The Impact Of Public Debt And It’s Effect On The Nigerian Economy

Project and Seminar Material for Economics

The Impact Of Public Debt And It’s Effect On The Nigerian Economy


Abstract


The study examined the Impact of Public Debt and it’s effect on the Nigeria Economy. It can be deduced from the data gathered on the field through the administration and analysis of questionnaires, interviews and the findings of the tested hypothesis that public debt has been a burden to the economy of Nigeria. This findings is consistent with the conclusions of other literatures, research findings and diverse publications.

From the presentation and analysis of the data gathered, it was revealed that GDP which was used to represent the Nigerian economy has a negative relationship with debt stock (DSK) meaning that an increase in DSK will lead to a decrease of GDP. However the result shows that there is a significant relationship between the economic growth and public debt, meaning that the growth rate of the Nigerian economy relies strongly on the extent of Nigeria’s debt profile.


Chapter One


Introduction

Background of study

In recent times, Nigerian economy has been characterized by high levels of public debt along with persistent low economic growth. As such, an understanding of the dynamics between public debt and growth is critical in addressing the obstacles to economic growth and to improve debt sustainability in Nigeria (Omet, Aktham & Fadwa, 2002). Traditionally, the main drivers of economic growth are the level and quality of a country’s physical and human capital, technological advancement and the quality of the labour force as well as the country’s level of openness to international trade (Omet et al, 2001). However, it is now universally accepted that a country’s ability to grow also depends critically on its level of indebtedness.

Debt financing provides fiscal space to governments which can facilitate growth through higher public investment. However, debt can create higher fiscal imbalances through greater debt servicing attributed, in part, to future increases in loans to repay existing debt. In addition, increase borrowing in the domestic economy can crowd out private sector investment. Further, research has shown that public debt levels have a non-linear impact on economic growth. Reinhart and Rogoff (2010) found that public debt to GDP in excess of 90 per cent has a negative impact on economic growth.

The act of borrowing is the source of public debt. Debt in itself refers to the resources of money in use in an organization which is not contributed by its owners and does not in any other way belong to them. It is a liability represented by a financial instrument of other formal equivalent (Cohen, 2001). When a government borrows, the debts is a public debt, Debts are incurred by government through borrowing in the domestic and international markets to finance domestic investment. Therefore, the public debt is seen as all claims against the government held by the private sector of the economy, or by foreigners, whether interest-bearing or not (and including bank held debt and government currency, if any); less any claims held by the government against the private sector and foreigners.

In the same vein, public debt burden refers to the economic hardship which the public debt imposes. The hardship may take the form of waste of productive efficiency(misdirection of production) for the economy as a whole or undesirable economic burdens imposed upon particular classes. The problem of public debt in Nigeria has resulted in various distortions in the macro-economy. Essentially, these distortions are structural in nature, and thus affect the level of per capita incomes and are instrumental to the rising poverty in the country. The latter has attracted the attention of various authors and Nigerian economic planners. The various points of view are all agreed that the condition of Africa in general and that of Nigeria in particular have now deteriorated to an economic and political catastrophe (Nzotta, 2004).

Basically, Nigeria began to experience public debt problem from the early 1980s when foreign exchange earnings plummeted as a result of the collapse of prices in the international oil market and external loans began to be acquired indiscriminately. The debt crisis, which is the combination of accumulated debt stock and difficulty servicing, has imposed several problems on the Nigerian economy. This is reflected in the fall in real GDP, investment rate and export earning since 1980. The problem of public debt has clearly been a constraining factor on rapid economic recovery growth and development with the public debt increasing at an alarming rate (Cohen, 2001).

Funds which should have been used for economic development are channeled towards servicing the public debt. The constraining effect of the public debt services is more pronounced as the economy has failed to grow sufficiently to reduce the problem to a sustainable level.


Statement of the problem

There have been a good number of studies in Nigeria that analyze the relationship between debt and economic growth. They have focused on international debt and local debt in Nigeria. These studies have provided an understanding of the dynamics between debt and economic growth and development which is critical in addressing the obstacles to economic growth and development. Against this background, this study examines the impact of public debt and its effect on economic growth in Nigeria. In addition, the study seeks to determine whether there is evidence of a nonlinear impact of public debt on the economy and to identify this critical threshold beyond which public debt impairs economic growth and development.


Purpose of the study

  1. To examine the impact of public debt.
  2. To examine the effects of public debt on the Nigerian economy.
  3. To examine the relationship between public debt and the Nigerian economy.

Research questions

  1. What is the impact of public debt?
  2. What are the effects of public debt on the Nigerian economy?
  3. What is the relationship between public debt and the Nigerian economy?

Formulation of Hypothesis

  • HO: There is no significant relationship between public debt and the Nigerian economic growth and development.
  • HA: There is significant relationship between public debt and the Nigerian economic growth and development.

Significance of the Study

The following are the significance of the study:

The results from this study will educate the policy makers and business managers in Nigeria and the general public on the impact of public debt on the Nigerian economy.

This research will be a contribution to the body of literature in the area of the effects of public debt on the Nigerian economy, thereby constituting the empirical literature for future research in the subject area


Definition of term

Debt:

Something, typically money, that is owed or due.

Growth:

The process of increasing in progress of the nation

Capital:

Wealth in the form of money or other assets owned by a person or organization or available or contributed for a particular purpose such as starting a company or investing.

Development:

The process of developing or being developed.


Limitation / scope of the study

This study is limited to the public debt and the Nigerian economy between 1984 and 2014.

Limitation of study
Financial constraint

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.


Organization of the study

This study is organized into five chapters.

