Background to the Study

Economic growth and development has been one of the key macroeconomic objectives of the Nigerian government from independence till date. To achieve this objective the government needs a huge amount of resources (revenue). The major traditional sources of revenue generation available to the government are taxation and borrowing. According to Dr. Tunde Fowler (Executive chairman of FIRS) he opines that in the year 2018, the tax agency set an all time record with N5.3 trillion tax revenue despite missing its target of N6.7 trillion, which exceed its highest record of N5.07 trillion generated in 2012. Notwithstanding the reported growth in tax revenue, the tax revenue/GDP ratio has remained at 6% in Nigeria which is relatively low compared to other Sub-Saharan African nations like South Africa, Ghana, Egypt, Lesotho among others. South Africa has 22.6% tax revenue/GDP ratio, Ghana has 17.2%, Egypt has 11.9%, and Lesotho has 50.8% (FIRS, 2017). This shows that the tax revenue generating capacity of the Nigerian government is yet to be properly harnessed. The other source of revenue open to the government aside taxation is borrowing or debt financing.

Public debt is as a result of money borrowed by the government of the country. It is the sum of money borrowed by federal, state and local governments. If such money is borrowed internally, it is known as domestic debt. On the other hand, when government borrows from foreign market or organizations like multilateral agencies such as the World Bank, Africa Development Bank, or the Islamic Development Bank, and bilateral agencies such as the China Exim Bank, the French Development Bank, or the Japanese Aid Agency to finance domestic investment is known as external 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). Generally, every obligation of a government such as contractors’ obligations (as well as currency obligation) are included in the public debt. Such obligations include the currency, short term debt, floating debt and funded debt.
The past couple of decades have witnessed rising concern on the increase in Nigeria’s public debt. The first most significant rise in Nigeria’s public debt occurred in 1987 when the total debt rose by 96.9 per cent to N137.58 billion. From then, the rise in Nigeria’s public debt continued unabated such that as at 2004, total public debt stood at N6,260.595 billion (CBN, 2006). In 1986, the total debt in Nigeria which was hitherto driven largely by the domestic debt witnessed a reversal and was being driven by the external debt. Thus, the dominance of the external debt as well as the steady rise in total debt remained till 2005 when the country was granted debt pardon by the Paris Club. The debt forgiveness saw Nigeria’s total debt and external debt plummeting by 59 per cent and 90.8 per cent, respectively between 2004 and 2006 to N4890.3 billion and N451.5 billion. In 2014, total debt had exceeded the 2004 level and stood at N9,535.525 billion. The increase in total debt continued to persist in Nigeria. It rose to N10,948.51 billion in 2015, 14,537.11 billion, and N18,377 billion in 2016, and 2017 respectively. By 2018, Nigeria’s total debt stood at N20,533.6 billion (CBN, 2018).

The current debates on fiscal consolidation emphasized the crucial role of prudential limits on public Debt/GDP ratios. A debt/GDP ratio of 60 per cent is quite often noted as a prudential limit for developed countries, while for developing and emerging economies, a debt/GDP ratio of 30 per cent was maintained before 2008 and 40 per cent was being applied since 2009 (DMO, 2013). However, these ratios are not sacrosanct as countries are encouraged to adopt different strategies to achieve fiscal consolidation (IMF, 2011).
In view of IMF debt/GDP ratio recommendation of 40% for developing and emerging economies, Nigeria’s public debt was unsustainable between the periods of 1985-1995 and 1998-2004. The debt/GDP ratio were above the optimal threshold of 40%. For example, in the year 1990 and 1992, the debt/GDP ratio were 71.68% and 70.16% respectively. It stood at 71.02% in 1993. However, a brief sustainability was enjoyed between 1996-1998. The debt/GDP ratio was lower than the optimal threshold of 40% recommended by the IMF. For example, it was 25.21% in 1996, 24.14% in 1997, and 22.27% in 1998. Nigeria’s debt/GDP ratio had been below the threshold since 2005 till date. For example in 2005 Nigeria debt/GDP percentage was 18.94%, and in 2010 it reduced to 9.60%, also in 2017 and 2018 recorded 25.34% and 27.26% of debt/GDP percentages respectively. The sustainability of the former was due to astronomical increase in Gross Domestic Product (GDP) whereas that of the later could be attributable to both GDP growth and debt forgiveness. Though Nigeria’s debt/GDP ratio had remained sustainable since 2005, it is however noteworthy that both public debt and GDP had been on continuous rise except for 2016 where the GDP fell marginally due to economic recession.

Overtime, the rise in public debt has become a major concern for observers who is concerned about the capacity of government to service its debt without sacrificing its scarce resources that is meant for the stabilization or stimulation of the Nigerian economy. Nigeria’s debt servicing crisis began around 1985, when the Nigerian government’s total external debt to all creditors amounted to $19 billion. Since then, the government has paid creditors more than $35 billion while borrowing less than $15 billion. Nevertheless, its outstanding external debt at the end of 2018 grew to $25 billion while domestic the debt stands at N12774 billion.
Falegan (1992) stated that there are numerous factors responsible for the increased size of Nigeria’ public debt (internal and external) which includes: decline in oil earnings, creation of new states, excessive reliance on external debts financing for projects, adverse interest rates movement, etc. These factors and more will be clearly elucidated in the following chapter.

Scholars have agreed that borrowings in itself is not bad if such funds are channeled and judiciously used in productive investment and are used to provide investment goods which return is more than the cost of incurring debt. According to Soludo (2008), 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 government borrows with the aim to boost economic growth and foster 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 became a burden to African countries because contracted loans were not optimally deployed, therefore returns on investments were not adequate to meet maturing obligations and also hindering economic growth (Erhieyovwe and Onovwoakpoma, 2013). This work aims to examine the impact of public debt (domestic and external debt) on the Nigeria’s economy performance.