Fiscal Sustainability in Nigeria: Does Changes in Oil Prices Matter?

Abstract

In this study, we explore the link between oil price fluctuations and fiscal sustainability in the context of debt servicing in Nigeria. The idea is that high oil prices tend to offer a unique opportunity for Nigeria to use the windfall gains to foster effective and sustainable debt management. Thus, we construct a dynamic parsimonious error correction model to quantify the effect of Brent crude and West Texas Intermediate oil prices and exchange rate on public debt serving between 1990 and 2022 with the data sourced from the World Bank and the Organisation of Petroleum Exporting Countries (OPEC). The findings showed that all the variables are integrated of order one, I(1) and have a long-run relationship at the 5% level. Evidence of a positive and significant effect of Brent crude oil prices on debt servicing was established from the results. This explains that an increase in Brent crude oil prices enhances the process of fiscal sustainability in Nigeria by meeting debt service obligations. Similarly, the results showed that West Texas Intermediate crude oil price affected debt servicing positively, but this finding is not significant at the 5% level. However, evidence of a negative effect of a negative and significant effect of exchange rates on debt servicing. This implies that an increase in the exchange rate decreases the value of the naira with adverse implications on the potential of the government to meet the debt service obligations. Given the findings, this study recommends that government must optimize the windfall gains from high oil prices to enhance public debt sustainability for better fiscal performance. This could potentially create more pathways for fiscal sustainability and ensure that debt servicing remains effective and sustainable in Nigeria.