The impact of government debt on economic growth in Nigeria

Yusuf, Abdulkarim; Saidatulakmal Mohd Article The impact of government debt on economic growth in Nigeria Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Yusuf, Abdulkarim; Saidatulakmal Mohd (2021) : The impact of government debt on economic growth in Nigeria, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 9, Iss. 1, pp. 1-19, https://doi.org/10.1080/23322039.2021.1946249 This Version is available at: https://hdl.handle.net/10419/270116 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 Cogent Economics & Finance ISSN: (Print) (Online) Journal homepage: https://www.tandfonline.com/loi/oaef20 The impact of government debt on economic growth in Nigeria Abdulkarim Yusuf & Saidatulakmal Mohd | To cite this article: Abdulkarim Yusuf & Saidatulakmal Mohd | (2021) The impact of government debt on economic growth in Nigeria, Cogent Economics & Finance, 9:1, 1946249, DOI: 10.1080/23322039.2021.1946249 To link to this article: https://doi.org/10.1080/23322039.2021.1946249 © 2021 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. Published online: 27 Jun 2021. Submit your article to this journal Article views: 49017 View related articles View Crossmark data Citing articles: 11 View citing articles FINANCIAL ECONOMICS | RESEARCH ARTICLE The impact of government debt on economic growth in Nigeria Abdulkarim Yusuf 1 * and Saidatulakmal Mohd 2 Abstract: This study investigated the effect of government debt on Nigeria’s economic growth using annual data from 1980 to 2018 and the Autoregressive Distributed Lag technique. The empirical results showed that external debt constituted an impediment to long-term growth while its short-term effect was growthenhancing. Domestic debt had a significant positive impact on long-term growth while its short-term effect was negative. In the long term and short term, debt service payments led to growth retardation confirming debt overhang effect. The findings suggested that the government should direct the borrowed funds to the diversification of the productive base of the economy. This will improve long-term economic growth, expand the revenue base and strengthen the capacity to repay outstanding debts when due. Fiscal improvements that encourage domestic resource mobilization, efficient debt management strategies and reliance on domestic debt rather than external debt for increased deficit financing to engender greater growth are the main contribution of the study. Subjects: Economics; Political Economy; History of Economic Thought; Finance ABOUT THE AUTHOR Abdulkarim Yusuf, who is the corresponding author to this manuscript, is a PhD candidate in the Economics programme at Universiti Sains Malaysia. His research interests are Public sector economics, Financial economics, Agricultural economics, Development economics and Applied econometrics. His career goal is to contribute positively to macroeconomic policy development, mostly in low-income countries and in Sub-Saharan African economies. Dr. Saidatulakmal Mohd. is an Associate Professor of Economics with the School of Social Sciences and currently the Director of Centre for Global Sustainability Studies of Universiti Sains Malaysia. She enjoys a wide range of highquality publications in several national and international journals with a research interests in social protection, welfare of the elderly, tourism and heritage economics and poverty reduction. Her research works have over the years focused on the dynamic linkages between the various macroeconomic policies in Asian countries and their effect on economic growth and poverty reduction. PUBLIC INTEREST STATEMENT Government borrowing becomes necessary when government revenue sources are inadequate to finance growing government expenditures. The Nigerian economy has witnessed poor revenue growth because of over-dependence on volatile oil revenue and low tax capacity. The country’s debt stock as a result has increased considerably over the past decades – a trend generally connected with expansion in the size of government expenditures. The associated repayment and servicing of these debts often result in diversion of productive funds towards debt repayments thereby limiting government’s ability to provide basic infrastructures that benefit the poor. Efficient use of debt could lead to improved economic growth and better standard of living for the populace. However, resources from debt have not been managed effectively to generate sufficient resources to service and repay such debt at maturity. Consequently, the country had to contend with mounting public debt and debt service payments amid deteriorating growth and rising poverty level. Yusuf & Mohd, Cogent Economics & Finance (2021), 9: 1946249 https://doi.org/10.1080/23322039.2021.1946249 Page 1 of 19 Received: 13 September 2020 Accepted: 17 June 2021 *Corresponding author: Abdulkarim Yusuf, Economics Programme, School of Social Sciences, Universiti Sains Malaysia (USM) E-mail: abdulkarimyusuf01@gmail. com Reviewing editor: David McMillan, University of Stirling, Stirling, United Kingdom Additional information is available at the end of the article © 2021 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. Keywords: ARDL cointegration; Debt overhang; Debt servicing; Economic growth; Government debt JEL classification: A22; E62; F16; G18; H26. 