Debt Sustainability and Economic Growth in Nigeria

Abstract

This study examines the effect of debt sustainability on Nigeria’s economic growth. In contrast to previous studies, this study takes a holistic approach that considers both domestic and external debt, as well as debt service payments. The study used yearly data that covered a period of forty years (1981 - 2020). Consequently, the non-linear autoregressive distributed lag (NARDL) econometric technique was used to decompose the effects of the debt variables into their positive and negative effects to ascertain if the inconsistent results documented by previous studies could be attributed to undetected asymmetries. The study established that Nigeria’s total debt stock and debt service payments had a considerable short-run effect on the economic growth of the country, but that only a reduction in total debt stock is important for long-run economic growth in the country. It was discovered that an increase in total debt stock initially has a terrible impact on economic growth, but that it has a positive impact after one year. On the other hand, the short-run effect of a total debt stock decrease is found to be consistently positive for all lags. Concerning debt service payment, the short-run effect showed that economic growth decreases when debt service payment increases and economic growth increases when debt service payment decreases. In the long-run, only a decrease in the total debt stock decreases economic growth significantly. From Recommendations from this study state that debt accumulation should be used to increase the country’s production capacity by increasing investments in infrastructure (e.g., power and better transportation networks) and to improve human capital development as these would help maximize the social gains from debt.

Untitled

“…Fiscal policy that delays tax collection until after existing taxpayers have died may influence accurate economic decisions (Afonso & Ibraimo, 2020). The core premise (Adetayo, 2021) was that intergenerational benevolence might broaden planning horizons, reinstalling robust versions of Ricardian equivalence.…”

“…Dey & M. Tareque (2020), and A.O. Adetayo (2021), Nigeria has had to and continues to rely on public debt for its savings-investment gap and fiscal deficit since its independence. It is critical to emphasize that foreign and domestic borrowing is not a negative issue for a country, mainly when it generates a better yield than the cost of borrowing.…”

External Debt Sustainability and Economic Growth in Sri Lanka

“…Some scholars have focused primarily on the nonlinear relationship between economic growth and external debt (Adekunle et al, 2021;Qureshi and Liaqat, 2020;Matthew and Adetayo, 2022). Based on the findings of the threshold regression analysis, Adekunle et al ( 2021) looked into the non-linear relationship between external debt and economic development in Nigeria from 1981 to 2015.…”

“…This model allows us to capture both the short-run and the long-run asymmetric relationship between external debt and economic growth in Sri Lanka. The current study specifies the following regression model, following Matthew and Adetayo (2022).…”