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Public Debt and Economic Growth in Nigeria, For A 30 Year Period Viz (1987-2017)




The research seeks to examine public debt and economic growth in Nigeria, for a 30 year period viz (1987-2017). The research made use of time series data ascertained from CBN statistical bulletin (2018) and various issues of debt management office (DMO) bulletins. The model of the research regressed domestic debt stock, external debt stock, external debt service, domestic debt service and exchange rate on gross domestic product (a proxy for economic growth). The research revealed that only external debt stock; domestic debt stock and exchange rate were significantly impacting on economic growth in Nigeria.  The joint Test of the research revealed that public debt is significantly impacting on Nigeria economic growth. The co-integration and error correction test as well showed that there was a long and short-run relationship between public debt and economic growth in Nigeria.

The variables were enough to confidently explain the model, as the coefficient of multiple determination revealed that 98.27% of the exogenous variable could confidently explain the models variation. The model was free from the problems of Heteroscedasticity.

The study recommended that government should schedule the mix of public debt in such a way that it encompasses more of domestic debt as they aren’t any adverse long-term impact on the growth of the economy.



Background to the Study

Sustainable economic growth is a major concern for any sovereign nation most especially the Less Developed Countries (LDCs) which are characterized by low capital formation due to low levels of domestic savings and investment (Adepoju, Salau and Obayelu, 2007). It is expected that these LDC’s when facing a scarcity of capital would resort to borrowing (Aluko and Arowolo, 2010; Suleiman and Azeez, 2012). The reported financial inadequacies lead countries to source for supplementary financing.

Sulaiman and Azeez (2012) observed that Borrowing is one major source of aid to developing nations. But the rate at which they borrow depends on the links among foreign and domestic savings, investment and economic growth so that the borrowing countries can increase their capacity output with the aid of foreign savings (Ijirshar, Fefa&Godoo, 2016). It is required that the borrowing nation should be able to invest the borrowed fund wisely especially in financing development projects like railway construction, electricity generation plants, road construction and any other major capital project of the economy. However, Ijirshar et al (2016) pointed out that external debt can only be productive if well managed by making the rate of return higher than the cost of servicing the debt.

Public debt can either be external or internal(domestic), domestic debts are incurred by government in domestic markets in order to finance domestic investments. The financial reforms introduced by the colonial government in 1958 were the beginning of the existing market for government domestic borrowing in Nigeria. These reforms saw the establishment of the CBN (Central Bank of Nigeria, 2002) and the creation of marketable public securities and debt instruments to finance fiscal deficits (Amakom, 2003). The CBN issues the debt instruments on behalf of the Federal government and such debt instruments are expressed and denominated in local currency (Gbosi, 1998). The instruments include treasury bills, treasury bonds, treasury certificates, development stocks, etc. however the instruments do not include contractor debts and supplier credit by the government (Osuma, Adesina, Isibor and Abiola, 2018). The commercial banks are the main holders of the debt instruments alongside other non-banking financial instruments.

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Nigeria external debts dated back to pre- independence era when it acquired its first loan of twenty-eight (28) million US dollars from World Bank, to finance the construction of railway. Ayadi and Ayadi (2016) reported that by 1960, the Nigeria’s external debt profile had risen to 150 million US dollar. The quest for developmental plans and the need to finance the flamboyant lifestyle of government leaders in Nigeria surged up the country’s external debt to 1 billion US dollar by 1971 (Olasode&Babatunde, 2016). The increase in external debt alarmingly continued which was however due to fall in oil price in 1978 and sharp decline in the balance of payment. Debt Management Office (2000) noted that Nigeria obtained her first jumbo loan of 1 billion US dollar from International Capital Market (ICM) in 1978 summing the external debt to 2.2 billion US dollars. The states in the country joined in contracting loans from foreign creditors which gave rise to Nigeria external loan of about N17.3 billion in 1986, a situation that compelled the nation to adopt the Structural Adjustment Programme (SAP) in1986, which was packaged by International Monetary Fund (IMF) as a means to revamping the nation’s economy (Ayadi&Ayadi, 2008). By 2005, Nigeria indebtedness to foreign creditors had gone to a very escalating amount of 30 billion US dollar, which servicing cost was generally considered as unsustainable (Odubuasi, Udoka and Anichebe, 2018). This scenario attracted debt relief from Paris/London Club in 2006, thereby making Nigeria debt burden and profile lighter.

In view of the above, Nigeria started to re accumulate and record upward move in public debt from 2008 in a bid to foster the required economic growth and a support to fiscal deficits. National Bureau Statistics (2017) reports that Nigeria’s debt to foreign creditors in 2016 stood at 15.05 billion US dollar and N14.06 trillion to domestic creditors. The usage of heavy inflow of cash via public debt to double up economic growth and development of Nigeria is rightly in accordance with Keynesian Theory of capital accumulation as a catalyst for economic growth. Contrarily, Campbell (2009) noted that accumulating debt is accumulating risk by increasing claims on future unrealized income. It becomes paramount to ascertain how far the heavy external debt of Nigerian government has actually helped to foster economic growth as propelled by Keynesian theory, or has the debt accumulation exposed the country to great danger as expressed by Campbell (2009). Therefore, to this backdrop this study is set to find out the of impact of public debt and Nigeria’s economic growth.

