Oil dependence, political economy and procyclicality of fiscal policy in Nigeria

Purpose The relative roles of political-economy and oil dependence on the procyclicality of fiscal policy in Nigeria are examined in this study. The focus is on assessing whether the fiscal characteristics of sub-national governments and over dependence on oil revenue provide additional influences on fiscal performance. Design/methodology/approach The study employs data for the period 1960–2020 that are further partitioned into the 1970–1998 period (before democracy) and the 1999–2020 period (during democracy). Both the autoregressive distributed lags and Ordinary Least Squares techniques are used to determine the presence of fiscal procyclicality and to explain the main drivers. Findings The study finds evidence of fiscal procyclicality in Nigeria which is more intense during the democratic era of 1999–2020. Neither oil price volatility nor oil dependence is found to significantly influence fiscal procyclicality during the democratic era in Nigeria, rather, political economy factors in terms of increased state governments’ fiscal participation in the democratic era are found to effectively increase fiscal procyclicality in the country. This implies that it is the pattern of fiscal federalism and fiscal participation of state governments in Nigeria, rather than oil dependence, that pose significant threats to maintaining efficient fiscal policy in Nigeria. More focus therefore needs to be on political agents (mainly sub-national governments) in the economy in the drive to enhance efficiency of fiscal policy in Nigeria. Originality/value The paper partitions the data into pre- and post-democratic eras in order to better show the influence of democracy as a background factor in explaining fiscal procyclicality in Nigeria.