EFFECT OF PUBLIC DEBT ON ECONOMIC GROWTH IN NIGERIA (2000 – 2015).
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EFFECT OF PUBLIC DEBT ON ECONOMIC GROWTH IN NIGERIA (2000 – 2015).
Chapter one
INTRODUCTION
1.1 Background of the Study
One of a country’s primary macroeconomic objectives is to achieve long-term economic growth. To attain this goal, every government must invest heavily in infrastructure and productive capacity development (Umaru et al., 2013).
As a result, this promotes the rise of their GDP, which, if sustained, should lead to economic development, a goal pursued actively by all less developed nations (LDCs), including Nigeria.
However, Ayadi and Ayadi (2008) observe that the quantity of capital available in most developing countries’ treasuries is grossly insufficient to meet their economic growth needs, owing to poor productivity, low savings, and a high consumption rate. To fill the resource imbalance, governments turn to external borrowing.
Countries borrow to promote economic growth and development by establishing an environment that encourages people to participate in various sectors of their economy (Umaru et al, 2013).
Similarly, Obudah and Tombofa (2013) argued that countries may borrow for a variety of reasons, including the ability to finance their recurring budget deficit, to deepen their financial markets, to fund rising government expenditures, to improve their limited revenue sources, and low output productivity, all of which result in poor economic growth.
Sustainable economic growth is a fundamental challenge for any sovereign nation, particularly Less Developed Countries (LDCs), which have limited capital formation due to low levels of domestic savings and investment (Adepoju et al. 2007).
It is envisaged that when faced with a lack of capital, these LDCs will borrow from public sources to replenish domestic savings (Aluko and Arowolo, 2010; Sulaiman and Azeez, 2011).
According to Soludo (2003), countries borrow for two primary reasons: macroeconomic reasons, which are to fund higher levels of consumption and investment, and temporary balance of payment deficits and escape budget constraints in order to stimulate economic growth and eliminate poverty.
The persistent necessity for governments to borrow to cover budget deficits has resulted in the accumulation of public debt (Osinubi and Olaleru, 2006).
According to Hameed et al. (2008), public borrowing should be used to boost economic growth, particularly when domestic finance is inadequate. Public debt also improves total factor productivity by increasing output, which boosts a country’s GDP growth.
The significance of public debt cannot be overstated because it is a powerful driver of prosperity, raising living standards and eliminating poverty.
It is commonly acknowledged in the international community that most developing countries’ heavy foreign debt is a serious obstacle to economic progress and stability (Audu, 2004).
Developing countries such as Nigeria have frequently acquired enormous amounts of public debt, resulting in the accumulation of trade loan arrears at highly concessional interest rates.
According to Gohar and Butt (2012), accumulated debt service payments cause many problems for countries, particularly developing countries, because a loan is serviced for more than the amount it was obtained, slowing down the growth process in such nations.
The Nigerian economy’s inability to meet its debt service payment obligations has resulted in debt overhang or debt service burden, which has hampered growth and development (Audu, 2004).
Public borrowing has a considerable impact on a country’s economy and investment until excessive levels of public debt servicing set in, affecting growth as the focus shifts from supporting private investment to debt repayment.
Pattilo et al. (2002) claimed that while debt has a favourable influence on growth at low levels, it has a detrimental impact on growth at certain points or thresholds.
Furthermore, Fosu (2009) found that large debt service payments divert expenditure away from the health, education, and social sectors. This obscures the purpose of public borrowing, which is to stimulate growth and development rather than drowning in a pool of debt service payments that consume the majority of the nation’s resources and stifle growth due to hefty interest payments on public debt.
Nigeria, a developing country, has implemented a number of initiatives, including the Structural Adjustment Programme (SAP) of 1986, to liberalise its economy and promote Gross Domestic Product (GDP) growth.
To enable the implementation of these programmes, the government borrowed massively from international sources, resulting in a significant public debt payment load, and the World Bank classed Nigeria as a substantially indebted poor country (HIPC) in 1992.
Nigeria’s debt servicing burden stretches back to 1978, when global oil prices fell. Prior to this incident, Nigeria had accrued some small debts from the World Bank in 1958 with a loan of US$28 million for railway development, 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. In 1978, the International Capital Market (ICM) made its first substantial borrowing of US$1 billion, known as the “Jumbo loan” (Adesola, 2009).
According to (Omotoye et al., 2006), Nigeria is the largest debtor country in Sub-Saharan Africa. When compared to other sub-Saharan nations such as South Africa, Nigeria’s public debt stock has risen over time, whereas the former has remained relatively stable (Ayad & Ayadi, 2008).
The debt quagmire in Nigeria may result in negative situations such as crowding out of private investment, low GDP growth, and so on (Okonjo Iweala, 2011).
1.2 Significance of the Study
In any economy, public debt serves as a primary source of public receipts and funding for capital accumulation. It is a vehicle used by countries to bridge deficits and carry out economic projects that can raise citizens’ living standards while also promoting long-term growth and development.
The burden of public debt has been a major problem for the Nigerian government and the country as a whole, prompting harsh measures such as dividing the nation’s limited resources in debt servicing on an annual basis. This action has resulted in economic disinvestment, as well as a decrease in domestic savings and overall growth rates.
This study aims to analyse the relationship between public debt liability and economic growth in Nigeria by determining the short- and long-run effects of public debt liability on economic growth. This study is significant because its findings will help policymakers develop policies to address Nigeria’s debt crisis.
1.3 Statement of the Research Problem
Nigeria, like most heavily indebted impoverished countries, has slow economic growth and low per capita income, with insufficient domestic savings to satisfy developmental and other national goals.
Nigerian exports were predominantly primary commodities, with export revenues insufficient to cover imports, which were mostly capital intensive (manufactured) goods that were correspondingly more expensive (Siddique, Selvanathan, and Selvanathan, 2015). Compounding the dilemma is Nigeria’s shift to a mono-economy following the discovery of oil.
The oil sector accounts for around 95% of foreign exchange earnings and roughly 80% of budgetary revenue. Nigeria sought public debt in order to achieve economic growth and development.
Nigeria obtained its first substantial public loan from the World Bank in 1958 to finance railway construction, totaling US$28 million. Since then, loans for numerous development projects have accumulated without yielding the desired outcomes.
As the number of loans expanded, the Debt Management Office (DMO) was founded in October 2000. Prior to the creation of DMO, the Central Bank of Nigeria (CBN) was responsible for managing national loans. Nigeria’s debts are currently managed by the DMO in partnership with the CBN and the Federal Ministry of Finance.
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