THE EFFECT OF PUBLIC DEBT ON ECONOMIC GROWTH IN NIGERIA

BY

ANYANWU CHIDERA MOSES

19/2223

A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE

REQUIREMENTS FOR THE AWARD OF BACHELOR OF

SCIENCE DEGREE IN ECONOMICS TO THE

DEPARTMENT OF ECONOMICS,VERONICA

ADELEKE SCHOOL OF SCIENCE,

BABCOCK UNIVERSITY,

ILISHAN-REMO,

OGUN STATE

SUPERVISOR:

DR. OSUNDINA, O.A.

APRIL,2022

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 CERTIFICATION OF ORIGINALITY

I hereby declare that this project submission titled “THE EFFECT OF PUBLIC DEBT ON
ECONOMIC GROWTH IN NIGERIA” is my work and that in the best of my knowledge
and brief, it contains no material previously published or written by another person nor
materials which is to a substantial extent have been accepted for award of my degree or
diploma of a university or other institutions of higher learning, except where due
acknowledgement is made in the text.

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Name Matric No. Signature Date

SUPERVISOR ATTESTATION

I certify that this project was carried out under my supervision, examined and found
acceptable in partial fulfilment of the requirements for the award of a Bachelor of Science
(B.Sc.) Degree in Economics, from the Department of Economics, Veronica Adeleke School
of Social Sciences, Babcock University.

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DR. OSUNDINA, O.A. DATE

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FOR OFFICE USE

PROJECT APPROVAL

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DR. OYEDELE, O DATE

HEAD OF DEPARTMENT

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 DEDICATION

This project is dedicated to Almighty God, the giver of life for bringing me this far
academically and seeing me through my stay at Babcock University and to my loving
parents, HRH Damian Anyanwu and Barrister Gladys Anyanwu.

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 ACKNOWLEDGEMENT

Thanks be to God Almighty, my guide, my comforter and my provider for His grace and

favour in seeing me through this phase of life. I acknowledge my parents HRH. Damian

Anyanwu and Barrister Gladys Anyanwu and my siblings Mr Anyanwu Tochukwu , Mrs

Anyanwu Adaugo, Mrs Anyanwu Succcess, and Mr Damain Anyanwu Abobby for their

spiritual and financial assistance

My profound gratitude goes to my spectacular supervisor Dr Osundina O.A, she is an

inspiring supervisor and I appreciate her for her valuable guidance, constructive criticism

comments, advice and encouragement.

To, Dr. Obiakor, Dr. Edy, Dr. lawal, Mr. Musa, Dr. Andy, Dr. Awolaja, Mrs Ebere, Dr.

Oluwalaiye, Mr Aroyewun, and Prof Onakoya. I am sincerely grateful for all the knowledge

you imparted in me throughout my stay in Babcock University.

I am extremely thankful to my lovely friends, Ikuerowo Opeyemi, Tuedor Igho, Oke Adeolu,

Otuwarikpo Kaniye Felix and Okonkwo Ebuka for making my stay at Babcock University a

memorable one and contributing positively to my life.

To all my course mates over the years, you’ve made this journey unforgettable.

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 ABSTRACT

There are divergent views on Public debt and Economic Growth in Nigeria. The study

examines Public debt and Economic Growth in less developed countries, using the time

frame 1988-2020. Real GDP, domestic debt stock, external debt stock, debt servicing

payments and inflation rate were used as proxy for economic growth and public debt.

The unit root test was conducted using Augmented Dickey-Fuller and Philip Perron revealed

that the variables where stationary at levels and at first difference. The Autoregressive

Distributed lag (ADRL) co-integrating framework showed that there was a short run and long

run relationship between public debt and economic growth in Nigeria.

The result rising from our findings indicates that inflation rate, domestic debt stock and

external debt stock have a negative effect on economic growth while debt servicing payment

has a positive effect on economic growth.

Government should strive to finance the budget deficit by improving on the present revenue

base rather than resulting in domestic borrowing. This can be achieved by improving its

revenue sources and efficient pursuit of tax reforms.

KEY WORDS: Public debt, Economic growth, Inflation rate, Domestic debt stock, Debt

service payment, External debt stock and Autoregressive Distributed lag (ADRL) technique.

Word Count: 174

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 TABLE OF CONTENTS

CHAPTER ONE: INTRODUCTION

1.1 Background of The Study 1
1.2 Significance of Study 4
1.3 Statement of The Problem 4
1.4 Research Questions 5
1.5 Research Objectives 5
1.6 Research Hypothesis 5

1.7 Justification of The Study 6

1.8 Scope / Limitation of The Study 7
1.9 Definition of Terms 7
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual Review 9
2.1.2 Why Countries Borrow 10
2.2 Theoretical Review 11
2.2.1 Keynesian Theory Of Increasing Government Activity 11
2.2.2 The Dual-Gap Theory 12
2.2.3 The Dependency Theory 13
2.2.4 The Solow Growth Model 14
2.2.5 Debt-Cum Growth Model 15
2.3 Empirical Review 15
2.4 Literature Map 23

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CHAPTER THREE: METHODOLOGY
3.0 Introduction 32
3.1 Data Sources And Definition 32
3.2 Model Specification 32
3.3 A Priori Expectation 34
3.3.1 Description And Measurement of Variables 34
3.4 Estimation Technique 37
3.5 Model Evaluation 38
3.5.1 Unit Root Test 38
3.5.2 T-Statistic 38
3.5.3 F-Statistic 39
3.5.4 Adjusted R-Squared 39
3.5.5 Serial Correlation 39
3.5.6 Heteroskedasticity Test 40
3.5.7 Normality Test 40
3.5.8 Stability Test 40
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.0 Introduction 41
4.1 Data Presentation And Discussion 41
4.2 Results Of Empirical Analysis 41
4.2.1 Preliminary Analysis 42
4.2.2 Trend Analysis 43
4.2.3 Stationarity Test Result 47
4.2.4 Optimal Lag Length Selection 49
4.2.5 Bound Cointegration Test 50
4.2.6 Ardl Test, Short run and long run Model Estimation 51
4.2.6.1 ARDL short model estimation 51
4.2.6.2 ARDL Long run model estimation 52
4.2.7 Model Evaluation 53
4.2.7.1 T-Statistics Test 53
4.2.7.2 F-Statistics Test 53
4.2.7.3 Standard Error Test 54
4.2.8 Post-Estimation Test 54
4.2.8.1 Normality Test 54

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4.2.8.2 Stability Test 55
4.2.8.3 Breusch-Godfrey Serial Correlation Lm Test 57

4.2.8.4 Linearity Test 58

4.2.8.5 Heteroscedasticity Test 58
4.2.8.6 Discussion Of Findings 59
4.3.1 Results of Research Questions 59
4.3.1.1 Result of Research Question 1 59
4.3.1.2 Result of Research Question 2 59
4.3.1.3 Result Of Research Question 3 59
4.3.1.4 Result Of Research Question 4 60
4.3.2 Discussion 60
4.3.3 Comparison With Key Theory 61
4.3.4 Comparison With Other Works 61
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction 63
5.2 Summary of the study 63
5.3 Conclusions 64
5.4 Recommendations 64

REFERENCES 66
APPENDICES 70

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 CHAPTER ONE

INTRODUCTION

1.1 Background of 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. 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. However, 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. Similarly, 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 which are characterized by low capital formation due to

low levels of domestic savings and investment . (Umaru, A., Hamidu, A., & Musa, S.

2013). 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 Soludo asserted that

countries borrow for two broad reasons; macroeconomic reason that is to finance higher

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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 .

However, 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. 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. 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.

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.

Public debt is defined as the total amount, total liabilities borrowed by the central

government of a state to meet its development budget. It is also described as an important

instrument of fiscal policy available to government to fund the development of a

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countries economy. Public debt which includes both internal (domestic) and external

debts is considered when the revenue realized by the governable is insufficient for its

projected expenditures (Rahman, 2012). Public debt is also referred to as national debt,

public interest, owed by the government or the aggregate of borrowings of all government

units such the federal, state and local government . Public debt is described as the

aggregate of borrowings acquired by government bodies of a country; this includes funds

owned to private organizations, public entities, foreign government which are owned

within a particular period of time. (Idenyi, Igberi and Anoke 2016) affirmed that public

debt forms one of the numerous approaches of financing government expenditures,

although governments can instruct the Central Bank to produce and release funds to it so

as to avoid the interest payment attached to government debts, this method will

unarguably control interest cost but will not get rid of the debt. Government can

inaugurate borrowings through means such as; treasury bills, bonds, issuing securities and

directly from international financial institutions. Most borrowed funds are used in

enhancing the productivity level and developing human capital through the provision of

employment opportunities, deliver adequate infrastructural facilities and expanding the

scope of private and public investment thereby increasing economic growth and

development in an economy.

Economic growth whereas can be defined as the increase in the wealth of a nation over

time. It is also defined as the increase in the adjusted market value or production of goods

and services produced in an economy over time. An increase in the gross domestic

product of a country is noticed as the productive capacity of the country accrues,

especially when measured relative to other periods. Hence, economic growth is observed

when the total goods and services of a country increases relative to the previous years.

The association between public debt and the economic growth of less developed countries

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has been recognized amongst policy holders and researchers over the years all over the

world.

1.2 Significance of Study

Numerous studies aimed at examining the effects of public debt on economic growth

have been carried out over time across countries of the world. Noticeably, a significant

number of these studies and other related researches are bereft of strategic empirical

evidences in developed countries. Ensuing the gap in the research focus and literature of

previous research.

This study empirically scrutinize the effect of public debt on economic growth in Nigeria.

This research seeks to investigate the relationship between public debt and economic

growth in less developed countries by finding a short run and long run effect of public

debt and economic growth.

This study is significant as its findings will provide a basis which will aid policy makers

in proffering polices aimed at managing the debt crisis situations.

The study will help broaden the understanding of the effect of public debt on economic

growth in less developed countries. The findings in the study will be of benefit to the

students who come across it either as a study work or a research material.

1.3 Statement of the Problem

The incapacity of less developed countries to amass or assemble domestic resources to

fill the usual budget deficit experienced in the country over the years gave rise to the

consistent dependence and reliance on public debt especially foreign debt which is often

typified by adverse lending conditions, instability of foreign exchange rates and the

potential repudiation that occasions debt overhand, hence exerting negative effects on the

economic growth to the country. The main cause of the unimpressive development state

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 of most less developed countries is the inadequacy and bad condition of infrastructures in

the country.

1.4 Research Questions

This main study seeks to investigate empirically the effect of public debt on economic

growth in Nigeria and therefore tries to answer the following research questions:

1. What is the impact of domestic debt stock on the economic growth in Nigeria

2. What is the effect of external debt stock on the economic growth in Nigeria

3. What is the relationship between debt servicing payment and the economic growth in

Nigeria

4. What is the effect of the rate of inflation on the economic growth in Nigeria

1.5 Research Objectives

The broad objective of this study is to examine the effect of public debt on economic in

Nigeria. The specific objectives of the study are:

1. To determine the impact of domestic debt stock on the economic growth in Nigeria

2. To assess the effect of external debt stock on the economic growth in Nigeria

3. To analyze the relationship between debt servicing payment and the economic growth

in Nigeria.

4. To determine the rate of inflation on the economic growth in Nigeria

1.6 Research Hypothesis

The hypothesis to be tested in the course of this research includes:

Hypothesis 1

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H01: Domestic debt stock has no significant effect on economic growth in Nigeria.

Hypothesis 2

H02: External debt stock has no significant effect on economic growth in Nigeria.

