ABSTRACT
This study investigates the relationship between public debt and economic growth in Nigeria over the period of 1981-2019. Specifically, the study analyses the relationship of public debt on economic growth using domestic debt and external debt. The study used annually time series data for domestic debt stock, external debt stock, exchange rate, and consumer price index. The multiple regression analysis, Unit Root test, Johansen cointegration test, and Granger causality test were employed in this study. The results of the multiple regression analysis show that external debt has negative and significant relationship with economic growth and domestic debt has a positive relationship with economic growth in Nigeria. The ADF unit root test shows that all variables were non stationary at level but all became stationary at first difference. The Johansen co-integration test shows that there is a long run relationship between economic growth, and public debt variables in Nigeria. The granger causality test also shows that external and domestic debt granger causes GDP in Nigeria. The study recommends the government should tie every public borrowing to a specific project that is production oriented. Acquiring debts domestically is also recommended rather than foreign debts because it has a positive relationship with GDP and lastly, the study recommends the government should increase their efforts to diversify sources of revenue and increase the tax-to-GDP ratio.
TABLE OF CONTENTS
TITTLE PAGE…………………………………………………………………….. i
DECLARATION…………………………………………………………………… ii
CERTIFICATION………………………………………………………………… iii
DEDICATION……………………………………………………………………… iv
AKNOWLEDGEMENT…………………………………………………………… v
ABSTRACT………………………………………………………………………… vi
TABLE OF CONTENTS…………………………………………………………. vii
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study 1
1.2 Statement of the Problem 3
1.3 Research Questions 4
1.4 Objectives of the Study 4
1.5 Statement of the Hypothesis 4
1.6 Significance of the Study 4
1.7 Scope and limitation of the Study 5
1.8 Definition of Terms 5
1.9 Organization of the Study 6
CHAPTER TWO: LITERATURE REVIEV
2.0 Introduction 6
2.1 Conceptual Framework 6
2.1.1 Domestic debt 6
2.1.2 External debt 7
2.1.3 Exchange rate 7
2.1.4 Consumer price index 7
2.1.5. Economic growth 7
2.2 Background of Public Debt in Nigeria 8
2.3 Theoretical Framework 10
2.3.1 Debt overhang theory 10
2.3.2 Ricardo’s theory of public debt 11
2.3.3. Keynesian theory of public debt 12
2.3.4 Dual gap theory 12
2.4 Empirical Literature review 13
2.5 Literature gaps 23
2.6 Summary 23
CHAPTER THREE: METHODOLOGY
3.0 Introduction 24
3.1 Research Design 24
3.2 Methods of Data Collection 24
3.3 Method of Data Analysis and Model Specification 24
3.3.1 Model Specification 25
3.3.2 Regression Analysis 25
3.3.3 Unit Root Test 25
3.3.4 Johansen Cointegration Test 26
3.3.5 Granger Causality Test 26
3.4 Justification of Methods 26
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.0 Introduction 27
4.1 Data Analysis and Result Presentation 27
4.1.1 Summary statistics of the variables 27
4.1.2 Unit Root Test 29
4.1.3 Regression Analysis 31
4.1.4 Johansen Cointegration Test 32
4.1.5. Granger Causality Test 33
4.2 Test of Hypothesis 34
4.3 Discussion of Findings 35
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
5.0 Summary 36
5.1 Conclusion 36
5.2 Recommendations 37
5.3 Suggestions for further Research 37
REFERENCES 38
APPENDIX 42
LIST OF TABLES
4.1 Summary statistics for variables………………………………………………34
4.2 Regression analysis results……………………………………………………..35
4.3 Unit root test results …………………………………………………………………..37
4.4 Johansen Cointegration test results ……………………………………………41
4.5 Granger causality test results………………………………………………..….45
LIST OF FIGURES
Figure 2.1 Conceptual framework………………………………………………..11
Figure 4.1 Trend of the variables …………………………………………………35
CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
Public debt is the amount of money owed by a country to individuals, businesses, institutions, and public corporations residing inside or outside the country. Money is borrowed by a government when a country has insufficient savings and revenue to carry out productive activities that foster economic growth and development. Economic growth is one of the key macroeconomic objectives every developing economy wishes to attain. But to achieve this goal, the government has to incur both capital and recurrent expenditure. The detailed estimate of government expenditure and expected revenues over a period of time is contained in its national budget. When revenue is equal to expenditure, the budget is said to be balanced; when revenue is greater than expenditure, there is a surplus budget and when there is a short fall in expected revenue and expenditure is greater, it shows a deficit budget. Government may finance its deficit budget through tax revenue, money creation or borrowing from banks or non-banking sources. The act of borrowing which is the option that generates the most funds creates debt. In Nigeria, like many other countries, it is made up of internal, external, and international debts.
Internal debt refers to money borrowed locally within the country using instruments such as bonds and treasury bills purchased by the Central Bank, local pension funds, and other financial or non financial institutions. External debt refers to a portion of national debt that is borrowed from sources out of the country including foreign governments, banks, and financial institutions and these loans are usually paid in the foreign currencies. While borrowings from international markets and organizations or multilateral agencies such as the International Monetary Fund (IMF), World Bank, Islamic Development Bank, or Africa Development Bank, and bilateral agencies such as the French Development Bank, China Exim Bank, or the Japanese Aid Agency to finance domestic investment are known as international debt. Therefore, “public debt is seen as all claims against government in the economy, either by her citizens or by foreigners, whether interest bearing or not” (Anyanwu, 1993). “Public debt can be domestic or foreign, short term, medium term, or long term, marketable or non-marketable, interest bearing or non-interest bearing, gross or net”(Anyanwu, 1993).
