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ABSTRACT

The study examined the effect of public debt on economic growth in Nigeria, using the time frame 2000-2015 (15years). It was established in the study that before the introduction of appropriate  government expenditure, public funds were grossly mismanaged, excessive borrowing, high occurrence of corruption in Nigerian public sector which as lead to surplus debt on the economy. The study employed the descriptive survey design in conjunction with the stratified sampling technique to select 100 staff in Ministry of Finance, Lagos. A well-structured questionnaire was used to collect data from the respondents. The data obtained were analyzed using the descriptive statistic technique and the chi-squared technique was adopted to test the two stated hypotheses. The major findings of the study are: There is a significant relationship between public debt liability and economic growth in Nigeria between 2000 and 2015. There is a significant relationship between debt service payment and economic growth in Nigeria between 2000 and 2015. The study conclude tat public debt as a significant effect on economic growth in Nigeria within the  time frame of 2000-2015 (15years). The study recommended; 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; 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; 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; 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; The government and the Debt Management Office (DMO) should drawn up guidelines to limit the growth of future debt

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

One of the key macroeconomic objectives of a nation is the achievement of sustainable economic growth. To achieve this goal, every Government requires a substantial amount of capital finance through investment expenditures on infrastructural and productive capacity development (Umaru et al, 2013). Consequently, this facilitates the growth of their gross domestic product (GDP), which if persistent should culminate in economic development, a status vigorously pursued by all less developed countries (LDCs), Nigeria inclusive. However, Ayadi & Ayadi (2008) note that the amount of capital available in most developing countries treasury is grossly inadequate to meet their economic growth needs mainly due to their low productivity, low savings and high consumption pattern. Governments therefore resort to borrowing from outside the country to bridge the resource gap. Countries borrow to promote economic growth and development, by creating conducive environment for people to invest in various sectors of their economies (Umaru et al, 2013). Similarly, Obudah and Tombofa (2013) argued that the specific reasons why countries may borrow include: to be able to finance their reoccurring budget deficit, as a means of deepening their financial markets, to enable them fund the increasing government expenditures, to enhance their narrow revenue sources and low output productivity which results in poor economic growth.

Sustainable economic growth is a major concern for any sovereign nation most especially the Less Developed Countries (LDCs) which are characterized by low capital formation due to low levels of domestic savings and investment (Adepoju et al., 2007). It is expected that these LDC’s when facing a scarcity of capital would resort to borrowing from public sources so as to supplement domestic saving (Aluko and Arowolo, 2010; Sulaiman and Azeez, 2011). Soludo (2003) asserted that countries borrow for two broad reasons; macroeconomic reason that is to finance higher level of consumption and investment or to finance transitory balance of payment deficit and avoid budget constraint so as to boost economic growth and reduce poverty. The constant need for governments to borrow in order to finance budget deficit has led to the creation of public debt (Osinubi and Olaleru, 2006).

Hameed et al., (2008) stated that public borrowing ought to accelerate economic growth especially when domestic financing is inadequate. public debt also improves total factor productivity through an increase in output which in turn enhances Gross Domestic product (GDP) growth of a nation. The importance of public debt cannot be overemphasized as it is an ardent booster of growth and thus improves living standards thereby alleviating poverty. It is widely recognized in the international community that excessive foreign indebtedness in most developing countries is a major impediment to their economic growth and stability (Audu, 2004). Developing countries like Nigeria have often contracted large amount of public debts that has led to the mounting of trade debt arrears at highly concessional interest rates. Gohar and Butt (2012) opined that accumulated debt service payments create a lot of problems for countries especially the developing nations reason being that a debt is actually serviced for more than the amount it was acquired and this slows down the growth process in such nations. The inability of the Nigerian economy to meet its debt service payments obligations has resulted in debt overhang or debt service burden that has militated against her growth and development (Audu, 2004).

public borrowing has a significant impact on the growth and investment of a nation up to a point where high levels of public debt servicing sets in and affects the growth as the focus moves from financing private investment to repayments of debts. Pattilo et al., (2002) asserted that at low levels debt has positive effects on growth but above particular points or thresholds accumulated debt begins to have a negative impact on growth. Furthermore Fosu (2009) observed that high debt service payments shifts spending away from health, educational and social sectors. This obscures the motive behind public borrowing which is to boost growth and development rather than get drowned in a pool of debt service payments which eats up most of the nation’s resources and hinders growth due to high interest payments on public debt.

