Public Debt Sustainability and Economic Stability in Nigeria: An Empirical Assessment

Abstract

This research investigates the link between public debt sustainability and economic stability in Nigeria over the period from 1981 to 2023. Given the rising concerns about increasing public debt levels and their potential effects on the broader economy, the study employs an ex post facto research design. Data were sourced from the Debt Management Office (DMO), the Central Bank of Nigeria (CBN), and the World Bank Development Indicators. Time series econometric methods were utilized to assess how different components of public debt influence exchange rate stability, with initial analyses including unit root tests to confirm the stationarity of the data. Additionally, the study implemented the Error Correction Model (ECM) to capture both short-term adjustments and long-term equilibrium relationships among the variables. The findings indicate that domestic debt has a negative and statistically significant impact on exchange rate stability, suggesting that increases in domestic borrowing can destabilize the currency, likely due to liquidity constraints and the crowding out of private sector investment. Similarly, external debt negatively influences exchange rate stability, reflecting susceptibility to exchange rate fluctuations and global financial shocks. Conversely, debt servicing is found to positively and significantly contribute to exchange rate stability, emphasizing that timely servicing of debt can offset destabilizing pressures. Overall, total public debt exhibits a strong positive and highly significant effect, implying that strategic and well-managed borrowing can enhance macroeconomic stability. The study concludes that careful management of domestic and external debt, prompt debt servicing, and the targeted use of public debt for productive investments are essential for sustaining exchange rate stability and promoting economic growth. Recommendations include strengthening debt monitoring systems, prioritizing productive borrowing, and reinforcing fiscal policies to protect Nigeria’s economic stability.