Trade Gap and Public Debt Sustainability in Nigeria

Abstract

This study assessed the effect of the trade gap on public debt sustainability and the transmission from the trade gap to public debt sustainability through the revenue channel using annual data for Nigeria from 1970 to 2022. The novelty of this study lies in its investigation of factors affecting trade gap shocks and its departure from conventional debt sustainability metrics, offering a deeper understanding of the connection between trade gap and public debt sustainability. The study has been anchored on the theory of trade misinvoicing. The researchers applied the structural vector autoregressive (SVAR) method, which has been estimated using the impulse response function tool. The findings established a negative effect of the trade gap on public debt sustainability. The results further show that the revenue variable is, on average, related to a larger (negative) effect of the trade gap. However, the effect of the trade gap on debt sustainability is shown to be communicated through budget deficits and not the revenue channel. The study recommends that policymakers should prioritise measures to counteract the negative impact of the trade gap on the economy. This may include boosting exports, decreasing import reliance and enhancing competitiveness in global markets.JEL Codes: F14, H62, H63