Impact of National Debt Burden on Economic Stability in Nigeria

Abstract

The study argues that national debt becomes a burden when debt overhang is rising, a foreign reserve is inadequate to cover short-term external debt and government revenue is inadequate for debt servicing. This paper investigates the impact of national debt burden on economic stability in Nigeria. Data spanning from 1981 to 2019 have been collated from the World Development Indicators and Central Bank of Nigeria Statistical Bulletin, 2019 edition. Consequently, the variables used to measure debt burden are total debt-to-GDP ratio (debt overhang), short-term external debt-to-reserves ratio (reserve adequacy) and debt service cost-to-government revenue ratio (revenue adequacy) with exchange rate as a control variable, while economic stability is measured with real GDP growth rate. The Autoregressive Distributed Lag (ARDL) model is used for the analysis since the variables are stationary at both levels and first difference. The ARDL estimation shows that the explanatory variables collectively cause a diminishing impact on economic stability in the long run with revenue adequacy having a negative and significant impact. In the short run, all the components of debt burden, except debt overhang, have a negative and significant impact on economic stability. Under this circumstance, exchange rate has a positive and significant impact on economic stability in the long run.

Government Debt Sustainability and Investments in Nigeria: Trends and Risk Thresholds amidst Macroeconomic Swings

“…c) The third strand of studies examined the relationship between debt and economic performance based on the debt overhang theory (Yussuf & Mohd, 2021;Onyele & Nwadike, 2021;Nzeh, 2020;Al-Dughme, 2019;Jilenga et al, 2016).…”

“…These macroeconomic imbalances hinder the potency of debt, leading to debt crises, low investments, and low economic growth (Onyele & Nwadike, 2021). where is the error term.…”

The Growth Effect of External Debt in Nigeria: Does Structural Break Matters?

“…On the other hand, the effects of external debts on economic growth are mixed. Some studies argued that external debt has growth-inhibiting effects as excessive external debts could instigate financial instability and crowd out domestic investment thereby, lowering economic growth potentials (Senadza et al, 2018;Essl et al, 2019;Ehikioya et al, 2020;Onyele and Nwadike, 2021). In addition, the huge cost of debt servicing could mop up domestic resources and undermine growth (Ogbonna et al, 2019;Yusuf and Mohd, 2021).…”

“…This is pertinent because both external debt and economic growth might have been subjected to structural shifts in the past, which if ignored could produce misleading results. Despite the failure of past studies (Edeminam, 2021;Fagge and Ibrahim, 2018;Ogbonna et al, 2019;Omesi et al, 2021;Onyele and Nwadike, 2021;Yusuf and Mohd, 2021) to take cognizance of structural break, this study takes structural break into consideration in its modelling of the growth effect of external debts. Lastly, this study employs the dynamic ordinary least square (DOLS) estimator to analyse the growth effect of external debt in Nigeria.…”

Impact of public debt profile on economic growth: Evidence from Nigeria

“…To most economies, therefore, debt is inevitable but will only be helpful if it is judiciously expended for the purpose for which it is sort in the first place. This is because borrowing provides funds for investments as well as financing deficits in the balance of payments (Onyele & Nwadike, 2021). Ohwofasa et al (2012) submit that the genesis of the debt crises in Nigeria began in early 1980 when government revenue began to dwindle due to volatility in prices of crude oil at the global market.…”