1. Introduction When government revenues fall short of its expenditure, governments borrow. Public debt is thus a critical tool for governments to fund public spending, particularly when it is difficult to raise taxes and reduce public expenditure. Over the years, this process has left most governments with massive outstanding debts. Reasonable borrowings to finance public and infrastructure development are the key to faster economic growth. But excess borrowings without appropriate planning for investment may lead to heavy debt burden and interest payment, which in turn may create several undesirable effects for the economy (Joy & Panda, 2020). For countries with poor economic structure, high public debt is also a critical issue since it can create uncertainty and low economic growth. High debt-to-GDP ratios are also considered a concern for investors, as they can have a negative effect on the stock market and reduces productive investment and employment in the long-run (Saungweme et al., 2019). Public debt, therefore, may be an economic stimulant but when its accumulation gets to a very substantial level, a reasonable proportion of government expenditure and foreign exchange earnings will be used to service and repay the debt with a heavy opportunity costs even for future generations. Moreover, the cost of debt servicing can increase beyond the capacity of the economy to cope, adversely affecting the efforts to address the desired fiscal and monetary policy objectives. In addition, rising debt burdens can restrict the government’s ability to pursue more productive investment programmes in infrastructure, education and public health (Johnny & Johnnywalker, 2018). Public debt can be either domestic or external. The justification for government borrowing has its foundation in the neoclassical growth models, which prescribes the need for capital scarce countries to borrow to increase their capital accumulation and steady-state level of output per capita (Madow et al., 2021). The occurrence of global economic crises has provided further impetus for countries (especially the developing ones) to borrow as they are often confronted with the need for increased expenditure levels and declining capital inflows (Ogbonna et al., 2019). Conventional view suggests that public debt has a positive effect on economic growth in the short-run by stimulating aggregate demand and output. However, theoretical literature continues to point to a negative debt-growth relation in the long run by crowding out private investment. Public debt can crowd-out private investment and threaten economic growth through higher long-term interest rates, higher inflation, and higher future distortionary taxation (Mhlaba et al., 2019). The extensive use of domestic borrowing can have severe repercussions on the economy. Domestic debt service can consume a significant part of government revenues, especially given that domestic interest rates are higher than foreign ones. The interest cost of domestic borrowing can rise quickly along with increases in the outstanding stock of debt, especially in shallow financial markets. In the long-run, higher interest rate would discourage investment and thus crowd out private investment. The lower investment eventually leads to a lower steady-state capital stock and a lower level of output. Therefore, the overall long-term impact of debt would be smaller total output and eventually lower consumption and reduced economic welfare. This is also referred to as the burden of public debt, as each generation burdens the next, by leaving behind a smaller aggregate stock of capital (Àkos & Istvàn, 2019). Nigeria is currently ranked among Sub-Saharan Africa heavily indebted countries with a stunted GDP growth rate, retarded export growth rate, a fast dwindling income per capita and an increasing poverty level. Most of these countries, Nigeria inclusive, have been trapped by hasty and distress borrowing which they are often unable to service. Worse still, they need to borrow more because of the deteriorating world prices of their primary exports (Ogunjimi, 2019). Nigeria’s 2005 debt relief provided by the Paris Club of creditors motivated largely by the need to free-up resources for investment and faster economic growth led to a significant decline in the country’s debt burden in 2006. Unfortunately, 14 years after, the country is back in bigger debt crisis. Successive governments Yusuf & Mohd, Cogent Economics & Finance (2021), 9: 1946249 https://doi.org/10.1080/23322039.2021.1946249 Page 2 of 19 have been accumulating debt