FISCAL DEFICIT EXPANSION AND DEBT SERVICE COSTS: DEFAULT RISK AND AN ALTERNATIVE PARADIGM

Abstract

The study examined the growth in fiscal deficit and the impact of increasing total debt service costs that might increase default risk; and the adoption of an alternative paradigm. The estimated model was tested by ARDL and ECM a well a Granger econometric methodologies. The nominal exchange rate, oil price, balance of payments, total debt servicing cost, and fiscal deficit were the regressors, while the fiscal deficit was chosen as the dependent variable. The results from the estimated model demonstrate that, except for the price of oil, all other variables point to a causal relationship between changes in the fiscal deficit value, which is a crucial step in Nigeria's journey toward increasing debt and the adopted regressors. The link between the budget deficit and the exchange rate and overall cost of debt payment is notably negative. The fiscal deficit and the overall cost of debt servicing as well as the balance of payments have a one-way causal link, according to the Granger causality test. It follows that a rising fiscal deficit will only make the debt problem worse. Therefore, a rising debt service cost raises the total debt service value. Debt accumulation raises the fiscal deficit, and the fiscal deficit increases lead to a spike in the overall cost of debt servicing, which fuels further debt accumulation and ultimately results in possible default as the country’s revenue falls further. The country has to plug the loop holes in the generation of revenue through oil exports and increasing tax revenue. By demonstrating that the flow of causality is unidirectional and that increases in the budget deficit further fuel growth in debt payment costs, this study contributes to the body of knowledge already available in Nigeria on the subject. It shows that further borrowing by the Federal government can only lead to greater spikes in the budget deficit and a worsening depreciation of the naira as well asa continuous negative balance of payment situation. The alternative paradigm is the debt service cost in relation to actual revenue.