Estimating a fiscal reaction function for Nigeria: is there a case for fiscal sustainability and cyclicality?

This study estimates the fiscal reaction function of the Nigerian economy through fiscal and macroeconomic variables using various econometric methods including ordinary least squares (OLS), fully modified OLS (FM-OLS), Discrete threshold autoregressive model (DTAR), Autoregressive distributed lag (ARDL) model, and the variants of the Smooth threshold autoregressive (STAR) models were used for testing for the sustainability or non-sustainability and cyclicality of fiscal policy for the period 2010q1 to 2022q4. Public debt and output gap serve as crucial indicators for analysing the sustainability and cyclicality of fiscal policy. Hence, this study reveals that fiscal policy in Nigeria is non-sustainable and procyclical, especially when public debt and output gap exert negative and statistically significant impacts on fiscal balance. Thus, the government reacts weakly to changes in public indebtedness, and the fiscal policy stance is prone to shocks or economic fluctuations. These results indicate that the government, through the fiscal authorities, should adopt reforms(like a comprehensive debt management strategy)that will discourage huge public debt accumulation and design expenditure switching programmes to improve the quality of spending. These strategies could avoid fiscal instability risks and procyclicality bias.