at an alarming rate while debt servicing cost has again increased astronomically to become a sour point in Nigeria’s budgetary process in the last decade. The economy is, therefore, over-burdened with massive government debt and debt service costs that consume more than half of government scarce revenue, narrowing down the fiscal space for government to invest in critical infrastructure that supports private investment and sustain growth. Rising global interest rates and the increasing debt burden of Nigeria is pointing toward another debt crisis which may not be far ahead. It is evident that unsustainable public debt is discouraging investment and lowering growth in Nigeria, thereby reducing the country’s global competitiveness, and increasing financial market susceptibility to international shocks (Ogbonna et al., 2019). Generally, debt sustainability can be explained using either debt to GDP or debt service to revenue ratio. Nigeria’s debt to GDP ratio is estimated at about 22%, one of the lowest in the world and much below what is obtainable in most emerging markets. With Nigeria’s total public debt below 30% of GDP, the country’s debt burden appears to be relatively light compared with many other countries. Meanwhile, debt-to-GDP is not regarded as the best indicator of debt sustainability, especially in a country like Nigeria that has one of the lowest tax-to-GDP ratio (6.1%) in the world. For Nigeria, a better indicator of debt sustainability is the debt service-to-revenue ratio, a metric that reveals whether the government is generating enough revenues to pay down its debts as they mature. The challenge has always been the debt service to revenue ratio which in Nigeria has in recent years risen to worrying levels, leading analysts to ask whether the country is bankrupt and heading to bankruptcy. Since the recession experienced in 2016, Nigeria has struggled with a higher debt service to revenue ratio as revenues slid in direct correlation with the fall in oil prices. Nigeria’s government spent about 2.45 trillion Nigeria Naira in debt service in 2019 out of total revenue of N4.1 trillion or 59.6% debt service to revenue ratio. The rising cost of Nigeria’s debt profile breached a new milestone with the country’s debt service as a percentage of revenue rising to 83% in 2020. This suggests that 83% of the revenue generated in 2020 was used to meet debt service obligations and this is worrisome. To service domestic debt, the government spent N1.76 trillion in 2020 as against a budget of N1.87 trillion. For foreign debts, a sum of N553 billion was spent against a target budget of N805.47 billion. The drop here is likely a result of lower interest rates on foreign borrowing as well as very limited borrowing from the foreign debt market during the year. The government only contributed N4.58 billion into its sinking fund instead of the budgeted N272.9 billion. The sinking fund is required to set aside funds that will be used to pay down on other loans such as bonds when they mature in the future. The government incessant borrowing from the domestic market was limiting the private businesses that need credits from assessing funding for business expansion and growth (Ogunjimi, 2019). When a country spends significant parts of its revenue on servicing huge debts, it has very little left to fund critical infrastructures which in turn affect growth negatively. Moreover, the National Bureau of Statistics (NBS) 2019 Poverty and Inequality in Nigeria report, indicated that 40.1% of the total population, or almost 83 million people, live below the country’s poverty line of N137,430 ($381.75) per year, highlighting the low levels of wealth in a country that has Africa’s biggest economy. Despite the revenue shortfalls recorded, government recurrent expenditure (debt and non-debt) remained high and in line with budgetary expectations while the much needed capital expenditure continued to suffer serious decline over the last two decades. The continued depletion in Nigeria’s revenue raises the questions around the solvency of the Nigerian economy. With the economy likely on the path to a covid-19 and growing insecurity induced recession, government revenues particularly non-oil revenues could remain depressed for a longer period. This means the government will still need to rely on borrowing to fund its operations, piling more pressure on Nigeria’s debt service to revenue ratio. Without major structural policy reforms and a revenue driven fiscal consolidation to stimulate private investment and promote growth, there will be limited resources to fund the budget and provide those infrastructural facilities that stimulate investment and drive long-term growth. The choice of Nigeria for this study is premised on the aforementioned fiscal quandary created by low revenue generation, escalating government recurrent expenditure, rapid increase in government Yusuf & Mohd, Cogent Economics & Finance (2021), 9: 1946249 