Nigeria as a developing nation has adopted a number of policies such as the Structural Adjustment Programme (SAP) of 1986 to liberalize her economy and boost Gross Domestic product (GDP) growth. In a bid to ensure the implementation of these policies the government embarked upon massive borrowings from multilateral sources which resulted in a high public debt service burden and by 1992 Nigeria was classified among the heavily indebted poor countries (HIPC) by the World Bank. The genesis of Nigeria’s debt service burden dates back to 1978 after a fall in world oil prices. Prior to this occurrence Nigeria had incurred some minor debts from World Bank in 1958 with a loan of US$28million dollars for railway construction and the Paris Club debtor nations in 1964 from the Italian government with a loan of US$13.1 million for the construction of the Niger dam. The first major borrowing of US$1 billion known as the ”Jumbo loan” was in 1978 from the International Capital Market (ICM) (Adesola, 2009).

According to (Omotoye et al., 2006) Nigeria is the largest debtor nation in sub Saharan Africa. When compared with other sub Saharan nations such as South Africa, Nigeria’s public debt stock follows an upward pattern over the years while the former is relatively stabilized (Ayad and Ayadi, 2008). The resultant effect of the debt quagmire in Nigeria could create some unfavourable circumstances such as crowding out of private investment, poor GDP growth e.t.c (Okonjo Iweala, 2011).

1.2  STATEMENT OF THE PROBLEM

Nigeria like most highly indebted poor countries has low economic growth and low per capita income, with domestic savings insufficient to meet developmental and other national goals. Nigerian exports were primarily primary commodities with export earnings too small to finance imports which are mostly capital intensive (Manufactured) goods which are comparably more expensive (Siddique, Selvanathan and Selvanathan, 2015). Compounding the problem is Nigeria’s drift to mono economy with the discovery of oil. The oil sector generates about 95% of foreign exchange earnings and about 80 percent of budgetary revenue. The quest for economic growth and development compelled Nigeria to seek public debt. The first major public loan of US$28 million by Nigeria was acquired from World Bank in 1958 to finance railway construction. Ever since then, there has been accumulation of loans aimed at various development projects without obvious results as expected. As the amount of loans increased, Debt Management Office (DMO) was established in October, 2000. Prior to the establishment of DMO, Central Bank of Nigeria (CBN) was saddled with the responsibility of management of national debts. At moment, DMO in collaboration with CBN and Federal Ministry of Finance manage Nigeria’s debts. “Huge public debt does not necessarily imply a slow economic growth; it is a nation’s inability to meet its debt service payments fueled by inadequate knowledge on the nature, structure and magnitude of the debt in question” (Were, 2011).

It is no exaggeration that this is the major challenge faced by the Nigerian economy. The inability of the Nigerian economy to effectively meet its debt servicing requirements has exposed the nation to a high debt service burden. The resultant effect of this debt service burden creates additional problems for the nation particularly the increasing fiscal deficit which is driven by higher levels of debt servicing. This poses a grave threat to the economy as a large chunk of the nation’s hard earned revenue is being eaten up. Nigeria’s public debt outstanding stood at US$28.35 million in 2001 which was about 59.4% of GDP from US$8.5 million in 1980 which was about 14.6% of GDP (WDI 2013). The debt crisis reached its maximum in 2003 when US$2.3 billion was transferred to service Nigeria’s public debt. In the year 2005 the Paris Club group of creditor nations forgave 60% (US$18 billion) of US$30.85 billion debt owed by Nigeria. Despite the debt relief of US$18 billion received by Nigeria from the Paris club in 2005 the situation remains the same (Bakare, 2010).