Hypothesis 3

H03: Debt servicing payment has no significant effect on economic growth in Nigeria.

Hypothesis 4

H04: Inflation rate has no significant effect on economic growth in Nigeria.

1.7 Justification of the Study

Related studies on Public debt have shown a variety of analysis by various scholars. The

study made by other scholars has been finding the rationale behind borrowing by the

government of a nation. Therefore, this study intends to make use of real GDP as proxy, and

cover a period of 31 years (1988-2020) which has not been done before. This study will make

justification by making comparative analysis between developed and under-developed

economies, and how public debt has impacted on the overall growth and development of

economies

1.8 Scope / Limitation of the Study

The study seeks to analyze public debt and its impact on economic growth. In order to

fully capture its effect on the economy, a thorough empirical investigation will be conducted

with data covering a period of 31 years i.e. 1988-2020. This period was chosen to cover the

post debt-relief era.

Finance is one of the elements that assists a good research. Financial constraint caused

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difficulties in the process of this research work; however, it did not hinder the research.

The main limitation of this study is time constraint. The time allotted for the completion of

this research is not adequate based on recent and contemporary happenings with respect to

the impact of public debt on economic growth in less developed countries.

1.9 Definition of Terms

The following words are operationally defined as they would be used in this research study.

Public Debt: The acquisition of foreign loan. That is the amount of money owing by country

to another.

Public Debt Service Payments: This is the amount used in repaying the interest and

principal of the public debt.

Economic Growth: The rate of expansion in the volume of production of goods and services

in an economy. It is the rate at which the Gross National Product (GNP) increases annually.

Inflation: A steady and progressive decline in the value of money, shown by the

proportionate rate of increase in the general price level per unit of time.

Debt Conversion: This involves the practice of issuing new stocks and shares exchange for

others. The transformation of repudiated loan stock into a new loan issue.

Foreign Exchange: Currency or interest bearing bonds of another country. For example,

holding by Nigerians of US Dollars. Euro - Dollars, Deutsche - Marks, Swiss - Francs or US

Government bonds.

Fiscal Deficit: A situation where Government expenditure exceed income or where

Government liabilities exceed assets at a specific point in time.

Economic Recession: A falling off in the progress of a country, which if it persists will lead

to depression and to a slump.

Devaluation: A reduction in the official per-value of the legal unit of currency in terms of the

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currencies of other countries. Devaluation is used to correct a balance of payment deficits but

only as a last resorts as it has major repercussions on the domestic economy.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Conceptual Review

Public debt arises as a result of the gap between domestic savings and investment (Ogbeifin,

2007). As the gap widens, debt accumulates and this makes the country to continually borrow

increasing amounts in order to stay afloat. Debt crisis occurs when a country has accumulated

a huge amount of debt such that it can no longer effectively manage the debt which leads to

several mishaps in the domestic political economy (Adejuwon et al) . Mimiko (1997) defined

debt crisis as a situation whereby a nation is severely indebted to public sources and is unable

to repay the principal of the debt.

Arnone, Bandiera and Presbitero (2005) described public debt as that part of a country’s debt

that was borrowed from foreign lenders including commercial banks, governments or

international financial institutions. public debt becomes necessary when domestic financial

resources become inadequate to finance public goods that increase welfare and engender

economic growth. public debts are funds sourced from outside the nation’s boarder usually in

foreign currency and are interest- bearing to finance specific project(s).

The effect of public debt on a nation’s economy has been a subject of controversy among

academics. Some were of the view that public debt accelerates economic growth (Hameed,

Ashraf and Chandhary, 2008). This view is in line with neoclassical model of economic

growth; the Keynesian theory in which capital accumulation is viewed as a catalyst to

economic growth. This was confirmed by the significant growth by the Asian Tigers;

Malaysia, Singapore, Indonesia and Taiwan and South American country, Brazil. These

nations were able to transform their economy using public debt

The proponents that public debt has negative impact on the economy stem from the fact that

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at certain level, debt accumulation becomes a burden and will no longer stimulate the

economic growth. Furthermore, the liquidity constraint referred to as ‘crowding out’ effect of

debt, that is, the need to service debt reduces funds available for investment and growth. Debt

servicing is like the proboscis of mosquito for sucking out blood from its victim.

The guiding rules to debt to be taken into account in debts management are, debt to GDP

ratio, which global maximum ratio is 40%; total debt to total revenue ratio and debt to debt

service ratio. Efficient debt management strategy should result in debt service ratio between

20-25% of GDP.

2.1.2 Why Countries Borrow

Generally, the need for public borrowing arises from the recognized role of capital in the

developmental process of any nation as capital accumulation improves productivity which in

turn enhances economic growth. There is abundant proof in the existing body of literature to

indicate that foreign borrowing aids the growth and development of a nation. Soludo was of

the opinion that countries borrow for major reasons. The first is of macroeconomic intent that

is to bring about increased investment and human capital development while the other is to

reduce budget constraint by financing fiscal and balance of payment deficits. Furthermore,

stressed the fact that countries especially the less developed countries borrow to raise capital

formation and investment which has been previously hampered by low level of domestic

savings.

Ultimately the reasons why countries borrow boils down to two major reasons which

are to bridge the “savings-investment” gap and the “foreign exchange gap”. Chenery pointed

out that the main reason why countries borrow is to supplement the lack of savings and

investment in that country. The dual-gap analysis justifies the need for public borrowing as

an attempt in trying to bridge the savings-investment gap in a nation. For development to take

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place it requires a level of investment which is a function of domestic savings and the level of

domestic savings is not sufficient enough to ensure that development take place . The second

reason for borrowing from overseas is also to fill the foreign exchange (imports-exports) gap.

For many developing countries like Nigeria the constant balance of payment deficit have not

allowed for capital inflow which will bring about growth and development. Since the foreign

exchange earnings required to finance this investment is insufficient public borrowing may be

the only means of gaining access to the resources needed to achieve rapid economic growth.

2.2 Theoretical Review

2.2.1 Keynesian theory of increasing government activity.

There exist many economic theories but the Keynesian theory of increasing government

activity as catalyst to economic growth was deemed most appropriate. This is an economic

theory named after a British Economist, John Maynard Keynes. The theory is based on the

concept that in order for an economy to grow and be stable, active government intervention is

required. The Keynesian Economists argue that private sector decisions sometimes lead to

inefficiency macroeconomic outcomes. Therefore, monetary policy action by central bank

and fiscal policy action by the government are required to direct the economy. These actions

will bring about stability in output over the business cycles.

Keynes stated that during depression, a combination of two approaches must be

applied viz: a reduction in interest rate (monetary policy), and government investment in

infrastructure (fiscal policy). Both Keynesians and monetarists believe that both fiscal and

monetary policies affect aggregate demand. The monetary policy requires CBN to reduce

interest rate to commercial banks and the commercial banks to do the same to their

customers. Government investment in infrastructure injects fund into the economy by

creating business opportunities, employment and demand. One of the sources of fund for

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infrastructural development is public borrowing during fiscal deficit.

This implies that Keynesian theory which views capital accumulation as a catalyst to

economic growth is supportive of public loans as it injects fund into the economy to increase

economic activity resulting in growth. It therefore supports a positive relationship between

public debt and economic growth.

Several other theoretical contributions have been made as regards the subject matter

of public debt and economic growth. Amongst them are; the dual-gap theory, debt overhang

theory, crowding-out effect theory, dependency theory . the Solow-growth model and the

debt cum theory.

2.2.2 The Dual-Gap Theory

Most economies have experienced a shortfall in trying to bridge the gap between the

level of savings and investment and have resorted to public borrowing in order to fill this gap.

This gap provides the motive behind public debt which is to fulfil the lack of savings and

investment in a nation as increases in savings and investment would vis-à-vis lead to a rise in

economic growth. The dual-gap analysis is provides a framework that shows that the

development of any nation is a function of investment and that such investment requires

domestic savings which is not sufficient to ensure that development take place. The dual-gap

theory is coined from a national income accounting identity which connotes that excess

investment expenditure (investment-savings gap) is equivalent to the surplus of imports over

exports (foreign exchange gap).

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2.2.3 The Dependency Theory

The dependency theory seeks to outline the factors that have contributed to the

development of the underdeveloped countries. This theory is based on the assumption that

resources flow from a “periphery” of poor and underdeveloped states to a “core” of wealthy

states thereby enriching the latter at the expense of the former. The phenomenon associated

with the dependency theory is that poor states are impoverished while rich ones are enriched

by the way poor states are integrated into the world system.

Dependency theory states that the poverty of the countries in the periphery is not

because they are not integrated or fully integrated into the world system as is often argued by

free market economists, but because of how they are integrated into the system. From this

standpoint a common school of thought is the bourgeoisie scholars. To them the state of

underdevelopment and the constant dependence of less developed countries on developed

countries are as a result of their domestic mishaps. They believe this issue can be explained

by their lack of close integration, diffusion of capital, low level of technology, poor

institutional framework, bad leadership, corruption, mismanagement, etc. They see the under-

development and dependency of the third world countries as being internally inflicted rather

than publicly afflicted. To this school of thought, a way out of the problem is for third world

countries to seek foreign assistance in terms of aid, loan, investment, etc, and allow

undisrupted operations of the Multinational Corporations (MNCs). Due to the

underdeveloped nature of most LDC’s, they are dependent on the developed nations for

virtually everything ranging from technology, aid, technical assistance, to culture, etc. The

dependent position of most underdeveloped countries has made them vulnerable to the

products of the Western metropolitan countries and Breton Woods institutions. The

dependency theory gives a detailed account of the factors responsible for the position of the

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developing countries and their constant and continuous reliance on public for their economic

growth and development.

2.2.4 The Solow Growth Model

The Solow-growth model was published in 1956 as a seminar paper on economic

growth and development under the title, “A contribution to the theory of economic growth”.

Like most economic growth theories, Solow growth model is built upon some assumptions:

Countries will produce and consume only a single homogenous good.

Technology is exogenous in the short run.

The Solow growth model is developed based on a Cobb - Douglas production function given

by the form:

Y = F (K, L) = Kα L1-α

Where

Y = output

K = Capital input

L = Labor input

α and 1-α are output elasticities of capital and labor respectively and α is a number between 0

and 1.

The other important equation from the Solow growth model is the capital accumulation

equation expressed in the form:

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Ḱ = sY – dK

Where:

Ḱ = change in capital stock

sY = gross investment

dK = depreciation during the production process

With mathematical manipulation Solow derives the capital accumulation equation in terms of

per worker i.e. ḱ = sy – (n+d)k . This implies that the change in capital per worker is a

function of investment per worker, depreciation per worker and population growth. Of these

three variables only investment per worker is positively related with change in capital per

worker.

2.2.5 Debt-cum growth model

The theory considers the debt capacity in terms of the benefit and cost of borrowing in

the process of economic growth. The basic argument of the theory is that a country will

maintain its capacity to service debt provided that additions to its debt overtime contribute

sufficiently to growth.

2.3 Empirical Review

The motive behind public debt is to boost economic growth and development of any

nation but as a result of future high debt service payments, it poses a serious threat to the

economy of that nation. Economic researchers have therefore sought out to investigate the

implication of public debt burden on the economies of debtor nations using different

methodology, and have come up with diverse views.

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 Suliman et al., (2012) carried out a study on the effect of public debt on the economic

growth of Nigeria. Annual time series data covering the period from 1970-2010 was used.

