Fiscal Stance, Public Debt, and Inflation Dynamics in Nigeria

This study examines how fiscal stance and public debt affect inflation dynamics in Nigeria from 1980 to 2024. The objective is to evaluate the specific effect of fiscal deficits and public debt on inflation and to explore if public debt moderates the relationship between fiscal deficits and inflation. The research employs the Autoregressive Distributed Lag (ARDL) model, Bai-Perron structural break analysis, and mean-centered variables to depict inflation as a function of fiscal deficits, public debt, their interaction, and control variables including exchange rates, money supply, and lending rates. A persistent long-term cointegrating relationship is confirmed by the findings. Fiscal deficits exert a significant positive impact on inflation in both the long and short run horizons, while the interaction term is statistically insignificant, suggesting that deficits are autonomously inflationary regardless of debt levels. Public debt remains insignificant in the long run but exhibits a contemporaneous deflationary effect followed by a significant positive lag in the short run. The exchange rate, money supply, and lending rates are all significant positive long-run determinants. Notably, the Error Correction Term (ECT) is -0.507, indicating a significant and moderate adjustment speed where 50.7% of macroeconomic disequilibrium is corrected annually. The study concludes that the primary cause of inflation in Nigeria is linked to fiscal factors, with deficits independently contributing to rising prices, unaffected by the levels of debt, and the depreciation of the currency. Recommended actions encompass vigorous fiscal consolidation aimed at minimizing deficits and improved coordination between fiscal and monetary policies to avoid "unpleasant monetarist arithmetic." Furthermore, debt management should focus on securing concessionary financing, while essential structural reforms are necessary to expand the export base and alleviate inflationary pressures caused by fluctuations in exchange rates.