EFFECT OF PUBLIC DEBT ON ECONOMIC GROWTH IN NIGERIA (2000 – 2022)
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EFFECT OF PUBLIC DEBT ON ECONOMIC GROWTH IN NIGERIA (2000 – 2022)
Chapter one
Introduction
Background of the study.
Sustainable economic growth is one of a country’s key macroeconomic objectives. To achieve this goal, each government must make major capital investments in infrastructure and production capacity (Umaru et al., 2013).
As a result, their gross domestic product (GDP) is more likely to grow. If this tendency continues, it should result in economic improvement, which many less developed countries (LDCs), including Nigeria, strive for.
However, Ayadi and Ayadi (2008) argue that the majority of developing countries’ poor productivity, low savings, and high spending habits result in a significant lack of capital in their treasuries to fund economic growth.
As a result, governments rely on foreign borrowing to bridge the resource gap. Countries borrow to promote economic development and progress by creating an environment that encourages investment in a variety of economic sectors (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 to achieve low output productivity, which results in weak 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.
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