The empirical analysis was carried out using econometric techniques of Ordinary least

squares (OLS), Augmented Dickey-Fuller unit root test, Johansen Cointegration test and error

correction method. The cointegration test shows a long-run relationship amongst the variables

and findings from the error correction model revealed that public debt has contributed

positively to the growth of the Nigerian economy. In addition the study recommends that the

Nigerian should ensure political and economic stability so as to ensure effective debt

management.

An empirical investigation conducted by Audu,(2004) examines the impact of public

debt on the economic growth and public investment of Nigeria. The study carried out its

analysis using time series data covering the period from 1970-2002. The Johansen

Cointegration test and Vector Error correction method econometric techniques of estimation

were employed in the study. The study concluded that Nigeria’s debt service burden has had

a significant adverse effect on the growth process and also negatively affected public

investment.

Another study by Ogunmuyiwa (2011) examined whether public debt promotes

economic growth in Nigeria using time-series data from 1970-2007. The regression equation

was estimated using econometric techniques such as Augmented Dickey-Fuller test, Granger

causality test, Johansen co-integration test and Vector Error Correction Method (VECM).

The results revealed that causality does not exist between public debt and economic growth in

Nigeria.

Clement et al., (2003) observe that aside from the effect of high debt stock on

investment, public debt can also affect growth through accumulated debt service payments

16
which are likely to “crowd out” investment (private or public) in the economy. The

crowding-out effect refers to a situation whereby a nation’s revenue which is obtained from

foreign exchange earnings is used to pay up debt service payments. This limits the resources

available for use for the domestic economy as most of it is soaked up by public debt service

burden which reduces the level of investment.

Ayadi and Ayadi (2008) examined the impact of the huge public debt, with its

servicing requirements on economic growth of the Nigerian and South African economies.

The Neoclassical growth model which incorporates public debt, debt indicators, and some

macroeconomic variables was employed and analyzed using both Ordinary Least Square

(OLS) and Generalized Least Square (GLS) techniques of estimation. Their findings revealed

that debt and its servicing requirement has a negative impact on the economic growth of

Nigeria and South Africa.

Faraji and Makame (2013) investigated the impact of public debt on the economic

growth of Tanzania using time series data on public debt and economic performance covering

the period 1990-2010. It was observed through the Johansen cointegration test that there is no

long-run relationship between public debt and GDP. However the findings show that public

debt and debt service both have significant impact on GDP growth with the total public debt

stock having a positive effect of about 0.36939 and debt service payment having a negative

effect of about 28.517. The study also identified the need for further research on the impact of

public debt on foreign direct investments (FDIs) and domestic revenues.

Safdari and Mehrizi, (2011) analysed public debt and economic growth in Iran by

observing the balance and long term relation of five variables (GDP, private investment,

public investment, public debt and imports). Time series data covering the period 1974-2007

was used and the vector auto regressive model (VAR) technique of estimation was employed.

17
Their findings revealed that public that has a negative effect on GDP and private investment

and public investment has a positive relationship with private investment.

Ejigayehu (2013) also analyzed the effect of public debt on the economic growth of

eight selected heavily indebted African countries (Benin, Ethiopia, Mali, Madagascar,

Mozambique, Senegal, Tanzania and Uganda) through the debt overhang and debt crowding

out effect with ratio of public debt to gross national income as a proxy for debt overhang and

debt service export ratio as a proxy for debt crowding out. Panel data covering the period

1991-2010 was used. The empirical investigation was carried out on a cross-sectional

regression model with tests for stationarity using Augmented Dickey Fuller tests,

heteroskedasticity and ordinary regression. The concluding result from estimation showed

that public debt affects economic growth through debt crowding out rather than debt

overhang.

In their study on public debt relief and economic growth in Nigeria, Ekperiware and

Oladeji, (2012) examined the structural break relationship between public debt and economic

growth in Nigeria. The study employed the quarterly time series data of public debt, public

debt service and real GDP from 1980-2009. An empirical investigation was conducted using

the chow test technique of estimation to determine the structural break effect of public debt

on economic growth in Nigeria as a result of the 2005 Paris Club debt relief. The result of

their findings revealed that the 2005 public debt relief caused a structural break effect in the

relationship between public debt and economic growth. Based on these findings they

concluded that the public debt relief made available resources for growth enhancing projects.

Abula Matthew and Ben Daddy Mordecai (2016) examined the impact of public debt on

economic development of Nigeria. Annual time series data spanning 1986 to 2014 was used.

The study employed the Augmented Dickey-Fuller test, Johansen co-integration test, Error

18
Correction Method (ECM) and the Granger Causality test. The Johansen co-integration test

results revealed the presence of a long-run relationship among the variables; external debt

stock, domestic debt stock, external debt servicing, domestic debt servicing and economic

development (proxied with GDP per capita) in Nigeria.

An empirical investigation conducted by Amakom (2003) examined Nigeria’s public debt

and economic growth as an empirical assignment of effects on Poverty. The study carried out

its analysis using time series data covering the period from 1970-2002. Augmented Dickey-

Fuller unit root test, Johansen Cointegration test and error correction method were employed

in the study. The results of our regression estimates show that the coefficients confirm our a

priori conditions for the expected effect of debt and growth on poverty applying the per

capita income approach in Nigeria

Eze et al., (2019) examined the impact of public debt on economic growth in Nigeria. The

study carried out its analysis using time series data covering the period from 1981-2017.

Multiple regression analysis was utilized in the study in which the ARDL model and Chow

Breakpoint test were the methods used in the analysis. Domestic product growth, public

investment, external debt, domestic debt, total public debt, government expenditure, national

savings (LNS), consumer price index and interest rate were used as proxy. The results

revealed that external debt has a negative and significant impact on GDP while domestic debt

has a negative and insignificant effect on GDP.

Khan, Rauf, Mirajul-haq, Anwar (2016) examined the impact of public debt on economic

growth of Pakistan. The study adopted quantitative research method as secondary data over

the period of 1972 to 2013. Data gathered in the study was examined using inferential

analyses. Results revealed in the study showed that that public debt and economic growth has

positive but statistically insignificant relationship. The study also revealed that high rate of

population growth affects economic growth adversely.

19
Mousa and Shawawreh (2017) analyzed the impact of debt on the economic growth of

Jordan. Specifically, the study investigate the impact of external debt on gross domestic

product; assessed the impact of domestic debt on gross domestic product; assessed the impact

of debt service on gross domestic product and evaluated the impact of public debt on gross

domestic product. The quantitative research approach was used as the study consider

secondary time series data spanning fifteen years (2000-2015). The least squares method and

regression model were adopted in analyzing the study’s data. Findings gathered from the

study revealed that there is a negative impact of total public debt, especially the external debt

on economic growth. Following this findings, the study suggested that nations should rather

depend on the available internal resources than depending on external debt.

Ndieupa (2018) studied the effect of public debt on economic growth of Central African

Economic and Monetary Community (CEMAC). The panel research design was adopted as

panel data spanning sixteen (2000-2015) was amassed from developing countries namely

Gabon, Cameroon, the Central African Republic, Chad, the Republic of the Congo and

Equatorial Guinea. The study’s data was examined using inferential analyses. Discoveries

from the study revealed that public debt has an adverse and statistically significant effect on

economic growth.

Brini, Jemali and Ferroukh (2016) reexamined public debt and economic growth in Tunisia.

The quantitative research design was adopted as secondary data spanning 23 years (1990-

2013) was gathered. Data collated in the study was analyzed using inferential analyses such

as Autoregressive distributed lag model ARDL. Findings demonstrated in the study revealed

that public debt and total debt service exerts a negative and significant effect on economic

growth in the long run and in the short and long run there is a unidirectional Granger

causality between public debt and economic growth.

20
Said and Yusuf (2018) studied public debt and economic growth in Tanzania. The

quantitative research approach was adopted as secondary time series data spanning forty-five

years was collated. Co-integration and Vector Error Correction Mechanism (VECM)

Approach were used in analyzing data collated in the study. The VECM estimate showed that

there is a negative relationship between public debt and economic growth in Tanzania over

the study period. In addition, granger causality test revealed that there is no causal

relationship between public debt and economic growth.

Grace G. (2014) examined the implications of shocks of public debt and government

expenditure on human capital development and growth looking at the role of fiscal

constraints through the introduction of government budget constraint for a set of preferred

developing countries from 1980-2013. The study captured fiscal challenges facing

developing countries in developing human capital which is essential for sustainable growth.

The results disclosed that high stocks of public debt, beyond the 30-40% debt/GDP threshold,

affect human capital on output growth by limiting government expenditure resources

available for developing human capital. The result of the study also indicates that government

expenditure has a positive role to play in developing human capital and sustainability seems

uncertain for countries that have fiscal constraints.

Obademi (2012) undertook an analysis of the long-run relationship and impact of debt from

the perspective of the value impact and proportional impact on the Nigeria economy. The

value impact variables used include the external debt value, domestic debt value, total debt

value and budget deficit. The result showed that the joint impact of debt on economic growth

is negative and quite significant in the long-run though in the short-run the impact of

borrowed funds and coefficient of budget deficit is positive. The study concluded that though

in the short-run the impact of borrowed fund on the Nigerian economy was positive, the

21
impact of debt in the long-run depressed economic growth as a result of incompetent debt

management.

Uguru, Leonard C. (2016) investigated the link between public debt and government

expenditure in Nigeria from 1980 to 2013. Using data from Central Bank of Nigeria

Statistical Bulletin for the years under consideration, the author estimated a model with

public debt as the dependent variable and the independent variables were capital expenditure

and recurrent expenditure respectively. The author made use of the ordinary least square

estimation technique at 5% level of significance which revealed a significant relationship

between public debt and government expenditure in Nigeria. Based on his result, he

recommended the government of Nigeria to hurriedly reduce its recurrent expenditure and

focus more on capital expenditure so as to meet the Vision 20:2020. He also suggested the

need for diversification of the economy so as to reduce much reliance on crude oil proceeds

and thereby reducing the tendency of the government contracting more debt obligation.

