegrated, indicative of the fact that fiscal policy in Nigeria was sustainable. However, it was further revealed by Wald coefficient restriction test that although fiscal policy in Nigeria was sustainable, it was found to be weakly sustainable. Thus, Nigeria could introduced debt ceilings in order to prevent explosion of the initial stock of debt arising from arbitrary borrowings by state governments. DOI : 10.7176/JESD/10-19-02 Publication date :October 31 st 2019

Highlights

The growing challenge of high fiscal deficits and accelerating debt levels in most economies of the world, coupled with the debt crisis in the Eurozone area has more than ever, ignited global concerns from economists and policymakers towards a renewed focus on the sustainability of fiscal policy and public debts in both the developed and developing economies
Whereas monetary policies involve the process by which the monetary authority such as the Central Bank of Nigeria (CBN) controls money supply, with the aim of targeting inflation or interest rate to achieve price stability and enhance public confidence on our currency, fiscal policy measure on the other hand, is concerned with the use of government revenue realized through taxes and expenditure to influence the economy
Total Debt Stock - Gross Domestic Product (GDP) Ratio: Table 2 shows total debt stock to GDP ratio for 2005-2017.The data revealed that public debt in Nigeria seem sustainable as the calculated ratios were lower than the peer group threshold stipulated by IMF/World Bank

Summary

Introduction

The growing challenge of high fiscal deficits and accelerating debt levels in most economies of the world, coupled with the debt crisis in the Eurozone area has more than ever, ignited global concerns from economists and policymakers towards a renewed focus on the sustainability of fiscal policy and public debts in both the developed and developing economies. The empirical evidence using stationarity test(ADF), co-integration test(Johansen) and fiscal reaction function revealed that few of the countries such as Denmark, Finland, Netherlands and Sweden were not in danger of facing solvency risk in the future, as their sustainability of their fiscal position was generated by public debt ratio did not surpass the threshold and as well as by a primary surplus large enough to cover the stabilizer one(except the Netherlands).the study revealed that the rest of the countries such as France, Ireland, Italy, Portugal, Spain and UK were over-indebted and the credit markets were already concerned about their ability to service their debts, evidenced by their huge debt ratios and the fact that they run primary deficits or very low surpluses, that cannot matched the primary balance-to-GDP ratio required to stabilize debt.

Empirical Results

Conclusion