Public Debt and Sustainable Economic Growth in Nigeria

Abstract

The Nigerian government has borrowed for more than three decades to cater for the growing fiscal deficit based on a weak tax revenue base. However, the development needs of a present generation must be managed without compromising the capacity of the future generations to meet their own needs in the same economy. This study investigates the relationship between government public borrowing and economic growth sustainability for the period 1981 to 2022. The study utilizes the disaggregated government borrowing in addition to the sustainable development variables. The Fully Modified OLS estimation technique (FMOLS) was deployed for the analysis of the study variables. The effect of domestic borrowing is negative in influencing the nation's sustainability because of high interest rate and the crowding out of private sector investment. The effect of external borrowing is positive and significant on sustainability and the applicable interest rate is relatively lower as the loan's proceeds are generally applied more to capital projects and infrastructure. The effect of other macroeconomic variables, such as interest rate and exchange rate, were negative and significant in affecting sustainability. The study recommends that the government improves negotiation for better interest rates and improve the utilization of domestic borrowed funds. Also, the government must consciously put measures in place to strengthen the domestic financial markets to have access to longer-tenured and cheaper funds. In addition, the government should ensure that borrowings are adequately channeled to finance essential public infrastructure like electricity and transportation, improve the productivity of the real sector and improve the capital stock for sustainable economic growth in the country.

Keywords: Domestic debt, economic growth, external debt, public debt, sustainability.

DOI: 10.7176/RJFA/15-9-05

Publication date: October 30th 2024