22
 2.4 LITERATURE MAP

S/N
AUTHOR TITLE TIME SOURCES
METHODOLOGY FINDINGS
PERIOD OF DATA

1 Sulaiman Using econometric 1970- Central Bank The findings

(2012) Effect of techniques of 2010 of Nigeria from the error
public debt Ordinary Least Statistical correction
on Economic Square(OLS), bulletin and method show
Growth in Augmented Debt that external debt
Nigeria Dickey-Fuller Management has contributed
(ADF) Unit Root Office from positively to the
test, Johansen Co- 1970 to 2010. Nigerian
integration test and economy.
Error Correction
Method (ECM) are
employed in the
empirical analysis

2 Auto-Regressive 1980- Scholarly The results

Anderu, External Distributed Lag 2016 journal explain that
Omolade, & Debt and (ARDL) and external debt has
Oguntuase Economic descriptive statistics significant
(2019). Growth in were applied. inverse
Nigeria relationship and
impact on
Nigeria’s
economic
growth.
Consequently,
contrary to the
expected
relationship,
external debt in
Nigeria does not
promote
economic
growth.
Diagnostic tests
also disclose
efficiency and
consistency of
the model.
using the Johansen 1981 - In the light of The result
cointegration and 2013 this, this study revealed that
3 Victoria, Public Debt FMOLS technique assesses the public debt has a
on the secondary impact of positive and
Emmanuel, and External data from 1981 to public debt on significant effect
2013. external on external
Obinna , reserve in reserve stock in

23
 Nigeria. the long run
suggesting that
Esther & Reserve the nation’s debt
crisis can be
Akinde, (2016) attributed to both
exogenous and
endogenous
factors such as
the nature of the
economy,
economic
policies, high
dependence on
oil, and
swindling
foreign exchange
receipt.
4 Alagba & Effect of Relevant secondary 1981- Scholarly The findings
Idowu, public debt data were sourced 2018 Journal showed that
(2019) on economic from Central Bank domestic debts
growth in of Nigeria of the Federal
Nigeria Statistical bulletin government of
and Debt Nigeria is
Management Office positive and
statistically
significant to
economic growth
of Nigeria while
foreign debts
contribute less to
the economic
growth of the
country.
5 Public Debt Error Correction 1970 - Scholarly The results
Bassey, & Carrying Mechanism (ECM) 2014 Journal showed public
Imoke, (2017) Capacity and technique was debt to GDP
Debt applied to estimate ratio was
Transmission the model. positive while
Channels: the squared of
The Nigerian Public debt to
Experience GDP was
negative and
statistically
significant at 5
percent level in
the different
equations

24
6 Impact of The study 1981- data sourced The study
Ehikioya, Omankh Public Debt used the 2019. from the demonstrates the
anlen, & Alexander on Johansen Central Bank presence of a
(2019 Economic cointegration of Nigeria, long-run
Growth test, Ordinary Debt equilibrium
Least Square Management relationship
technique and Office, between public
Vector Error International debt and
Correction Monetary economic growth
Model to Fund and the in Nigeria. The
analyze data . World Bank analysis reveals
for the period evidence of an
adverse impact of
public debt on
economic
performance for
the study period
in Nigeria.
However, the
impact of the
relationship is
only significant
with the lag
variable. The
study
demonstrates that
inflation, interest
rates, oil price
and investment
exert influence on
economic growth
in Nigeria.
7 Impact of . Using 1970– This paper Moreover,
Olugbenga, & external Blanchard and 2014 uses a innovations to
Oluwole, .(2017) debt shocks Perotti (Q J structural external debt
on Econ vector were found to
economic 177:1329– autoregression have short-lived
growth in 1368, 2002) generalized positive impacts
Nigeria identification economic on inflation,
techniques to growth model negative impacts
arrive at augmented on trade
economically with a debt openness, but
interpretable variable to insignificant
variance characterize effects on the
decompositio the dynamic exchange rate.
ns and impact of
impulse innovations to
response external
functions, the public debt-
results show to-GDP ratio

25
 that external on per capita
debt shocks GDP growth,
have long- investment,
lived negative trade
impacts on openness,
economic exchange rate
growth and and inflation
investment, as in Nigeria
consistent
with the debt
overhang
hypothesis
8 Omodero, Cordelia The Effect The data was 1997- Data for the The study
, Alpheaus, & of Foreign analyzed 2017 study are recommends a
Ogechi Debt on the using the collected from more purposeful
Economic ordinary least the World borrowing pattern
Growth of squares Bank and and revenue
Nigeria regression Central Bank generation
technique. of Nigeria through profitable
Statistical capital
Bulletin investments as the
remedy for a
foreign debt crisis
in the country.
The study also
suggests a revival
of abandoned
industries as a
more effective
way of reducing
foreign
borrowing,
creating
employment
opportunities and
alleviating
poverty in the
country.
9 Ayunku, & Etale Econometri The study 1981- time series The findings
(2016) c Analysis employed 2012 secondary revealed that
Of External Unit Root data collected external debt
Debt, test, for the period contributes
Exchange Descriptive positively to
Rate And statistics, economic growth
Economic Johansen- in Nigeria in the
Growth In Juselius short run but had
Nigeria Cointegration a statistically
test and negative
Vector Error significant
Correction influence on

26
 model using economic growth
E-Views in the long run.
computer
software to
analyse
10 Abdulkadir & An The study To ensure The findings of
Abdulazeez, Empirical applied the robust result the study reveal
(2019) Analysis of autoregressive is achieved, that debt
the Impact distributed time series refinancing has
of Public lagged model data from negative impact
Debt econometric World on total debt
Managemen methodology Development profile in Nigeria.
t in order to Index, Central In addition to
investigate the Bank of that, debt
long-run and Nigeria forgiveness was
the short run (CBN) and detected to have
dynamics of Debt significant
total debt Management negative impact
profile of the office were on the debt
country on used. profile of the
DRF DF and country. While,
DCV. Debt Conversion
on its part was
found to be
having significant
effect on the
Nigeria’s debt
profile.
11 Adesola (2009) Debt used with the 1981- bilateral and We found that
Servicing ordinary least 2004 multilateral debt payment to
And square sources London club
Economic multiple creditors, Paris
Growth In regression club creditors,
Nigeria method promissory notes
holders are
positively related
to GDP and
GFCF, while debt
payment to
London club
creditors have
significant impact
on the GDP and
GFCF. Debt
payment to Paris
club creditors and
debt payment to
and Other
creditors shows a
negative

27
 significant
relation to GDP
and GFCF
12 Adegboyega Eternal The 1981 and Scholarly The Error
(2005) Debt and secondary 2016 Journal Correction Model
Economic data collected shows that there
Growth in from Central is 106 percent
Nigeria: An Bank of increase over the
ARDL Nigeria and previous year
Approach World Bank growth. In
database conclusion, it is
between 1981 evident that for
and 2016 debt to be
were productive it
subjected to requires effective
an ARDL management
method of which will make
analysis to the rate of return
determine higher than the
both the short cost of debt
and long-run servicing.
periods.
13 Olatunji, & Debt-output using the 1981- Annual time The results show
Adebayo (2019) gap nexus Augmented 2018 series data that external debt
in Nigeria: Dickey Fuller sourced from had negative
Does test (ADF) to the Central impact on the
inflationary check the Bank of Nigerian
pressure stationary Nigeria economy.
matter properties of statistical
the series, and bulletin
the Engel-
Granger Co-
integration
test to
estimate the
long-run
relationship of
the variables
14 Olaoye, (2019) External Using 1981- The findings
Debt and Granger 2016 emanating from
Private causality, the estimated
Investment Johansen models show
in Nigeria cointegration clearly that
and Error private
correction investment is
mechanism, inversely related
the short-run to debt overhang
and long-run both in the short-
association on run and long-run;
an annual data marginal rise in

28
 covering the current year debt
period 1981- service leads to
2016 was more than
examined proportionate
decrease in
current ratio of
debt overhang;
and interest rate,
exchange rate and
inflation rate are
positively linked
to debt overhang
ratio.
15 Impact of The study 1970- Scholarly The implication is
Eze & Ogiji (2016) Deficit adopted 2013 journals that government
Financing regression deficit financing
on analysis through External
Economic Source of Deficit
Stability in Financing (EXF)
Nigeria: and Non-banking
Analysis of Public Source of
Economic Deficit Financing
Growth (NBPF) will
maintain
economic
stability while
government
deficit financing
through Banking
System Source of
Deficit Financing
(BSF) and Ways
and Means
Source of Deficit
Financing (WM)
will reduce
economic growth
thereby causing
instability in the
economy.
16 Debt and The ordinary 1979- Secondary The study
Debt least square 2005 data was used revealed that only
James (2012) Volatility: regression and the E- lag in GDP affect
Effect on analysis and view package the GDP volume,
Economic the general adopted in the while debt and
Growth in autoregression study. volatility in debt
Nigeria al conditional does not affect
heteroscedasti the GDP.
city
(GARCH)

29
 were used.
17 Mojekwu & Ogege Nigeria . The study 1971- Nigeria's data The finding
(2012) public debt employed Co- 2010 set from the shows that there
and integration CBN is a negative
economic techniques Statistical relationship
growth: a and structural Bulletin between debt
critical analysis to (2010) during stock (internal
appraiser test the the period and external debt)
relationship and gross
between debt domestic product,
and the meaning that an
Nigerian increase in debt
economy. stock will lead to
reduction on the
growth rate of
Nigerian
economy.
18 External The study 1990- Time series The study reveals
Debt and employed the 2015 collected from a negative and
Sami Al Economic Autoregressiv the World significant
Kharusi. Mbah, Growth: e Distributed Bank and the influence of
Stella Ada. (2018) The Case of Lag Central Bank external debt on
Emerging cointegration of Oman. economic growth
Economy approach in Oman. Further,
explain the gross fixed capital
error was found to be
correction positively
mechanism to significant in
ascertain the determining
short-run growth
dynamic performance in
nature of Oman.
external debt
and economic
growth.
19 Adetokunbo & Determinan Multivariate 1970- obtained Domestic debt
Ebere, C.(2019) ts and vector error 2015 from Central investor base
Analysis of correction Bank of swings between
Domestic framework Nigeria, the deposit money
Debt in was used to World Bank bank and the non-
Nigeria analyze data National bank public.
Accounts Lagged values of
Data and Debt budget deficit,
Management external debt and
Office GDP growth rate
explains current
domestic debt in
the short run.
There exist bi-
directional

30
 granger
causalities
between domestic
debt and budget
deficit, domestic
debt and external
debt and domestic
debt and GDP
growth rate.
20 Senibi, Alege, The Impact Adopting the 1981- Scholarly This study
Ehimare, Ogunlusi of Domestic Structural 2015 Journal concludes that
& Mayowa, (2017) Debt on VAR since domestic
Private technique of debt induces
Credits in estimation to prolonged
Nigeria: A investigate the crowding out
Structural response of effect on the
VAR credits to credits to private
Approach private sector sector in Nigeria,
to innovations the federal
from domestic government
debt should carryout
fiscal reforms in
order to stem the
current crowding
out effect of
domestic debt
policy through
restructuring and
rescheduling of
domestic debt.

31
 CHAPTER THREE

METHODOLOGY

3.0 Introduction

3.1 Data Sources and Definition

The study made use of time series, which were sourced from the Central Bank of

Nigeria Statistical Bulletin (2020) and the World Bank Indicators. The data obtained covered

the period of 1988 to 2020 The variables of interest in the study include real gross domestic

product (proxy for economic growth), domestic debt stock external debt stock, debt servicing

payment (Proxy for public debt servicing) and inflation rate.

3.2 Model Specifications

The study adapted the model of Onakoya and Ogunade (2017) with slight modifications.

Economic growth (represented by real gross domestic product) is expressed as a function of

domestic debt stock, external debt stock and debt servicing payment while inflation is

deployed as the control variable in the model.

The model is functionally represented as:

RGDP = f (DDS, EDS,DSP, INF) ………. (3.7)

The model in equation (3.7) is predicated on the debt-cum growth model. The theory

considers the debt capacity in terms of the benefit and cost of borrowing in the process of

economic growth. The basic argument of the theory is that a country will maintain its

capacity to service debt provided that additions to its debt overtime contribute sufficiently to

growth. The functional form of the model can equally be converted to a linear regression

model, and it becomes:

RGDP= α0 +α1DDS + α2EDS +α3DSP + α4INF + µ……. (3.8)

32
Where:

RGDP= Real gross domestic product (proxy for economic growth).

DDS= Domestic debt stock.

EDS= External debt stock.

DSP= Debt servicing payment.

INF= Inflation rate.

α0= Intercept of the regression model.

α1-4= Coefficient of parameter estimates of the explanatory variables.

µ= Disturbance term.

33
 3.3 A priori expectation:

This is based on economic theories concerning the signs and magnitude of the

parameter estimate. The sign of the coefficient of independent variable would be: α 1>0; α2>0;

α3>0; α4 <0.

