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Advances in Social Sciences Research Journal – Vol. 9, No. 7

Publication Date: July 25, 2022

DOI:10.14738/assrj.97.12714. Ofurum, C. O., & Fubara, S. J. (2022). Public Debt and Economic Development: An Empirical Evidence from Nigeria. Advances in

Social Sciences Research Journal, 9(7). 462-474.

Services for Science and Education – United Kingdom

Public Debt and Economic Development: An Empirical Evidence

from Nigeria

Clifford Obiyo Ofurum

Department of Accounting, Faculty of Management Sciences

University of Port Harcourt

Siminalayi Joseph Fubara

Ministry of Finance, Rivers State Secretariate, Moscow Road,

Port Harcourt

ABSTRACT

This study investigates the impact of public debt on economic development in

Nigeria. The objective is to empirical study the relationship between public debt

and economic development in Nigeria between 1980 and 2019. Data were collected

from the Central Bank of Nigeria (CBN) Statistical bulletin, and the Augmented

DiDickey-FullerADF), Autoregressive Distributed Lag (ARDL), and Granger

Causality were used to test the hypotheses and analyse the data. The results indicate

that foreign debt servicing does not have a significant impact on Nigerian real GDP.

Foreign debt servicing has a negative but insignificant impact on real GDP. In

addition, the result indicates that external debt does not significantly impact

unemployment. External debt servicing has no significant effect on unemployment.

Given the study's findings and the importance of natural resource utilisation in the

Nigerian economy, the study recommends that the private sector support the

government in developing technology to facilitate natural resource exploitation to

generate additional revenue to finance the government budget and reduce

borrowings.

Keywords: External Debt, internal Debt, Debt servicing, and Gross Domestic Product.

INTRODUCTION

The Keynesian school of thought is the principal proponent of public debt. They believe

government interference in the economy's viability and operation is unavoidable. They argue

that government borrowing is sacred, especially when money is needed to pump into the

economy to create specific amenities and infrastructure that would contribute to fulfilling

essential macroeconomic objectives, among other things, in any economy (Efanga, Etim &

Jeremiah, 2020).

The beginning of government borrowing in Nigeria could be traced back to a financial reform

launched by the colonial fathers' administration in 1958, which resulted in the formation of

public financial assets to support fiscal deficits (Urama, Ekeocha et al. 2018). According to

paragraph 35 of the Central Bank of Nigeria Ordinance 1958, the central bank is entrusted with

issuing and managing federal government loans publicly issued in Nigeria on such terms and

circumstances as the government and the central bank may agree (Ajayi and Edewusi 2020).To

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Ofurum, C. O., & Fubara, S. J. (2022). Public Debt and Economic Development: An Empirical Evidence from Nigeria. Advances in Social Sciences

Research Journal, 9(7). 462-474.

URL: http://dx.doi.org/10.14738/assrj.97.12714

boost economic growth and development, developing countries like Nigeria borrow to cover

budget deficits, which means they will have more investment opportunities with more excellent

rates of return than countries in developed economies that do not borrow as much. Thus,

borrowing is effective as long as borrowed money and some organically ploughed back funds

are used appropriately for productive investment.

The issue of public debt proliferation, which many developing countries worldwide have

experienced, has attracted global attention. In Nigeria, this experience, caused by falling oil

prices, exchange rate volatility, rising interest rates, and other factors, has negatively impacted

the country's economy Marafa (2017). Studies have found that having a high level of public

debt has a detrimental influence on the growth of the most developing economy (Olaoye and

Orimogunje, 2022). Budget deficits show that government spending is high compared to

receipts, and this gap has been rising in many developing nations.

It is crucial to remember that public debt is bad when it becomes chronic and burdensome for

governments to repay; however, countries cannot escape it once in a while because it can

achieve critical macroeconomic goals of improving citizens' standard of living (Ajayi and

Edewusi 2020). As a result, governmental debt has been described as a necessary evil. This

means that borrowing is beneficial until it causes the economy to suffer. Scholars have

hypothesised that countries with lower debt burdens have higher development rates than

those with more enormous debt burdens (Efanga et al., 2020). The failure of Nigeria to generate

domestic savings to fill the country's usual budget deficit over the years has resulted in the

country's continued reliance on public debt, particularly foreign debt. Foreign debts are often

characterised by unfavourable lending conditions, fluctuating foreign exchange rates, and the

risk of repudiation, resulting in debt overhang, thus negatively affecting the economy

(Akinwunmi and Adekoya 2018). This problem has also been identified as impeding domestic

capital creation, resulting in a reduction in the supply of essential services to citizens in the

country (Udoka and Anyingang 2010). The former Minister of Finance backed up this assertion,

stating that Nigeria's infrastructure inadequacy is the main cause of the country's poor progress

(Efanga et al., 2020). Against this background, this article empirically explores the impact of

public debt on Nigerian economic development to fill gaps in prior studies' research topics and

literature.