https://doi.org/10.1080/23322039.2021.1946249 Page 3 of 19 debt, dramatic decline in foreign reserve and large-scale accumulation of arrears on external trade payments that is increasing the rate of default and rapid build-up of arrears. The discord between a rapid increase in government debt and debt service payment amidst lower levels of growth and rising poverty levels in Nigeria in recent time is of particular concern to researchers and policy analysts. This uncertainty prompted this study to examine if an escalating debt profile has any effect on economic growth in Nigeria and determine whether such effect (if any) is in the longrun or shortrun period. As the pursuit towards debt reduction that will enhance economic growth with a resultant improvement in poverty level intensifies, it is imperative to comprehensively investigate the long- and short-term impact of government debt on economic growth using long period Nigeria-specific debt and growth related data and an advanced econometric method for improved policy formulation. This is necessary to enhance domestic resource mobilization, curtail fiscal deficit, reduce the level of government debt and uphold fiscal discipline that can help reset the economy on a higher growth path. The study findings have direct policy implications, especially on tax and investment decisions and crucial for understanding whether an expansionary fiscal policy that increases the level of public debt will reduce the standard of living in the future. The results are expected to guide policymakers in the design of an optimal public debt strategy that is conducive for Nigeria’s economic growth objectives and free up resources for pro-growth government spending. The paper is organised into five sections. Following the introduction, section two presents the overview of the related literature, while section three addresses the methodological issues and research materials. The empirical results are presented and discussed in section four while section five concludes the study and offers policy recommendations based on findings. 1.1. Literature review Economic theory suggests that reasonable levels of borrowing by a developing country are likely to enhance its economic growth. Countries in their early stages of development have small stock of capital and are likely to have investment opportunities with rates of return higher than those in advanced economies. As observed by Pattillo et al. (2004), as long as these countries use the borrowed funds for productive investment and do not suffer from macroeconomic instability, policies that distort economic incentives or sizable adverse shocks, growth should increase and allow for timely debt repayment. When this cycle is maintained over time, growth will affect per capita income positively which is a prerequisite for poverty reduction. These predictions are known to hold even in theories based on the more realistic assumption that countries may not be able to borrow freely because of the risk of debt denial. Nonetheless, the stylised facts in Nigeria showed that despite the steady increase in public debt in recent years, economic growth has remained low with widening level of poverty (Ogunjimi, 2019). From a theoretical standpoint, various schools of thought provided different paradigms on the effect of public debt on economic growth. The debt overhang and debt crowding out hypotheses, which serve as dependable framework upon which this study was built are discussed below: 1.2. The debt overhang hypothesis Debt overhang theory implies that large borrowing leads to high debt, debt traps and slowing down of economic growth. According to the debt overhang hypothesis, if there exists the likelihood that in the future government debt will be larger than the country’s repayment ability, expected debt service costs will discourage further domestic and foreign investment. Potential investors would be discouraged on the assumption that the more there is production, the more they will be taxed by governments to service the public debt and thus they will be less willing to incur investment costs today for the sake of increasing future output (Gordon & Cosimo, 2018). According to Krugman (1988), accumulated public debt act as a tax on future output as well as reduces the incentive for savings and investment. In particular, the theory argued that the requirement to service debt reduces funds available for investment purposes; hence, a binding liquidity constraint on debt would restrain investment and further retard growth. The theory holds that both the stock of public debt and its service affect growth by discouraging private investment or altering the composition of public spending. Debt service may discourage growth by squeezing the public resources available for investment in infrastructure and human capital (Coccia, 2017). The theory further suggests that public debt may have non-linear effects on growth, either through capital accumulation or