3.3.1 Description and Measurement of Variables

S/N Label Variable Definition Source A-priori

Expectati

on

1 RGDP Real Gross GDP at purchaser's CBN

prices is the sum of
Domestic gross value added by all Statistical
resident producers in
Product the economy plus any Bulletin(2
product taxes and
minus any subsidies not 020)
included in the value of
the products. It is
calculated without
making deductions for
depreciation of
fabricated assets or for
depletion and
degradation of natural
resources. Data are in
constant 2015 prices,
expressed in U.S.
dollars. Dollar figures
for GDP are converted
from domestic
currencies using 2015
official exchange rates.
For a few countries
where the official
exchange rate does not
reflect the rate
effectively applied to
actual foreign exchange
transactions, an
alternative conversion

34
 factor is used.

2 DDS Domestic Debt is the entire stock CBN α1> 0

of direct government
debt stock fixed-term contractual Statistical
obligations to others
Bulletin
outstanding on a
particular date. It (2020)
includes domestic and
foreign liabilities such
as currency and money
deposits, securities
other than shares, and
loans. It is the gross
amount of government
liabilities reduced by
the amount of equity
and financial
derivatives held by the
government. Because
debt is a stock rather
than a flow, it is
measured as of a given
date, usually the last
day of the fiscal year.

3 EDS External Total external debt is CBN α2 >0

debt owed to
debt stock nonresidents repayable Statistical
in currency, goods, or
Bulletin
services. Total external
debt is the sum of (2020)
public, publicly
guaranteed, and private
nonguaranteed long-
term debt, use of IMF
credit, and short-term
debt. Short-term debt

35
 includes all debt having
an original maturity of
one year or less and
interest in arrears on
long-term debt. Data
are in current U.S.
dollars.

4 DSP Debt Debt service is the sum CBN α3> 0

of principle repayments
servicing and interest actually Statistical
paid in currency, goods,
payment Bulletin
or services. This series
differs from the (2020)
standard debt to exports
series. It covers only
long-term public and
publicly guaranteed
debt and repayments
(repurchases and
charges) to the IMF.
Exports of goods and
services include
primary income, but do
not include workers'
remittances.

5 INF Inflation Inflation as measured by World α4 < 0

Rate the consumer price index developme

reflects the annual nt

percentage change in the Indicators

cost to the average (2020)

consumer of acquiring a

basket of goods and

services that may be fixed

36
 or changed at specified

intervals, such as yearly.

The Laspeyres formula is

generally used.

3.4 Estimation Technique.

The vector autoregressive model (VAR) would be utilized for analysis of data. The

vector auto-regression is a stochastic process model used to capture the linear

interdependencies among multiple time series (Greene, 2007). VAR models generalize the

univariante autoregressive model (AR model) by allowing for more than one evolving

variable.

All the variables in a VAR enter the model in the same way; with each variable has an

equation explaining its evolution based on its own lagged values, the lagged values of the

other model variables, and an error term. VAR modelling does not require as much

knowledge about the forces influencing a variable as do structural models with simultaneous

equations (Greene, 2007).

A VAR model describes the evolution of a set of k variables (called endogenous

variables) over the same sample period (t= 1… T) as a linear function of only their past

values. The variables are collected in a k x1 vector y t, which has as the ith element, yi,t, the

observation at time “t” of the i th variable. For example, if the i th variable is GDP, then yi,t is the

value of GDP at time t.

A p-th order VAR, denoted VAR (p) is,

yt = c + A1yt-1 + A2yt-2 + …...+ Atyt-1+k……………… (3.9)

37
where the I-periods back observation, yt-1 is called the I-th lag of y, c is a k x 1 vector of

constants (intercepts), A1 is a time-invariant k x k matrix and e t is a k x 1 vector of k x 1

vector of error terms satisfying.

The VAR model for the study is stated as follows:

m m m m m
RGDPt =α 0+ ∑ ❑ α ij RGDPt − j + ∑ ❑α 2 j DDSt − j + ∑ ❑α 3 j EDS t− j + ∑ ❑ α 4 j DSP t − j + ∑ ❑ α 5 j INF t − j +µt
j=1 j=1 j=1 j=1 j=1

……. (3.10)

3.5 Model Evaluation

This entails determining whether a model is statistically significant or not. The model

evaluation is based on testing the reliability of the results of our estimated model parameters.

3.5.1 Unit Root test

The unit root test is a pre-test used to evaluate the behaviour of the series over time.

The Augmented dickey fuller test and Phillip perron test would be implemented in

ascertaining that the variables are stationary at first difference.

3.5.2 t-statistic

The t-statistic is used to test for the partial effect of the variable. The null hypothesis of the t-

test is H0: b=0 and the Alternative hypothesis is H 1: b≠0. Therefore, b is not statistically

significant or different from 0 if the estimated parameter equals to 0 and otherwise for the

alternative hypothesis.

Decision Criteria;

H0: = 0

H1: ≠ 0

38
If Tcal< Ttab hence accept H0 and reject H1
If Tcal> Ttab hence accept H1 and reject H0

3.5.3 F-statistic

This is useful for testing the joint hypothesis about the variables. It is the analysis of the total

effect of Public Debt on Economic growth in less developed countries (Nigeria). This is used

to test for the overall statistical significance of the model. The F-statistics given as;

Where: ESS is the explained sum of square

RSS is the sum of squared residual

k is the number of estimated parameters

n is the number of observation

Decision Criteria:

If Fcal< Ftab hence accept H0 and reject H1

If Fcal> Ftab hence accept H1 and reject H0

3.5.4 Adjusted R-squared

The adjusted R-squared is used for multiple regression and this is relevant in this study. The

R-squared is non-decreasing of the number of regressors, that is, as the number of regressors

increases, the R-squared invariably increases and never decreases.

3.5.5 Serial correlation

This is said to be the relationship between a given variable and itself over time intervals.

Serial correlations are often in repeating patterns, when the level of a variable affects its

future level. The decision criteria is to accept the alternative hypothesis (H 1) if the F-statistic

39
is less than the criteria value otherwise, we do not reject the null hypothesis (H 0) if the F-

statistic is greater than the criteria value. The alternative hypothesis shows the presence of

serial correlation while the null hypothesis shows no serial correlation.

3.5.6 Heteroskedasticity Test

The test would be carried out if the disturbance term has the same finite variance and for the

presence of heteroskedasticity. The null hypothesis for the test is equal finite variance or

homoscedasticity while the alternate hypothesis is unequal finite variance or

homoscedasticity.

3.5.7 Normality Test

The test would be carried out to check if the disturbance term follows a normal distribution.

The null hypothesis of this test is normality and the alternative hypothesis is non-normality.

The decision criteria is to accept the alternative criteria of non-normality if the probability

value is less than the criteria value, else do not reject the null hypothesis if the probability

value is greater than the criteria value.

3.5.8 Stability Test

The CUSUM of squares tests graph would be carried out to check the stability of the model

specified in this work. The decision rule to check for stability is that if the blue line is in

between the red lines, the model is stable. If the blue line does not fall in between the red

lines, the model is not stable.

40
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.0 Introduction

This chapter focused on the results of the estimation of the effect of public debt on economic

growth in Nigeria from 1988-2020. The independent variables used in this study are domestic

debt stock (LDDS), external debt stock (LEDS), debt servicing payment (LDSP) and inflation

rate (INF). Real gross domestic product (LRGDP) is the dependent variable and serves as the

proxy for economic growth. This chapter commenced with a discussion of the trend analysis

of the variables involved in the model and consequently proceeded to pre-test the data for

unit roots using the Augmented Dickey-Fuller and Phillip Perron tests. The bound co-

integration test was used to check that the variables had a long run relationship after

determining the order of integration at levels and first difference, and the Auto Regressive

distributed Lag was used to estimate the short run and long run relationship. This chapter

concluded with post estimation techniques such as normality test, stability test , breusch-

godfrey serial correlation lm test, linearity test and heteroscedasticity tests.

4.1 Data Presentation and Discussion

The data for real gross domestic product (RGDP), domestic debt stock (DDS), external debt

stock (EDS), debt servicing payment (DSP) and inflation rate (INF) for the period 1988-2020

are presented in Appendix 2.

4.2 Results of Empirical Analysis

The empirical analysis is done with the Econometrics Views 9.0 (E-views) analytical

software, which is used to estimate the model, and the results are presented in the subsequent

sections.

41
4.2.1 Preliminary Analysis

Descriptive statistics will include calculating the mean, median, maximum value, minimum

value, standard deviation, skewness, kurtosis and normality. The inferential statistics will

include the unit root test and co-integration test. The preliminary data and summary of the

statistics of the variables are presented in Table 4.1 below.

Table 4.1 Descriptive Statistics of the model

LRGDP LDDS LEDS LDSP INF

Mean 10.51 7.24 7.14 5.31 20.15
Median 10.49 7.22 6.80 5.52 12.88
Maximum 11.18 9.68 9.45 8.09 72.84
Minimum 9.84 3.85 4.90 2.22 5.38
Std. Dev. 0.48 1.70 1.16 1.62 18.16
Skewness 0.12 -0.34 0.23 -0.11 1.62
Kurtosis 1.40 2.21 2.08 2.02 4.25
Jarque-Bera 3.61 1.50 1.45 1.40 16.64
Probability 0.16 0.47 0.48 0.50 0.00
Sum 346.78 238.87 235.70 175.13 664.96
Sum Sq. Dev. 7.48 91.98 42.88 83.91 10547.82
Observations 33 33 33 33 33
Source: Author’s computation using E-views 9.0 (2022)

The results based on the statistical distribution of the series reveals that the real gross

domestic product (LRGDP), external debt stock (LEDS), and inflation rate (INF) are

positively skewed while domestic debt stock (LDDS) and debt servicing payment (LDSP) are

negatively skewed. The distribution is peaked or leptokurtic compared to the normal if the

kurtosis is greater than three. If the kurtosis is less than three, the distribution is flat or

platykurtic relative to the normal. All the variables real gross domestic product (LRGDP),

domestic debt stock (LDDS), external debt stock (LEDS), debt servicing payment (LDSP)

and inflation rate (INF) are platykurtic because the kurtosis is less than 3.

42
4.2.2 Trend Analysis

The trend analysis shows the movement of the variables over the years.

Fig 4.1 Trend of Real Gross Domestic Product 1988-2020

Source: Author’s computation using E-views 9.0 (2022)

From the trend analysis in Figure 4.1, it is observed that Nigeria's real gross domestic product

(LRGDP) had a steady increase in growth rate of about 13.34 percent from 1988 to 2020.

Some factors responsible for the increase in real gross domestic product over the years are

increase in supply of natural resources, increase in the size of the work force and output per

hour of the work force, capital goods and technology.

43
Fig 4.2 Trend of Domestic Debt Stock 1988-2020
Source: Author’s computation using E-views 9.0 (2022)

From the trend analysis in Figure 4.2, it is observed that Nigeria's domestic debt stock

(LDDS) had a steady increase in growth rate of about 151.43 percent from 1988 to 2020.

Some factors responsible for the increase in domestic debt stock over the years are increase in

budget deficit, low output level, increase in government expenditure and high inflation.

44
Fig 4.3 Trend of External Debt Stock 1988-2020
Source: Author’s computation using E-views 9.0 (2022)

From the trend analysis in Figure 4.3, it is observed that Nigeria's external debt stock (LEDS)

experienced a 73.45 percent growth rate from 1988 to 2020 and a decline of 18.37 percent

from 2004 to 2012. It later experienced a growth rate of 31.34 from 2012 to 2020. Some

factors responsible for changes in domestic debt stock over the years are increase in

government expenditure, borrowing from the international community, decline in oil earnings

and dependence on imports.

