Rising External Debt Burden, Increase Financial Stability Risk; the Need for Fiscal Adjustment in Nigeria

Abstract

The study examines the rising external debt burden, increased financial stability risk; the need for fiscal adjustment. Given that economic sustainability is the prime desire of every economy and considering the continuous accumulation of external borrowings. Our main focus is to investigate the fiscal vulnerability and debt sustainability position of the Nigerian economy. To find out whether the country’s present fiscal position is sustainable? Has the substantial external borrowings in the last two decades of uninterrupted democratic rule significantly supported the growth path of the Nigeria economy? If not, there is need for fiscal adjustment. Our period of investigation spans from 1999 to 2019. Data estimated using the time series based from CBN, Federal Ministry of Finance, IMF/World Bank publications. In analyzing the country’s debt burden/vulnerability, we applied the IMF debt burden indicators under the debt sustainability framework (DSF) for low income countries. Using the descriptive statistic, the study also employed the regression analysis technique to exploits the cause and effect relationship between the nation’s present debt stock, debt servicing obligation and the nominal as well the real economic growth rate. Our findings revealed the following; (i) using the percentile analysis and comparing it with the major debt sustainability bench marks under the IMF/Work Bank specifications, the country’s debt sustainability position was very negligible. The Nigerian situation shows debt sustainability position that fell below the bench marks (ii) the results of our finding also indicates a negative statistically significant relationship that exists between debt stock, servicing payment and both the nominal and real GDP. Based on our results, we concluded that the present fiscal vulnerability position of the country if not checked or curtailed through fiscal adjustment would amount to increasing the financial stability risk capable of causing deterioration in the functioning of the economy. We therefore, suggest amongst other measures that all should be aimed at improving and or enhancing monetary restrains, debt contraction restrains as well evolving and improving existing rules toward achieving fiscal responsibility and discipline.