productivity growth. Yusuf & Mohd, Cogent Economics & Finance (2021), 9: 1946249 https://doi.org/10.1080/23322039.2021.1946249 Page 4 of 19 Coccia (2017) argued that the resources used to service massive public debt represent resource drain that should have been available to invest in critical sectors that sustain growth. The cost of servicing huge public debts could take a greater part of government scarce revenue leading to distortions and lower levels of growth in developing countries. Debt overhang is a primary cause of stunted economic growth in heavily indebted countries. As Àkos and Istvàn (2019) explained in the context of poor countries, servicing of high public debts depletes the revenue of the indebted country to such an extent that the ability to return to growth paths is dim, even if the country implement strong reform programmes. For Krugman (1988), if a country’s debt level exceeds the nation’s repayment ability, expected debt servicing is likely to be an increasing share of the country’s future output level. Thus, investment and growth will be discouraged via expectation of high tax rates on the returns from the domestic economy issued for the existing foreign creditors. The presence of debt overhang prevents private investment programmes due to uncertainty and adverse incentive effects it creates along the way (Spilioti & Vamvoukas, 2015). High debt burden also encourages capital flight through creating risks of devaluation, increases in taxation and thus the desire to protect the real value of financial assets. Capital flight in turn reduces domestic savings and investment, thus reducing growth, the tax base and debt servicing capacity. The diversion of foreign exchange to debt servicing also limits import capacity, competitiveness, and investment and thus growth (Madow et al., 2021). 1.3. Debt crowding-out hypothesis According to the debt crowding out hypothesis, higher debt service payments can increase a country’s budget deficit, thereby reducing public savings if private savings do not increase to offset the difference. This, in turn, may either drive up interest rates or crowd out the credit available for private investment, thereby depressing economic growth. When government increases borrowing to fund higher spending, or reduce taxes, it crowds-out private sector investment through higher interest rates. If increased borrowing leads to higher interest rates by creating higher demand for money and loanable funds and thus higher prices, the interest rate sensitive private sector will likely reduce investment due to lower rate of returns. A fall in businessfixed investment will hurt long-term supply-side economic growth, that is, potential production growth. This crowding-out effect is weakened by the fact that government spending through the multiplier increases the demand for private sector products, thereby stimulating fixed investment via the acceleration effect (Joy & Panda, 2020). Government deficit financing through domestic and external borrowing might result in increased interest rates, lower disposable income and higher wages all of which reduces the profitability of businesses and by extension private investment. This may consequently discourage or crowd-out private investment and decrease the production level in an economy (Spilioti & Vamvoukas, 2015). The Keynesian economists maintained that fiscal expansion have the proclivity to increase aggregate demand for private sector goods through the fiscal multiplier, thereby stimulating the growth of private investment. Higher government spending financed by borrowing leads to a fall in private sector saving. This is for two main reasons: First, with expansionary fiscal policy, private sector savers buy government bonds and so have fewer savings to fund private sector investment. Also, higher government borrowing tends to push up interest rates and these higher interest rates crowd-out private investment. Furthermore, by shifting the tax burden to the future generations, current borrowing crowds out private investment (Gordon & Cosimo, 2018). The classical economists are of the view that public debt is deleterious to the economy, particularly if public borrowing reduces both the financial discipline of the budget process and the private sector’s access to credit. This proposition argued that public debt repayments, mostly foreign, crowds out economic growth by discouraging private investment and deterring potential foreign investors. However, the Ricardian equivalence hypothesis purports that fiscal stabilization efforts have a neutral impact on economic growth. This hypothesis is based on the presumption that variations in government expenditures and revenues are matched by changes in private savings (Saungweme et al., 2019). Yusuf & Mohd, Cogent Economics & Finance (2021), 9: 1946249 https://doi.org/10.1080/23322039.2021.1946249 Page 5 of 19 In the monetarist view, the expansion in government expenditures after a relatively