45
Fig 4.4 Trend of Debt Servicing Payment 1988-2020
Source: Author’s computation using E-views 9.0 (2022)

From the trend analysis in Figure 4.4, it is observed that Nigeria's debt servicing payment

(LDSP) had a steady increase in growth rate of about 251.04 percent from 1988 to 2020.

Some factors responsible for the changes in debt servicing payment are debt service ratio,

GDP growth rate and rate of domestic inflation.

46
Fig 4.5 Trend of Inflation rate 1988-2020
Source: Author’s computation using E-views 9.0 (2022)

There has been an inconsistence trend in inflation rate in Nigeria. This shows that inflation

rate in Nigeria is characterized by fluctuations (increase and decrease). Inflation rate in the

year 1991 was 23%. This shows that inflation rate had an increase from 13.7% rate in 1986 to

23%. Furthermore, inflation rate had its highest value in 1994 with 76.8% rate. In 1999,

inflation rate was a low as 0.2%. However, it later increased to 23.8% in 2003 and later

decreased to 15.1% in 2008. In the years 2013, 2014 and 2015, inflation rate was 7.96%,

7.98% and 9.55% respectively. This implies that within those periods, Nigeria maintained a

one digit inflation rate.

4.2.3 Stationarity Test Result

The analysis uses time series, as a result unit root test is needed in order to check for the

stationarity of the data. The variables used are real gross domestic product (LRGDP),

domestic debt stock (LDDS), external debt stock (LEDS), debt servicing payment (LDSP)

and inflation rate (INF).

47
Table 4.2A: Results of the Augmented Dickey Fuller Test
Series 5% 5% ADF ADF at ADF ADF Test Equatio Orde
Critical Critical at first Test at at first n r of
Value Value levels differenc levels difference Specific integ
At At first (Prob. es(Prob.) ation ratio
levels differenc ) n
es
LRGDP -2.97 -2.96 0.69 0.03 -1.13 -3.23 Intercep I(1)
t
LDDS -2.96 -2.96 0.12 0.00 -2.51 -4.15 Intercep I(1)
t
LEDS -2.96 -2.96 0.63 0.00 -1.27 -3.98 Intercep I(1)
t
LDSP -2.98 -2.98 0.91 0.00 0.12 -5.69 Intercep I(1)
t
INF -2.98 -2.96 0.03 0.00 -3.23 -4.92 Intercep I(0)
t
Source: Authors computation using E-views 9.0 (2022)

Table 4.2B: Results of the Phillip Perron Test

Series 5% 5% PP at PP at PP Test PP Test at Equatio Orde

Critical Critical levels first at levels first n r of
Value Value (Prob. differenc difference Specific integ
At At first ) es(Prob.) ation ratio
levels differenc n
es
LRGD -2.96 -2.96 0.90 0.03 -4.03 -3.23 Intercep I(1)
P t
LDDS -2.96 -2.96 0.17 0.00 -2.34 -4.30 Intercep I(1)
t
LEDS -2.96 -2.96 0.57 0.00 -1.40 -3.97 Intercep I(1)
t
LDSP -2.96 -2.96 0.78 0.00 -0.90 -8.40 Intercep I(1)
t
INF -2.96 -2.96 0.06 0.00 -2.87 -5.69 Intercep I(1)
t
Source: Authors computation using E-views 9.0 (2022)

The alternative hypothesis of stationarity is accepted if the probability value at first difference

or levels is less than 5% significance level using the augmented dickey fuller test or phillip-

48
perron. In table 4.2A, the ADF result demonstrates that real gross domestic product

(LRGDP), domestic debt stock (LDDS), external debt stock (LEDS), debt servicing payment

(LDSP) are stationary at intercept at first difference I(1) while inflation rate (INF) is

stationary at intercept at levels I(0) and first difference I(1) because their respective

probability values are less than 5%. All of the variables are stationary at intercept at first

difference using the phillip-perron test in table 4.2B.

Based on the ADF and phillip-perron results, it is determined that the variables are

stationary and so cannot provide a spurious result. This study would use Auto Regressive

Distributed Lag to examine both the short and long relationship because some of the variables

are stationary at levels. A bound test co-integration must be performed in order to determine

whether there is a long-run relationship between the variables.

4.2.4 Optimal Lag Length Selection

The selection of an optimal lag length was very essential before carrying the bound test

because it is very sensitive. The result in table 4.3 portrays different lag length criteria and the

respective lag length chosen.

Lag LogL LR FPE AIC SC HQ

0 -100.9254 NA 0.000803 7.061691 7.295224 7.136400

1 55.73577 250.6578 1.27e-07 -1.715718 -0.314521* -1.267463
2 93.54432 47.89083* 6.30e-08* -2.569622* -0.000760 -1.747821*

* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion

49
A lag length of 1 explains how the performance of the immediate past year influences the

current year, while a lag length of 2 explains how the outcomes of the past 2 years influence

the current year. A lag length is selected based on any criterion with lowest value. The lower

the criterion value, the better the model. At lag 2, AIC has the lowest value ( -2.569622)

followed by HQ (-1.747821) and SIC (-0.314521) at 1. The lowest value is -2.569622.

Therefore lag 2 will be used under Akaike Information Criterion.

4.2.5 Bound Cointegration Test

This test is carried out to determine if there is a long-run relationship among the variable.

H0: There is no long-run relationship among the variables

H1: There is a long-run relationship among the variables

The decision rule states that if the value of the F-statistic is greater than the I(0) bound and

I(1) bound at 5% level of significance, we reject the null hypothesis that there is no long-run

relationship among the variables and accept the alternate hypothesis that states that there is a

long-run relationship among the variables.

Table 4.4: Results of the Lag Length Criteria

Test Statistic Value K
F-statistic 10.99 4
Critical Value Bounds
Significance I0 Bound I1 Bound
10% 2.2 3.09
5% 2.56 3.49
2.5% 2.88 3.87
1% 3.29 4.37
Source: Authors computation using E-views 9.0 (2022)

The F-statistics value was 10.99, which is higher than the upper bound and lower bound

critical values. Therefore, the null hypothesis, which states that there is no co-integration or

long run relationship between the variables, is rejected. Therefore, there exists a long-run

50
relationship among the variables. Thus, the short-run and long-run model will be estimated

using the Auto-Regressive Distribution Lag (ARDL) model.

4.2.6 ARDL Test, Short run and long run Model Estimation

4.2.6.1 ARDL short model estimation

Short Run Coefficients
Variable Coefficient Std. Error t-Statistic Prob.
LINF -0.06 0.02 -3.62 0.02
LEDS -0.04 0.02 -2.22 0.09
LDSP 0.23 0.07 3.28 0.03
LDDS -0.09 0.08 -1.15 0.32
C 17.1 5.24 3.26 0.03
Source: Authors computation using E-views 9.0 (2022)

The estimated Short-run model is stated below:

LRGDP = 17.1 -0.06LINF - 0.04LEDS + 0.23DSP - 0.09LDDS

The coefficient of the inflation rate (LINF) is -0.06, which means that there is a negative

relationship between inflation rate and real gross domestic product in the short run. It

indicates that a unit increase in inflation rate would result to about 0.06 unit decrease in real

gross domestic product, which is said to be statistically significant because the probability

value (0.02) is less than 5%.

The coefficient of external debt stock (LEDS) is -0.04, which means there is a negative

relationship between external debt stock and real gross domestic product in the short run.

This indicates that a unit increase in external debt stock would result to a 0.04 unit decrease

in real gross domestic product and the effect is said to be statistically insignificant because

the probability value (0.09) is greater than 5%.

The coefficient of debt servicing payment (LDSP) is 0.23, which means there is a positive

relationship between debt servicing payment and real gross domestic product in the short run.

This indicates that a unit increase in debt servicing payment would result to a 0.23 increase in

51
real gross domestic product and the effect is said to be statistically significant because the

probability value (0.03) is less than 5%.

The coefficient of domestic debt stock (LDDS) is -0.09, which means there is a negative

relationship between domestic debt stock and real gross domestic product in the short run.

This indicates that a unit increase in domestic debt stock would result to a 0.09 decrease in

real gross domestic product and the effect is said to be statistically insignificant because the

probability value (0.32) is greater than 5%.

4.2.6.2 ARDL Long run model estimation

Table 4.5 Long-run Auto-Regressive Distributed Lag (ARDL)

Long Run Coefficients
Variable Coefficient Std. Error t-Statistic Prob.
LDDS -0.20 0.07 -2.72 0.02
LDSP 0.04 0.02 1.75 0.11
LEDS -0.004 0.01 -0.38 0.71
LINF -0.04 0.02 -2.76 0.02
C 3.42 1.27 2.69 0.02
Source: Authors computation using E-views 9.0 (2022)

The estimated long-run model is stated below:

LRGDP = 3.42 -0.20LDDS +0.04LDSP - 0.004LEDS -0.04LINF

The coefficient of the inflation rate (LINF) is -0.04, which means that there is a negative

relationship between inflation rate and real gross domestic product in the long run. It

indicates that a unit increase in inflation rate would result to about 0.04 unit decrease in real

gross domestic product, which is said to be statistically significant because the probability

value (0.02) is less than 5%.

The coefficient of external debt stock (LEDS) is -0.004, which means there is a negative

relationship between external debt stock and real gross domestic product in the long run. This

52
indicates that a unit increase in external debt stock would result to a 0.004 unit decrease in

real gross domestic product and the effect is said to be statistically insignificant because the

probability value (0.71) is greater than 5%.

The coefficient of debt servicing payment (LDSP) is 0.04, which means there is a positive

relationship between debt servicing payment and real gross domestic product in the long run.

This indicates that a unit increase in debt servicing payment would result to a 0.04 increase in

real gross domestic product and the effect is said to be statistically insignificant because the

probability value (0.11) is greater than 5%.

The coefficient of domestic debt stock (LDDS) is -0.20, which means there is a negative

relationship between domestic debt stock and real gross domestic product in the long run.

This indicates that a unit increase in domestic debt stock would result to a 0.20 decrease in

real gross domestic product and the effect is said to be statistically significant because the

probability value (0.02) is less than 5%.

4.2.7 Model Evaluation

4.2.7.1 T-Statistics Test

This is used to look at the statistical significance of each variable in the model

individually. The null hypothesis states that the variable has no statistical significance,

whereas the alternative hypothesis states that it does. The alternative hypothesis is accepted if

T-calculated is more than T-tabulated, but the null hypothesis should not be rejected if T-

calculated is smaller than T-tabulated, according to the decision criteria.

4.2.7.2 F-Statistics Test

This is used to see if the independent variable's aggregate or joint influence on the

dependent variable is statistically significant. The null hypothesis states that the variables

53
have no statistical significance, whereas the alternative hypothesis states that they do. The

alternative hypothesis is accepted if F-calculated is more than F-tabulated, but the null

hypothesis should not be rejected if F-calculated is smaller than F-tabulated, according to the

decision criteria.

4.2.7.3 Standard Error Test

The standard error of the estimated parameter or coefficient is a statistical criterion used to

evaluate the partial effects (individual coefficients) of the independent variables in a model.

The null hypothesis states that the variable is not statistically significant, while the alternative

hypothesis states that the variable is statistically significant. The decision criteria do not reject

the alternative hypothesis and reject the null when the standard error is less than the

coefficient divided by 2.

