Optimal Government Debt and Economic Growth in Nigeria

A Wavering Illusion

Abstract

Developing economies rely on government debt to finance
budget deficits. Nevertheless, debt incurred beyond a certain
limit becomes detrimental to the economy. This study examined
the optimal point beyond which government debt impairs
economic performance in Nigeria, using annual time series
data from various issues of the Statistical Bulletin of the Central
Bank of Nigeria, the Debt Management Office, and data from
the World Development Indicators (WDI). Gross Domestic
Product (GDP) was used as a proxy for economic growth and
served as the dependent variable, while external debt, domestic
debt, debt servicing, interest rate, exchange rate, capital
(proxied by gross capital formation), labour (proxied by the
labour force participation rate), and foreign capital inflow
(proxied by foreign direct investment) were considered as
independent variables. The test mechanisms adopted were the
unit root test, the bounds test for cointegration, and the
Autoregressive Distributed Lag (ARDL) technique. The study
revealed a debt inflection point for external debt in Nigeria at
66.1 percent and 43 percent for domestic debt, implying that
beyond these points, external and domestic debts are not
sustainable. The policy implication of this study is the need for
the government to ensure that public debt management policies
align with the established debt-growth maximising threshold.
Moreover, the government is encouraged to implement fiscal
reforms that would support improved public debt management