Domestic Debt Dynamics and Fiscal Sustainability in Nigeria: An Empirical Evidence

The purpose of this paper is to examine the relationship between domestic debt dynamics and fiscal deficits over the period 1970-2006. We pretest the variables for stationarity by carrying out unit root tests. However, a variable may appear to exhibit non-stationary behavior when in actual fact it is stationary. Testing for unit root in the presence of structural break sometimes results in a stationary process. Thus a test for unit root utilizing ADF statistic may be insufficient to justify classifying a variable as stationary or non-stationary. Testing for unit root in the presence of structural break may give a clearer indication. This is what we have done in this study. As a result of these tests we find that all the variables of our model are integrated of order zero, that I(0). This led to the estimation of a multiple regression model. The results of our estimation show that all the variables significantly affect the debt dynamics while the inflation rate bears no significant relationship with the debt dynamics. The empirical results indicate that deterioration of primary fiscal balance account for the worsening of the debt dynamics as domestic debt outstanding continue to grow even in the face of modest economic growth. We recommend that government should take all necessary steps to implement the Fiscal Responsibility Act and intensify its efforts in utilizing the capital market whenever it is in need of funds.