Dynamics of Nigeria’s Fiscal Policy Responses to Oil Price Shocks: Implications for Revenue Stabilization, Public Health Outcomes, and External Debt Sustainability

Abstract

Nigeria's fiscal policy framework remains highly susceptible to oil price fluctuations due to its heavy reliance on petroleum revenue. This study investigates the dynamics of Nigeria’s fiscal policy responses to oil price shocks and their implications for revenue stabilization, public health outcomes, and external debt sustainability. The motivation stems from Nigeria’s persistent fiscal vulnerabilities, recent subsidy reforms, and increasing concerns over debt sustainability. The study examined the patterns of Nigeria’s fiscal policy responses to oil price shocks and assess their effectiveness in achieving revenue stabilization, improving public health outcomes, and ensuring external debt sustainability from 1980 to 2023. Grounded in the Oil Price Shock Theory, New Keynesian Theory and Theory of Fiscal Federalism, this study builds on existing literature on oil price shocks and macroeconomic stability. Empirical findings suggest that oil price volatility significantly influences fiscal performance, debt accumulation, and healthcare financing. Prior studies have explored fiscal responses to oil price shocks, but limited attention has been given to their effects on health equity and external debt sustainability. Employing a Vector Autoregression (VAR) model, Impulse Response Functions (IRF) and Variance Decomposition (VD) were used to evaluate the transmission mechanisms of oil price fluctuations on Nigeria’s fiscal and health sectors. Findings reveal that oil price shocks significantly affect fiscal stability, healthcare funding, and debt sustainability. Effective revenue diversification, fiscal buffers, and public health investments are necessary to enhance economic resilience and mitigate oil price volatility risks.