Table 4.6 Standard Error Test Results

Variable Coefficient Std. Error Coefficient/2 Decision
D(LDDS) -0.004 0.02 -0.002 Do not reject
D(LEDS) -0.03 0.01 -0.015 Do not reject
D(LDSP) 0.03 0.02 0.015 Do not reject
D(INF) -0.002 0.0005 -0.001 Do not reject
Source: Author’s computation using E-views 9.0 (2022)

4.2.8 Post-Estimation Test

4.2.8.1 Normality Test

This test was carried out using the histogram normality test to check if there was a normal

distribution among variables. The null hypothesis of normality would be accepted if the

probability value is higher than the 0.05 critical value which means that the sample data are

not significantly different than a normal population while the alternative hypothesis of

54
normality would be accepted if the probability value is less than 0.05 critical value which

means that the sample data are significantly different than a normal population.

Fig 4.6 Normality Test result

Source: Authors computation using E-views9.0 (2022)

The null hypothesis which says there is normality will not be rejected because the probability

value (0.69) is greater than the critical value of 0.05. The variables are positively skewed

which means that the distribution has a long tail to the right.

4.2.8.2 Stability Test

The CUSUM of squares tests graph was used to check the stability of the model specified in

this work. The decision rule to check for stability is that if the blue line is in between the red

lines, the model is stable. If the blue line does not fall in between the red lines, the model is

not stable.

55
Fig 4.7 Stability (CUSUM ) Test result

Source: Authors computation using E-views9.0 (2022)

The test reveals that the blue line lies with the red line within the 5% significant line which

proves that the residual variances are stable.

56
Fig 4.7.1 Stability (CUSUM of Squares) Test result
Source: Authors computation using E-views9.0 (2022)

The stability of the model is tested by conducting CUSUM of squares test as shown in the

figure 4.7. The test reveals the stability of the model coefficients since the estimated model

lies within the 5% significance line for CUSUM of squares test.

4.2.8.3 Breusch-Godfrey Serial Correlation Lm Test

This serial correlation test was used to check for the serial relationship between the variables.

The null hypothesis states the absence of serial correlation but the alternative hypothesis

states the presence of serial correlation. The decision criteria states that if the prob.chi square

is less than 5% level of significance the alternative hypothesis should be accepted while if the

prob-chi square is greater than 5% level of significance, the null hypothesis should not be

rejected.

Table 4.12: Results of Breusch-Godfrey Serial Correlation LM Test Result

Breusch-Godfrey Serial Correlation LM Test:
F-statistic 7.77 Prob. F(2,26) 0.00
Obs*R-squared 12.35 Prob. Chi-Square(2) 0.00

57
Source: Authors computation using E-views9.0 (2022)

The table above indicates that the probability value of the Obs* R-squared is 0.00 which is

less than 5% significance level. The null hypothesis would be rejected and the alternative

hypothesis is accepted which implies that there is presence of serial correlation.

4.2.8.4 Linearity Test

The test for linearity was carried out using the Ramsey Reset Test, the null hypothesis states

that there is no linearity while the alternative hypothesis states that there is linearity. The

decision criteria states that if the probability value of the F-statistics is greater than 5%

significance level we do not reject the null hypothesis.

Table 4.13 Results of Ramsey Reset Test

Value Df Probability
t-statistic 7.59 27 0.00
F-statistic 57.56 (1, 27) 0.00
Likelihood ratio 37.67 1 0.00
Source: Authors computation using E-views9.0 (2022)

The result above states that the probability value of the F-statistics (0.00) is less than 5%

significance level so we reject the null hypothesis which states that there is no linearity in the

model.

4.2.8.6 Heteroscedasticity Test

This test was developed Breusch and Pagan (1979) to confirm the presence or otherwise of

heteroscedasticity of possible errors in regression estimation. Certainly, one of the basic

assumptions of ordinary least square estimation is the absence of heteroscedasticity.

Table 4.14 Heteroscedasticity Test Results

F-statistic 7.34 Prob. F(4,28) 0.00
Obs*R-squared 16.89 Prob. Chi-Square(4) 0.00
Scaled explained SS 7.20 Prob. Chi-Square(4) 0.13
Source: Authors computation using E-views9.0 (2022)

58
The result in table 4.14 above indicates that the Probability or P Value of the Obs* R-squared

is 0.00 which is less than 5% significance level. This means that we reject the null hypothesis

which states the absence of heteroscedasticity.

4.2.8.6 Discussion of Findings

4.3.1 Results of Research Questions

4.3.1.1 Result of Research Question 1

What is the impact of domestic debt stock on the economic growth in Nigeria?

Based on the analysis carried out, it was discovered that there is a negative relationship

between domestic debt stock and real gross domestic product in the short run, while there is a

negative relationship between domestic debt stock and real gross domestic product in the

long run.

4.3.1.2 Result of Research Question 2

What is the effect of external debt stock on the economic growth in Nigeria?

Based on the analysis carried out, it was discovered that there is a negative relationship

between external debt stock and real gross domestic product in the short run, while there is a

negative relationship between external debt stock and real gross domestic product in the long

run.

4.3.1.3 Result of Research Question 3

What is the relationship between debt servicing payment and the economic growth in

Nigeria?

59
Based on the analysis carried out, it was discovered that there is a positive relationship

between debt servicing payment and real gross domestic product in the short run while there

is a positive relationship between debt servicing payment and real gross domestic product in

the long run.

4.3.1.4 Result of Research Question 4

What is the effect of the rate of inflation rate on the economic growth in Nigeria?

Based on the analysis carried out, it was discovered that there is a negative relationship

between inflation rate and real gross domestic product in the short run while there is a

negative relationship between inflation rate and real gross domestic product in the long run.

4.3.2 Discussion

The stationarity test was carried out using both the Augmented Dickey-Fuller and Philip

Perron test to find the order of integration of the variables. It was discovered that some of the

variables are stationary at levels while some are stationary at the first difference This made

the Auto Regressive Distributed Lag an excellent estimation technique in determining the

effects of the independent variables on the dependent variables. Due to the sensitivity of the

Auto Regressive Distributed lag to lag structure, it is very pertinent to determine the optimal

lag length, which was gotten to be 2, then proceeded to perform a Bound test to ensure that

there is a long-run relationship, it was then discovered that there was a long relationship

between the independent and dependent variables. Auto-Regressive Distributed Lag was used

to examine both the short-run and long-run relationship of the model.

The post estimation tests carried out in the course of study was the Breusch Pagan

heteroscedasticity test that showed the variables in the model were heteroscedastic; meaning

they have an unequal spread, the Breusch-Godfrey serial correlation test that showed that the

60
variables were auto-correlated, the Ramsey-Reset test showed the variables were linear. The

histogram normality test also revealed that there was normality, and the null hypothesis will

be accepted because the probability values (0.69) is greater than the critical value of 0.05.

The variables are positively skewed, which means that the distribution has a long tail to the

right.

4.3.3 Comparison with Key Theory

This study is anchored based on the Keynesian theory of increasing government

activity. The theory suggests that Keynesian theory views capital accumulation as a catalyst

to economic growth as supportive of public loans as it injects fund into the economy to

increase economic activity resulting in growth. It therefore supports a positive relationship

between public debt and economic growth which is contrary to the finding this study because

domestic debt stock has a negative relationship with economic growth according to this

study.

4.3.4 Comparison with Other Works

An empirical investigation conducted by Audu (2004) examines the impact of public

debt on the economic growth and public investment of Nigeria. The study carried out its

analysis using time series data covering the period from 1970-2002. The Johansen

Cointegration test and Vector Error correction method econometric techniques of estimation

were employed in the study. The study concluded that Nigeria’s debt service burden has had

a significant adverse effect on the growth process and also negatively affected public

investment. This finding is in line with the result of this study which states that domestic and

external debt stock have a negative impact on economic growth.

61
 Ayadi and Ayadi (2008) examined the impact of the huge public debt, with its

servicing requirements on economic growth of the Nigerian and South African economies.

The Neoclassical growth model which incorporates public debt, debt indicators, and some

macroeconomic variables was employed and analyzed using both Ordinary Least Square

(OLS) and Generalized Least Square (GLS) techniques of estimation. Their findings revealed

that debt and its servicing requirement has a negative impact on the economic growth of

Nigeria and South Africa. This is contrary to the result of this finding which states that debt

servicing payment has a positive effect on economic growth.

Faraji and Makame (2013) investigated the impact of public debt on the economic

growth of Tanzania using time series data on public debt and economic performance covering

the period 1990-2010. It was observed through the Johansen cointegration test that there is no

long-run relationship between public debt and GDP. However the findings show that debt

service payment having a negative effect on economic growth. The result of this study is

contrary to the finding of this study.

62
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

This chapter covers the summary of the findings, conclusion and recommendations, the

implications for further study, contribution to knowledge as well as suggestions for further

studies on the empirical analysis of public debt and economic growth in Nigeria.

5.2 Summary of the study

The objective of this study was to carry out an empirical analysis to ascertain empirically the

impact public debt has on economic growth in Nigeria during the period of 1988-2020 using

the analyzed time series data.

The unit root test was conducted using Augmented Dickey Fuller (ADF) and Philip Perron.

Results from both tests show that external debt stock, domestic debt stock, debt servicing

payment and GDP growth rate were stationary at first difference inflation rate was stationary

at levels. By implication, all the variables were not integrated in the same order.

Estimation was done using VAR as the variables were not integrated in the same order.

Bound cointegration test results from the ARDL model shows that there is a long run

relationship between public debt and economic growth in Nigeria.

Furthermore, the short and long run model was estimated using Auto Regressive Distributed

Lag(ARDL) and it showed that in the short run domestic debt stock and external debt stock

had a negative but insignificant relationship on economic growth. Debt servicing payment

has a positive significant relationship on economic growth. Inflation rate has a negative but

significant relationship on economic growth. In the long run domestic debt stock has negative

but significant relationship on economic growth. Debt servicing payment has a positive but

insignificant relationship on economic growth. External debt stock has a negative and

63
insignificant relationship on economic growth. The post estimation test carried out revealed

the presence of linearity and heteroscedasticity

5.3 Conclusions

This study as one of the empirical investigations on public debt and economic growth has

provided a good understanding of the state of public debt in Nigeria. The study covered the

period of 1988-2020 and time series data obtained from central bank statistical bulletin were

used. The econometrics tool used in this study include; which were used to determine the

level of impact that one variable has on another. The result rising from our findings indicates

that inflation rate, domestic debt stock and external debt stock have a negative effect on

economic growth while debt servicing payment has a positive effect on economic growth.

5.4 Recommendations

Nigeria is considered one of the biggest economies in Africa and based on its boastful

affluent wealth, one would have expected it to be amongst the developed countries in the

world but this is not the case. Hence, based on the findings ascertained in the study, the

following policy recommendations become imperative:

Government should strive to finance the budget deficit by improving on the present revenue

base rather than resulting in domestic borrowing. This can be achieved by improving its

revenue sources and efficient pursuit of tax reforms.

Government should ensure that contracted national debts are directed towards encouraging

investment in the country so as to increase capital formation in the country and consequently

a sustainable economic growth.

Policy makers should integrate appropriate measures towards ensuring suitable management

of domestic debts so as to enhance the productivity level of the country.

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. Even if the

64
ratio of the long-term debt is a multiple of deposit, the economy can still accommodate it so

long as the proceed is channeled towards improving Nigerian investment climate.

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.

65
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APPENDIX 2

The variables used are real gross domestic product (RGDP), domestic debt stock (DDS),
external debt stock (EDS), debt servicing payment (DSP) and inflation rate (INF).