Research Hypotheses

The operational hypotheses for this article are as follows:

Ho1: There is no relationship between the explanatory variables and real gross domestic

product in Nigeria.

Ho2: There is no relationship between the explanatory variables and total unemployment in

Nigeria.

** the explanatory variables are Total External Debt, Domestic Debt, Total External Debt

Servicing and Total Domestic Debt Servicing.

REVIEW OF RELATED LITERATURE

Nigeria's domestic and external debt profiles have risen steadily without corresponding

increases in capacity utilisation, prompting Nigeria and several other emerging countries

worldwide to seek debt restructuring and cancellation (World Bank, 2002). Endogenous factor

such as extra-tax burden, and exogenous factors such as exchange rate and interest rate,

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Advances in Social Sciences Research Journal (ASSRJ) Vol. 9, Issue 7, July-2022

Services for Science and Education – United Kingdom

coupled with the oil price drop, led Nigeria into its first recession in 2004 and a subsequent

recession in 2005 (Nwankwo, 2010). Despite discontinuing her membership in the Paris and

London Clubs in 2006, Nigeria continued to use deficit financing, particularly in 2009 and 2010,

when it issued debt instruments worth N524 billion and N867 billion, respectively (Ajayi and

Edewusi 2020). This action was awkward and resulted in the payment of a $42 billion interest

rate to the Paris Club (Nwankwo, 2010). Several studies on the effects of public debt on

economic growth have been conducted over time in various nations worldwide. Interestingly,

many of these studies and other related research lack strategic empirical evidence Mencinger,

Aristovnik et al. (2014). Mencinger, Aristovnik et al. (2015); Ohiomu (2020), Lee and Ng (2015);

Egbetunde (2012), Brini, Jemmali et al. (2016)

Although public debt is frequently used as a last alternative by governments worldwide, it is

regarded as advantageous compared to other strategies such as money creation and the sale of

national assets. Nonetheless, it has been found that an increase in foreign debt has a detrimental

influence on most countries' trading capabilities and economic success (Asley 2002).

Furthermore, debt overhang impacts economic development and the efficacy of monetary

policies, export growth and decreases the harshness of trade restrictions, therefore improving

market friendliness and, as a result, boosting trade openness. Regardless, debt, if not properly

utilised, decreases the amount of economic progress (Muinga 2014). According to Ojo (2020),

the rising debt accumulated by Nigeria was undoubtedly one of the factors that prompted the

SAP (Structural Adjustment Programme)established in 1986 to promote sustainable economic

growth. According to Buryk, Bashtannyk et al. (2019), public debt is an excellent tool for

boosting economic growth, especially when it is utilised to create national assets that may

generate job possibilities. Although public debt, if mishandled or used inefficiently, causes a

slew of economic problems, the notion is that debt should only be used when it is indispensable

and when sufficient measures for its usefulness and control are in place. This study used

external debt, domestic debt, external debt servicing, and domestic debt servicing as public

debt indicators.

External debt refers to liabilities owing to other countries or international organisations. There

is ample evidence in the current body of research to suggest that foreign borrowing promotes

a country's growth and development. Governments borrow for various reasons; the first is for

macroeconomic reason, to increase investment and human capital development, while the

second is to alleviate budget constraints by funding fiscal and balance-of-payment imbalances.

Alabi (2010)) emphasised that nations, particularly less developed countries, borrow to

increase capital formation and investment, which low domestic savings had historically limited.

The two primary reasons the government borrow are to bridge the savings-investment gap and

the foreign exchange deficit. According to Chenery (1967), governments borrow to compensate

for a country's lack of savings and investment. Domestic debt refers to the responsibility or

obligation committed by a country within its borders. Domestic debt markets can assist

improve money and financial markets, increase private savings, and promote investment

(Abbas and Christensen 2007). According to data provided by Nigeria's Debt Management

Office (DMO), Nigeria's domestic debt stock was at about $43.185 billion or N7.25 trillion in

March 2015 Titus, Chidi et al. (2016)), 10.606 trillion in June 2016 (DMO, 2016), and is

constantly growing. Meanwhile, Nigeria's internal debt amounted to $21.8 billion in October

2010, up from $17.7 billion in 2009 (Udeh, UGWU et al. 2016).