Asymmetric Response of Fiscal Sustainability to the Financial Development in Nigeria

Abstract

This study examines the asymmetric response of fiscal sustainability to financial development in Nigeria while augmenting the model with exchange rate volatility within the non-linear autoregressive distributed lag framework. The empirical evidence reveals that positive and negative shocks in domestic credit to the private sector result in significant unsustainable fiscal balance and fiscal sustainability both in the short run and long run respectively. Increase and decrease in annual market capitalization have a positive and negative significant impact on the fiscal sustainability in the long run respectively. Exchange rate devaluation or depreciation has a devastating effect on fiscal sustainability both in the short run and long run. Wald test revealed that credit to the private sector and annual market capitalization have an asymmetric effect on fiscal sustainability both in the short run and long run, while the exchange rate has no asymmetric effect on fiscal sustainability. For a sustainable fiscal stance, we recommend a financial model that channels credits towards productive activities to boost GDP as this will go a long way in reducing the debt-to-GDP ratio and enhancing solvency.