A Theory of Fiscal Sustainability Under Resource Revenue Dependence: Evidence from Nigeria

Fiscal sustainability in resource-dependent economies presents theoretical challenges that conventional debt sustainability frameworks developed for diversified economies do not adequately address, given the unique volatility, exhaustibility, and political economy dynamics of resource revenues. This study develops a theoretical framework for assessing fiscal sustainability in resource-dependent states and applies it empirically to Nigeria between 1990 and 2023. The theoretical contribution is a dynamic fiscal sustainability model that incorporates stochastic oil revenue processes, endogenous government spending responses, and time-varying debt tolerance parameters calibrated to institutional quality measures. The empirical application uses a non-linear cointegration framework with smooth transition mechanisms to detect regime-dependent sustainability properties of Nigeria's primary fiscal balance. A historical decomposition analysis identifies the contributions of oil price cycles, discretionary fiscal policy, and institutional quality shifts to the evolution of fiscal sustainability. The model is solved using dynamic programming techniques and estimated using Bayesian simulation methods. The theoretical framework builds on Bohn's sustainability test, the permanent income model of resource revenue management, and the fiscal theory of the price level. The study generates original theoretical propositions about the conditions under which resource-dependent governments can simultaneously maintain fiscal sustainability and deliver development investments, testing these propositions against Nigerian historical data. The PhD-level contribution lies in the novel theoretical model and the application of cutting-edge econometric methods to an important but undertheorised problem in Nigerian public finance. Findings carry implications for the International Monetary Fund's debt sustainability assessments, the Debt Management Office, and comparative fiscal theory in oil-exporting economies. Keywords: fiscal sustainability, resource revenue, oil dependence, Nigeria, dynamic fiscal model