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Statement of the Problem

Nigeria like most highly indebted poor countries has low economic growth and low per capita income, with domestic savings insufficient to meet developmental and other national goals. Nigerian exports were primarily primary commodities with export earnings too small to finance imports which are mostly capital intensive (Manufactured) goods which are comparably more expensive (Siddique, Selvanathan and Selvanathan, 2015). Compounding the problem is Nigeria’s drift to mono economy with the discovery of oil. Between May 2015 and June, 2016, the country debt had increased by more than $14billion (NBS, 2016)

Debt may have positive effect on growth in the short-run but in the long-run if the debt service repayment regime exceeds the ability to pay with some probability, it will lead to debt overhang and at a point, the interest becomes higher than the principal and the effect becomes negative. At this point, crowding-out of investment and private sector constraints will arise due to capital shortages (Mba, Yuni, and Oburota, 2013).

In Nigeria apart from factors identified to explain the changing domestic debt profile (such as high budget deficit, low output growth, large expenditure growth, high inflation and narrow revenue base), others include oil shocks as defined in terms of price fluctuation and single commodity economy as a result of non-diversification and expansion of non-traditional export.

Borrowing is a mechanism for financing deficit budget and also achieve  economic growth, but in Nigeria despite the huge debt portfolio the Nation is yet to achieve sustainable growth as the reverse has been the case, Could it be that this borrowed fund were not utilized efficiently or that Nigeria is yet to reap any benefit borrowing brings, or that public debt has been providing growth to the Nigerian economy. To this forgoing this research is concerned with finding out how public debt has influenced nigeria’s economic growth.

Objectives of the Study

The broad objective of the study is to examine the impact of Public debt on Nigeria’s economic growth. The Specific objectives are to;

  1. Determine the impact of Domestic debt stock on gross domestic product in Nigeria.
  2. Ascertain the relationship that exist between External debt stock and gross domestic product in Nigeria.
  3. Examine the influence of domestic debt servicing on gross domestic product in Nigeria.
  4. Analyze the impact of external debt servicing on gross domestic product in Nigeria.
  5. Examine the relationship between exchange rate and gross domestic product in Nigeria.

Research Questions

The research intends to provide answers to the following questions

  • What is the impact of Domestic debt stock on gross domestic product in Nigeria?
  • Does there exist any relationship between External debt stock and gross domestic product in Nigeria?
  • To what extent does domestic debt servicing influence gross domestic product in Nigeria?
  • How does external debt servicing impact on gross domestic product in Nigeria?
  • What is the relationship between exchange rate and gross domestic product in Nigeria?

Statement of Hypotheses

The following hypotheses shall be tested;

  1. H0: Domestic debt stock does not have any significant impact on gross domestic product in Nigeria.
  2. H0: External debt stock does not have any significant relationship with gross domestic product in Nigeria.
  3. H0: Domestic debt servicing does not significantly influence gross domestic product in Nigeria.
  4. H0: External debt servicing does not have significant impact on gross domestic product in Nigeria.
  5. H0:  Exchange rate does not have any significant relationship with gross domestic product in Nigeria.
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Significance of the Study

The study on Public debt and growth of Nigeria’s economy is of immense importance to the general economic health of the Nation, hence the study shall benefit all Nigerian citizens. Specifically, the study shall benefit the following groups

Policy Makers/Government: The study will assist those concerned to ascertain how Nigeria can utilize its debt portfolio in order to achieve sustainable economic growth.

Students: The study will save as a first-hand knowledge to those wishing to make further research on the topic matter.

Scope of the Study

Though the researcher would make reference to related studies of other economies of the world with a mind-set of reviewing literature on the topic matter, data for this research shall only be on the Nigerian economy.  It shall be collected between wide ranges of time spanning over a period of 30 years (1987_2017). Data for this study shall be from secondary sources majorly from Government institutions like the central bank of Nigeria (CBN) and multilateral organizations such as World Bank.

Limitation of the Study

The limitations encountered during the course of carrying out this research include non-availability of relevant data owing to the fact that the research materials available to the researcher is insufficient. The time frame allocated to the study does not enhance wide coverage as the researcher has to combine other academic activities and examinations with the study and limited access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the subject matter. However, in spite of the difficulties encountered the researcher made adequate effort to ensure the result of the study can be relied upon to make policies.

Organization of the Study

The study is structured into five chapters. The first chapter generally introduced the study and took care of the statement of the problem, Objectives of the study, significance of the study, statement of the hypothesis etc. The second Chapter is the literature review where different point of views of authors and authorities regarding the leading issues in the study were reviewed. The third is the research methodology and it specifies the statistical and econometric techniques employed for the study, without leaving out the source of data and specification of models. Chapter Four deals with the presentation and analysis of data. It is here the individual and joint test of hypothesis are carried out. It also contains discussion of regression results. While chapter five is the last and summarizes the leading issues and recommendations were not left out here.

Pages:  94

Category: Project

Format:  Word & PDF

Chapters: 1-5

Material contains Table of Content, Abstract and References

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