Empirical Analysis of Domestic Debt Sustainability and Determinants in Nigeria
Keywords:
Debt sustainability, Debt stock, Fiscal spaceAbstract
The conventional debt to GDP ratio measure of debt sustainability is widely believed to be misleading especially in a developing country context. This has led to the need for improved indicators of domestic debt sustainability such as debt to government revenue ratios. Yet, studies on the comparative usefulness of these measures remain scanty. Consequently, this paper employs the domestic debt to revenue ratio as the preferred indicator because it depicts the debt burden on the country and indicates the fiscal capacity to sustainably accumulate debt. The study relies on a debt sustainability framework while a dynamic modelling approach was used to ascertain the sustainability of debt in Nigeria for the period 1980-2019. The result revealed that debt to government revenue better reflects domestic debt sustainability in Nigeria as against debt to GDP ratio. The counterfactual simulation exercise revealed that an increase in domestic revenue mobilization makes the debt profile more sustainable. The analysis also revealed that the long-run determinants of debt in Nigeria are interest rate, the growth rate of GDP, and financial deepening while the contemporaneous determinants are inflation, exchange rate, trade openness and federal government total expenditure as a percentage of government revenue. Therefore, the paper suggests that efforts towards intensifying non-oil domestic revenue mobilization should be considered particularly through export diversification, broadening the tax base, reducing fiscal leakages and enhancing the efficiency of revenue collection could be considered.
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