YEARS DDS(%GDP) EDS(%GDP) DSP(%GDP) RGDP(in INF(%)

billion$)
1988 47.03 133.96 9.24 16,215.37 54.51122
1989 47.05 240.39 13.27 17,294.68 50.46669
1990 84.09 298.61 23.82 19,305.63 7.3644
1991 116.2 328.45 26.41 19,199.06 13.00697
1992 177.96 544.26 19.4 19,620.19 44.58884
1993 273.84 633.14 81.08 19,927.99 57.16525
1994 407.58 648.81 49.4 19,979.12 57.03171
1995 477.73 716.87 51.06 20,353.20 72.8355
1996 419.98 617.32 53.05 21,177.92 29.26829
1997 501.75 595.93 68.54 21,789.10 8.529874
1998 560.83 633.02 64.39 22,332.87 9.996378
1999 794.81 2,577.37 30.84 22,449.41 6.618373
2000 898.25 3,097.38 131.05 23,688.28 6.933292
2001 1,016.97 3,176.29 155.42 25,267.54 18.87365
2002 1,166.00 3,932.88 163.81 28,957.71 12.87658
2003 1,329.68 4,478.33 363.51 31,709.45 14.03178
2004 1,370.33 4,890.27 382.5 35,020.55 14.99803
2005 1,525.91 2,695.07 393.96 37,474.95 17.86349
2006 1,753.26 451.46 249.33 39,995.50 8.239527
2007 2,169.64 438.89 213.73 42,922.41 5.382224
2008 2,320.31 523.25 381.2 46,012.52 11.57798
2009 3,228.03 590.44 251.79 49,856.10 11.53767
2010 4,551.82 689.84 415.66 54,612.26 13.7202
2011 5,622.84 896.85 527.18 57,511.04 10.84003
2012 6,537.54 1,026.90 679.3 59,929.89 12.21778
2013 7,118.98 1,387.33 828.1 63,218.72 8.475827
2014 7,904.03 1,631.50 941.7 67,152.79 8.062486
2015 8,837.00 2,111.51 1,060.38 69,023.93 9.009387
2016 11,058.20 3,478.91 1,426.00 67,931.24 15.67534
2017 12,589.49 5,787.51 1,823.89 68,490.98 16.52354
2018 12,774.40 7,759.20 2,161.37 69,799.94 12.09473
2019 14,272.64 9,022.42 2,454.07 71,387.83 11.39679
2020 16,023.89 12,705.62 3,265.47 13.25

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Source : CBN Statistical Bulletin 2020 & World development indicators

RGDP: Real Gross domestic product

DDS: Domestic debt stock

EDS: External debt stock

INF: Inflation rate

DSP: Debt servicing payment (proxy for pubic debt servicing)

71
APPENDIX 3

Descriptive Statistics

LRGDP LDDS LEDS LDSP INF

Mean 10.50861 7.238530 7.142449 5.307036 20.15042
Median 10.49288 7.222807 6.798889 5.518777 12.87658
Maximum 11.17588 9.681836 9.449800 8.091159 72.83550
Minimum 9.843714 3.850786 4.897541 2.223542 5.382224
Std. Dev. 0.483503 1.695361 1.157539 1.619327 18.15542
Skewness 0.119901 -0.342559 0.230021 -0.109672 1.623380
Kurtosis 1.397279 2.211603 2.082762 2.015843 4.247925

Jarque-Bera 3.611052 1.500065 1.447826 1.397930 16.63581

Probability 0.164388 0.472351 0.484851 0.497100 0.000244

Sum 346.7840 238.8715 235.7008 175.1322 664.9638

Sum Sq. Dev. 7.480814 91.97599 42.87668 83.91107 10547.82

Observations 33 33 33 33 33

APPENDIX 4

LAG LENGTH CRITERIA

VAR Lag Order Selection Criteria

Endogenous variables: LRGDP LDDS LEDS
LDSP INF
Exogenous variables: C
Date: 04/05/22 Time: 07:32
Sample: 1988 2020
Included observations: 31

Lag LogL LR FPE AIC SC HQ

0 -205.5553 NA 0.546043 13.58422 13.81550 13.65961

1 -39.27323 268.1970* 6.16e-05 4.469241 5.856970* 4.921606*
2 -11.08867 36.36718 5.75e-05* 4.263785* 6.807956 5.093121

* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5%
level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion

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APPENDIX 5

BOUND TEST

ARDL Bounds Test

Date: 04/05/22 Time: 07:40
Sample: 1990 2020
Included observations: 31
Null Hypothesis: No long-run relationships exist

Test Statistic Value k

F-statistic 1.235824 4

Critical Value Bounds

Significance I0 Bound I1 Bound

10% 2.45 3.52

5% 2.86 4.01
2.5% 3.25 4.49
1% 3.74 5.06

Test Equation:
Dependent Variable: D(LRGDP)
Method: Least Squares
Date: 04/05/22 Time: 07:40
Sample: 1990 2020
Included observations: 31

Variable Coefficient Std. Error t-Statistic Prob.

D(INF) -0.000175 0.000548 -0.319219 0.7523

C 0.437496 0.615603 0.710678 0.4841
LDDS(-1) -0.003328 0.018247 -0.182411 0.8568
LEDS(-1) -0.001676 0.011492 -0.145835 0.8853
LDSP(-1) 0.007698 0.021251 0.362240 0.7203
INF -0.001252 0.000509 -2.458926 0.0215
LRGDP(-1) -0.035980 0.066264 -0.542976 0.5922

R-squared 0.274667 Mean dependent var 0.041733

Adjusted R-
squared 0.093333 S.D. dependent var 0.039088
S.E. of
regression 0.037219 Akaike info criterion -3.548311
Sum squared
resid 0.033246 Schwarz criterion -3.224507
Log likelihood 61.99882 Hannan-Quinn criter. -3.442759
F-statistic 1.514706 Durbin-Watson stat 1.276559
Prob(F-statistic) 0.215883

73
APPENDIX 6

ARDL COINTEGRATING AND LONG RUN FORM

ARDL Cointegrating And Long Run Form

Dependent Variable: LRGDP
Selected Model: ARDL(1, 0, 0, 0, 2)
Date: 04/05/22 Time: 07:49
Sample: 1988 2020
Included observations: 31

Cointegrating Form

Variable Coefficient Std. Error t-Statistic Prob.

D(LDDS) -0.004294 0.019132 -0.224419 0.8244

D(LEDS) -0.016854 0.010422 -1.617139 0.1195
D(LDSP) 0.026748 0.018775 1.424632 0.1677
D(INF) -0.001808 0.000518 -3.486789 0.0020
D(INF) 0.001312 0.000526 2.494023 0.0203
CointEq(-1) -0.091612 0.067127 -1.364766 0.1855

Cointeq = LRGDP - (-0.0469*LDDS -0.1840*LEDS +

0.2920*LDSP -0.0230
*INF + 11.4872 )

Long Run Coefficients

Variable Coefficient Std. Error t-Statistic Prob.

LDDS -0.046866 0.232471 -0.201600 0.8420

LEDS -0.183968 0.104044 -1.768171 0.0903
LDSP 0.291969 0.191557 1.524193 0.1411
INF -0.023036 0.016893 -1.363684 0.1859
C 11.487188 1.959492 5.862329 0.0000

APPENDIX 7

NORMALITY TEST RESULT

74
APPENDIX 8

STABILITY TEST RESULT

APPENDIX 9

BREUSCH GODFREY SERIAL CORRELATION LM TEST

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 7.770689 Prob. F(2,26) 0.0023

Obs*R-squared 12.34589 Prob. Chi-Square(2) 0.0021

Test Equation:
Dependent Variable: RESID

75
Method: Least Squares
Date: 04/04/22 Time: 16:25
Sample: 1988 2020
Included observations: 33
Presample missing value lagged residuals set to zero.

Variable CoefficientStd. Error t-Statistic Prob.

LEDS 0.023403 0.022033 1.062221 0.2979

LDSP -0.127260 0.052737 -2.413120 0.0232
LDDS 0.104197 0.046461 2.242691 0.0337
INF -0.000277 0.001089 -0.254029 0.8015
C -0.239317 0.162453 -1.473147 0.1527
RESID(-1) 0.627261 0.202332 3.100161 0.0046
RESID(-2) 0.254775 0.181099 1.406829 0.1713

R-squared 0.374118 Mean dependent var -4.86E-16

Adjusted R-squared 0.229684 S.D. dependent var 0.105774
S.E. of regression 0.092836 Akaike info criterion -1.730142
Sum squared resid 0.224080 Schwarz criterion -1.412701
Log likelihood 35.54734 Hannan-Quinn criter. -1.623333
F-statistic 2.590230 Durbin-Watson stat 1.401582
Prob(F-statistic) 0.042065

APPENDIX 10

RAMSEY RESET TEST RESULT

Ramsey RESET Test

Equation: UNTITLED
Specification: LRGDP LEDS LDSP LDDS INF C
Omitted Variables: Squares of fitted values

Value df Probability
t-statistic 7.586815 27 0.0000
F-statistic 57.55977 (1, 27) 0.0000
Likelihood ratio 37.67352 1 0.0000

F-test summary:
Sum of Mean
Sq. df Squares
Test SSR 0.243705 1 0.243705
Restricted SSR 0.358022 28 0.012787
Unrestricted SSR 0.114317 27 0.004234

LR test summary:
Value df
Restricted LogL 27.81555 28
Unrestricted LogL 46.65231 27

76
Unrestricted Test Equation:
Dependent Variable: LRGDP
Method: Least Squares
Date: 04/04/22 Time: 16:31
Sample: 1988 2020
Included observations: 33

Coefficien
Variable t Std. Error t-Statistic Prob.

LEDS 1.162591 0.169599 6.854954 0.0000

LDSP -1.959336 0.286206 -6.845903 0.0000
LDDS -1.309964 0.192658 -6.799413 0.0000
INF 0.007308 0.001321 5.531001 0.0000
C -34.18068 5.734291 -5.960750 0.0000
FITTED^2 0.507189 0.066851 7.586815 0.0000

R-squared 0.984719 Mean dependent var 10.50861

Adjusted R-squared 0.981889 S.D. dependent var 0.483503
S.E. of regression 0.065069 Akaike info criterion -2.463776
Sum squared resid 0.114317 Schwarz criterion -2.191684
Log likelihood 46.65231 Hannan-Quinn criter.-2.372226
F-statistic 347.9725 Durbin-Watson stat 1.223787
Prob(F-statistic) 0.000000

APPENDIX 11

HETEROSCEDASTICITY TEST RESULT

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 7.335818 Prob. F(4,28) 0.0004

Obs*R-squared 16.88651 Prob. Chi-Square(4) 0.0020
Scaled explained SS 7.201808 Prob. Chi-Square(4) 0.1256

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 04/04/22 Time: 16:35
Sample: 1988 2020
Included observations: 33

Variable CoefficientStd. Error t-Statistic Prob.

C 0.032135 0.014534 2.211048 0.0354

LEDS 0.000103 0.002043 0.050263 0.9603
LDSP -0.003331 0.004021 -0.828544 0.4144
LDDS -0.000992 0.003676 -0.269717 0.7894

77
INF 0.000141 0.000104 1.350146 0.1878

R-squared 0.511713 Mean dependent var 0.010849

Adjusted R-squared 0.441957 S.D. dependent var 0.011992
S.E. of regression 0.008958 Akaike info criterion -6.453710
Sum squared resid 0.002247 Schwarz criterion -6.226966
Log likelihood 111.4862 Hannan-Quinn criter. -6.377417
F-statistic 7.335818 Durbin-Watson stat 1.552854
Prob(F-statistic) 0.000358

78