Modeling Fiscal Operations and Balance of Payments Positions Nexus in Nigeria

Abstract

Fiscal operations are essential tools of macroeconomic policy whereby governments generate revenue, spend public money, balance fiscal accounts and raise funds to repay public debts for stability purposes. In Nigeria, problems of balance of payments instability, import dependency, unstable revenues from crude oil exports and external borrowing have questioned the efficiency of fiscal operations for external sector stability. Despite the significance of fiscal policies, the degree of influence of selected fiscal indicators on Nigeria’s balance of payments has remained an empirical issue. This paper investigated the impact of government revenue, government expenditure, fiscal balance and public debt on Nigeria’s balance of payments position over the period from 1981 to 2024. The annual time series data were analyzed using the autoregressive distributed lag (ARDL) approach. The results indicated that the effect of the combination of all fiscal operations was statistically significant on the balance of payments position. Government revenue had a negative and statistically significant effect, while government expenditure and fiscal balance had positive and statistically significant effects. Public debt had a positive but statistically insignificant effect, showing that the role of public debt in enhancing external sector performance was not well confirmed within the estimated model. From the results, it can be noted that the performance of the external sector of Nigeria is not only influenced by the size of the government but also the composition and effectiveness of the fiscal operations. Therefore, the paper recommends that there should be a diversification of the sources of non-oil revenue, channeling of public spending to areas that increase productive capacity and exports, and also the prudence in fiscal operations.