Investors usually measure the risk to invest in a country by comparing its national debt to its national output (GDP). It is known as debt-to-GDP ratio and it indicates a country’s ability to pay off its public debt. As at June 2020, Nigeria’s debt-to-GDP ratio stood at 18.2% (source: CEIC).
Soludo (2003) explained that; “countries borrow for two broad categories: macroeconomic reasons [higher investment, higher consumption (education and health)] or to finance transitory balance of payments deficits [to lower nominal interest rates abroad, lack of domestic long-term credit, or to circumvent hard budget constraints]”. This implies that the government borrows with aim of boosting economic growth and fostering development. He is also of the opinion that once an initial stock of debt grows to a certain threshold, servicing them becomes a burden, and countries find themselves on the wrong side of the debt-laffer curve, with debt crowding out investment and growth. “This seems to be the position of Nigeria today because investment, which will accordingly result to high-speed growth with a positive effect on poverty, is moving sporadically in both positive and negative directions” (Tajudeen, 2012).
“Public debt becomes a burden to countries when contracted loans are not optimally deployed, therefore returns on investments becomes inadequate to meet maturing obligations and also hindering economic growth” (Erhieyovwe and Onovwoakpoma, 2013). This project aims to examine the impact of public debt (domestic and external debt) on the Nigeria’s economy performance.
STATEMENT OF THE PROBLEM
The clear problems of government borrowing include repayment of high interest, increase in taxes, and inflationary pressures among others. As public debt increases, the government would have to service the debt with the accumulated interest and principal including the difference in exchange rate over the period of time to those who hold the bonds. To raise funds, the government could adopt contractionary fiscal that means increase in taxes and limiting of government spending as a way to service the debt. This would lead to a decrease in disposable income, greater inefficiencies, and distortions of the population- which will cause people to experience lower standards of living. In some cases, the government could respond to the high levels of debt by printing more money. This increase in money supply causes inflationary pressures in the economy.
The high percentage of budgeted fund for the repayment of debt and debt service obligations reduces society’s welfare of the debtor nation and hinders the large domestic investment gap that is needed for Nigeria to achieve its growth and development objective. The lack of judicious use of loaned fund for the betterment of lives of the citizenry by allocation of such funds to the productive sectors of the economy has affected aim of stimulating and stabilization effect of deficit financing for the growth of the Nigerian economy.
If we consider all the negative long run effects of public debt, we see that it tends to create balance of payment deficits for the country in debt, reduce the size of a nation’s private capital which can lead to crowding out of the public sector, reduce a nation’s output, consumption, while increasing inefficiency and government’s dependency on other countries. Hence, it is against this background that this study therefore aims to investigate the impact of public debt (domestic and external debt) on economic growth and development in Nigeria.
RESEARCH QUESTIONS
The study answers the following questions:
What is the short run relationship between public debt and economic growth in Nigeria?
What is the long run relationship between public debt and economic growth in Nigeria?
What is the causal relationship between public debt and economic growth in Nigeria?
OBJECTIVES OF THE STUDY
The main objective of this paper is to investigate the relationship between public debt and economic growth in Nigeria.
The specific objectives include:
To determine the short run relationship between public debt and economic growth in Nigeria.
To determine the long run relationship between public debt and economic growth in Nigeria;
To assess the causal relationship of public debt and economic growth in Nigeria.
STATEMENT OF HYPOTHESIS
The study uses the following hypothesis:
Ho: There is no relationship between public debt and economic growth in Nigeria
H1: There is a relationship between public debt and economic growth in Nigeria.
SIGNIFICANCE OF THE STUDY
This study is significant in discussing the nature of public debt Nigeria. The growing debt pattern in Nigeria is one that raises concerns for the future of the economy.
Firstly, the findings from this study will provide information for policy makers in making appropriate decisions on factors to consider before borrowing money, and how to manage the situation of debt crisis that Nigeria is in today.
Secondly, this paper will be of great importance to the general public as it would educate people on the causes of some of the different problems being faced by various sectors of the country such as electricity, education, healthcare, transportation, and the general living standard of the average Nigerian.
Disinvestment is being caused by the use of scare public resource for the repayment of debt and debt service obligation has been a source of concern to the government and even the populace whose future is been short-changed by means of higher taxes and lack of development.
Lastly, this study will investigate the relationship of public debt on macroeconomic variables such as the GDP, and Consumer Price Index which would be a worthy contribution to knowledge on the debate of public debt-economic growth benefit.
SCOPE AND LIMITATION OF THE STUDY
The study covered the impact of public debt both domestic and external debt on the economic growth in Nigeria from the period of 1981 to 2019.
The limitation of the study is that secondary data used in the analysis may not be 100 percent accurate. There is also a limitation in the methodology of the study. All methods of data analysis are not completely free from estimation errors and errors in terms of parameter measurements. The study will however ensure all errors are minimized to achieve valid and reliable results.
DEFINITION OF THE TERMS
Public debt: Public debt is defined as the total national debt owed by a country both internally (money borrowed within the country) and externally (loans acquired internationally). It is often expressed as a ratio of the GDP.
Economic Growth: Economic growth is an increase in the production of goods and services in a country from one period to another on a sustainable basis. It implies an increase in a country’s wealth and standard of living. It can be measured in terms of real GDP or nominal GDP.
Gross Domestic Product (GDP): GDP is the monetary value of all finished goods and services produced in a country within a certain period of time. It is commonly used to measure economic activity in a country and it is traditionally measured annually.
Debt Service: Debt service is the cash required for the repayment of interest and principal on a debt for a particular period. The debt service ratio is a tool used to measure a country’s ability to repay its debt. The Debt Management Office (DMO) is the government agency established to coordinate the management of debt in Nigeria.