  1. The chapter one will contain the introduction. The introduction will be made up of the background of the study, problem statement, objectives, research questions and hypothesis.
  2. Chapter two is the literature review. Past studies are reviewed. The theoretical and conceptual background for the study is contained in chapter two.
  3. Chapter three is the research methodology. It contains the research design, population, sampling, method of data collection and analysis.
  4. The results and discussion of the findings were presented in chapter four.
  5. The last chapter finally contains the summary of findings, recommendation and conclusion.

The Impact Of Public Debt And It’s Effect On The Nigerian Economy


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Chapter Five


Summary of Findings, Conclusion and Recommendations

5.0 Introduction

This chapter discusses the findings in details and summary of the research study. An attempt has been made in this research to trace the genesis, trend, and structure of the country’s debt as well as the factors that prompted the accumulation of the debt and its effects on the economy. As a result of the findings on this research study, conclusions are drawn and recommendations are subsequently made in order to proffer a solution to the research problem. Also included in this chapter is area of further research for the purpose of further exploiting the research study.

5.1 Summary of Findings

It can be deduced from the data gathered on the field through the administration and analysis of questionnaires, interviews and the findings of the tested hypothesis that public debt has been a burden to the economy of Nigeria. This findings is consistent with the conclusions of other literatures, research findings and diverse publications.
From the presentation and analysis of the data gathered, it was revealed that GDP which was used to represent the Nigerian economy has a negative relationship with debt stock (DSK) meaning that an increase in DSK will lead to a decrease of GDP. However the result shows that there is a significant relationship between the economic growth and public debt, meaning that the growth rate of the Nigerian economy relies strongly on the extent of Nigeria’s debt profile.


5.2 Conclusion

Sustainable economic growth is of predominant concern for all economies, especially for the developing economies which commonly face burgeoning fiscal deficits mainly driven by higher levels of debt servicing, particularly external debt servicing and widening current account deficits.

The major objective of the study was therefore to analyze the effect of debt burden (both internal and external) on the growth of Nigerian economy. Nigeria has relied much on both external and internal debt to finance its development projects in the past two decades ago which put her debt profile so high.

Findings of this paper suggests that developing countries need to mobilize enough resources so that they can, not only meet their debt service obligations on time and have an access to tap the external resources, but also have resources to mobilize their private investment. Public debt, if not sustainable, may adversely affect the economic growth. It has an adverse effect on the behavior of private investment, and leads to crowding out. Developing economies, therefore, need to channelize their external resources in a way that it can help in creating new opportunities for investment and attract more investors to their countries. Openness, affects positively to the level of investment suggesting that higher level of exports will not only decrease the public and publicly guaranteed debt to exports earnings ratio but will also help in promoting the private investment in Nigeria.


5.3 Recommendations

Base on the above findings, we therefore recommend that Nigeria should not borrow now either internally or externally. It is important to add that, much as the current effort of the Paris Club is highly commended, the Club should indeed do more than it has promised by ensuring total write-off of Nigeria’s debt if any is still remaining.

Nigeria has paid for more than it has borrowed from the Club over the years. The bulk of the outstanding debt arose from capitalization of interest and penalty charges that fell due on the initial debt. It will be healthy if the government strive to finance budget deficit by improving on the present revenue base rather than resulting to domestic borrowing. This can be achieved by improving its revenue sources and efficient pursuit of tax reforms.

The rise in debt profile of Nigeria is attributed to government extra budgetary activities, which most often are not used for the intended project. Commitment to budget should be encouraged for fiscal discipline on the part of the government and its agencies. The government and the Debt Management Office (DMO) should drawn up guidelines to limit the growth of future debt. Effective mechanism should be put in place to ensure that any new borrowing is judiciously utilized to contribute to economic growth.

The place of corruption in public debt in Nigeria is central. Most often, borrowed fund are either misapplied or embezzled. In this regard, government effort at curbing corruption should be sustained.

Finally, it is important to stress the need for the Government to sustain existing macroeconomic policies including prudent debt management policy, if the ugly experience of the past would not be repeated. Growth- friendly structural policies including infrastructure, trade, tax and social policies and regulatory frameworks that affect economic incentives for private investments and production should be adopted and sustained while the fight against corruption should also be sustained. These policy measures are currently being implemented and there is no doubt about Government’s Commitment. The Government of Nigeria needs all the support to achieve these goals.

The major policy recommendations are as follows

  1. Government should maintain a Debt to GDP ratio of below 30 percent if procuring debt is unavoidable and resort to increase use of tax revenue to finance its projects as it is our believe that tax revenue is far from the optimum.
  2. Government should divest itself of all projects which the private sector can handle including refining crude oil (petroleum product) and transportation but should provide enabling environment for private sector investors such as tax holidays, subsidies, guarantees and most importantly improved infrastructure
  3. Government should maintain a proper balance between short term and long term debt instruments in such a way that long term instruments dominate the debt market. Even if the ratio of the long term debt is a multiple of deposit, the economy can still accommodate it so long as the proceed is channeled towards improving Nigerian investment climate.
  4. Government should strive to finance budget deficit by improving on the present revenue base rather than resulting to domestic borrowing. This can be achieved by improving its revenue sources and efficient pursuit of tax reforms.
  5. The government and the Debt Management Office (DMO) should drawn up guidelines to limit the growth of future debt

5.4 Areas of Further Research

This research study have been comprehensively carried out to justify the topic and has also to a reasonable extent contributed to the existing body of knowledge. However, it should be borne in mind that, this research can be further explored. Attention should be given to the following suggested research areas:

  1. The relationship between public finance and public debt
  2. The relationship between annual budget and public debt especially the area of deficit budget.
  3. Economic diversification as a means to curb the menace of public debt.

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