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THE IMPACT OF PUBLIC DEBT AND ITS EFFECT ON THE NIGERIAN ECONOMY

 

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 anorganization which is not contributed by its owners and does not in any other way belong tothem. It is a liability represented by a financial instrument of other formal equivalent (Cohen, 2001). When agovernment borrows, the debts is a public debt, Debts are incurred by government throughborrowing 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 theeconomy, or by foreigners, whether interest-bearing or not (and including bank held debt andgovernment currency, if any); less any claims held by the government against the private sectorand foreigners. In the same vein, public debt burden refers to the economic hardship which thepublic 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 burdensimposed upon particular classes. The problem of public debtin Nigeria has resulted in various distortions in the macro-economy. Essentially, thesedistortions are structural in nature, and thus affect the level of per capita incomes and areinstrumental to the rising poverty in the country. The latter has attracted the attention of variousauthors and Nigerian economic planners. The various points of view are all agreed that thecondition of Africa in general and that of Nigeria in particular have now deteriorated to aneconomic and political catastrophe (Nzotta, 2004).

Basically, Nigeria began to experience public debt problem from the early 1980s when foreignexchange earnings plummeted as a result of the collapse of prices in the international oil marketand external loans began to be acquired indiscriminately. The debt crisis, which is thecombination of accumulated debt stock and difficulty servicing, has imposed several problemson the Nigerian economy. This is reflected in the fall in real GDP, investment rate andexport earning since 1980. The problem of public debt has clearly been a constraining factor on rapideconomic 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 towardsservicing the public debt. The constraining effect of the public debt services is more pronounced asthe 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 iscritical in addressing the obstacles to economic growth and development. Against this background, this studyexamines 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

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

Research questions

What is the impact of public debt? What are the effects of public debt on the Nigerian economy? 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. 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. Chapter two is the literature review. Past studies are reviewed. The theoretical and conceptual background for the study is contained in chapter two. Chapter three is the research methodology. It contains the research design, population, sampling, method of data collection and analysis. The results and discussion of the findings were presented in chapter four. The last chapter finally contains the summary of findings, recommendation and conclusion.

REFERENCES

Cohen, D. (2001). Large external debt and (show) domestic growth: A Theoretical analysis.Journal of Economic Dynamics and control, 19, 1144-1163.

Nzotta, S. M. (2004). Money, banking and finance.Owerri;Hudson-Jude Nigeria Publishers

Omet, G., Aktham, M., &Fadwa, K. (2002). External Debt and Economic Growthin Jordan: The Threshold Effect. Faculty of Economics & Administrative Sciences The Hashemite University Jordan.

Rogoff, G. (2010). Growth, debt and economic transformation: The Capital Flight problem;inCoricelli, F. and Hahn, F. (eds), New Theories in growth and development, st.martins press, pp.847-868.

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