Public Debt, Fiscal Space, and Industrial Sector Performance in Nigeria

Abstract

There has been a surge in the public debt profile of Nigeria in recent years. This paper examines the usefulness of deficit financing plans based on public debt in driving industrial sector output performance in an economy with sufficient borrowing space. The paper utilizes the ARDL cointegration technique to investigate both the short-run dynamics of the hypothesized relationship as well as the long-run dimension of the relationship among public debt, fiscal space, and industrial sector performance in Nigeria. Two variables, total debt stock and the debt service over exports ratio, proved statistically significant in the long run in explaining industrial output performance in Nigeria. Two variables, fiscal balance and the debt service over exports ratio were statistically significant and satisfactorily explain industrial output performance in Nigeria over the short-run period. These findings, in effect, confirm the applicability of the Keynesian general theory, which assigns a positive connotation to public indebtedness, whether in the attempt to design demand-side fiscal policy or to stimulate an economy in recession onto the path of balanced economic growth. One piece of emerging evidence from this study on Nigeria is that an increase in the debt service over exports ratio, which is a key measure of debt-related risks, does not provide evidence of any long-run damage to industrial output performance.