Effects of Public Debt on Economic Growth in Nigeria

The study was centered on the effect of public debt on economic growth in Nigeria. Given the impact of debt burden on economic growth and other macro-economic parameters, total debt was disaggregated into domestic, external and debt servicing cost. The data was obtained from the Debt Management Office and Federal Office of Statistics. For ease of analysis, the study employed Vector Error Correction Model (VECM) due to the presence of long run relationship identified during data diagnosis. The findings confirmed that domestic debt in the short run is inversely related to growth but positively related in the long run provided it is done with moderation where the total domestic debt did not outweigh 30% of the total domestic bank deposits against crowding out effects. The impact of external debts was both negatively related to economic growth at both short run and long run period due to possible wrong application of loans to project types. It was also important to note that debt servicing posits a major evil plaguing the economy of the country. In summary, the findings confirm that public debts significantly do affect economic growth and against their justification for infrastructural development on fixed capital formation, it was also revealed that it is non-incentive to economic growth, due to wrong resource allocation and timing of such fixed capital investment for appropriate economic growth drive and stimulation. The coefficients of most of these parameters are all statistically significant at 5% confident level. Policy recommendation from the study is that government should only borrow on items that can repay, what the loan was collected for, in the first place. Keywords; Crowding effects, debt financing, debt overhang, Fixed capital formation, economic growth, Nigeria economy