short transition period, displace or crowd-out an equivalent magnitude of private expenditures. Businesses compete with government in bond markets for a limited amount of funds. Increasing government expenditure without any improvement in money supply increases production, profit and transaction demand for money (Ogunjimi, 2019). Given a constant money supply, increased transaction demand for money and increased in supply of debt in the market, drive up interest rates. The increase in interest rates reduces business spending and perhaps even government expenditures. The net result of the crowding-out hypothesis is that government sector growth, inevitably, comes at the expense of the private sector of the economy, unless the money supply rises during the process (Khan & Gill, 2014). This crowding out effect impedes the effectiveness of the government to influence the economy through fiscal policies. 1.4. Empirical review The nexus between public debt and economic growth has been the subject of several empirical studies with mixed results. Findings from these studies in support of conventional wisdom tend to suggest that debt below a certain threshold can promote economic growth while debt well above this threshold could retard growth. This sub-section highlights some empirical works related to debt and economic growth from cross-national and Nigeria studies. Pattillo et al. (2004) in their study assessed the non-linear impact of external debt on growth using a panel data of 93 countries over 1969–1998 and found that the impact of debt on growth can be very different at low levels of debt and at high levels. At high levels of debt, doubling debt from any initial debt level will reduce per capita income growth by about 1% point while high debt reduces growth mainly by lowering the efficiency of investment. At low levels, however, the effect was generally positive but often not significant. Meanwhile, the negative impact of high debt on growth operated through both a strong negative effect on physical capital accumulation and on total factor productivity growth. However, the study is cross-country in nature whose results cannot be directly applied to Nigeria. Adofu and Abula (2010) using OLS regression technique and annual data from 1986 to 2005, investigated the empirical relationship between domestic debt and economic growth in Nigeria. The results showed that domestic debt had affected the growth of the economy negatively. The study focused on domestic debt which constitute a segment of total debt stock and used an estimation technique that cannot produce robust coefficient estimates about the study variables. Egbetunde (2012) using the vector autoregressive method and annual data from 1970 to 2010, analysed the causal nexus between public debt and economic growth in Nigeria. The findings of the VAR model revealed that there exists a bi-directional causality between disaggregated components of public debt and economic growth in Nigeria. The study was based on data whose results may have been overtaken by recent development in government debt position and did not include any control variables. Babu et al. (2015) explored the effect of domestic debt on economic growth in East African countries over the period 1990–2010 adopting the Solow-Swan growth model augmented for debt. The Hausman specification test was used to select the panel fixedeffect model, which was corrected for heteroscedasticity. The results showed that domestic debt had a significant positive effect on economic growth in East African countries. However, the study findings are based on cross-country data whose results cannot be directly applied to Nigeria. Udeh et al. (2016) using OLS method and annual data spanning the period 1980–2013 examined the impact of external debt on economic growth in Nigeria. The study modelled GDP as a function of external debt stock, debt service payments and exchange rate. The empirical results indicated that external debt stock and debt service payments impacted growth negatively while exchange rate showed a positive impact. The study concentrated on external debt which is a fraction of total debt stock and used the OLS estimation technique that cannot separate the long- and short-run effect of external debt on growth. Elom-Obed et al. (2017) using the Vector Error Correction Model (VECM) and annual data from 1980 to 2015, analysed the relationship between public debt and economic growth Yusuf & Mohd, Cogent Economics & Finance (2021), 9: 1946249 https://doi.org/10.1080/23322039.2021.1946249 Page 6 of 19 in Nigeria. The variables used in the study included RGDP, foreign debt, domestic debt, and domestic private savings. The study findings revealed a significant negative impact of foreign and domestic debt on economic growth in Nigeria. The study suffered from significant variable omission bias and adopted an inadequate estimation technique that cannot generate reliable coefficient estimates about the study variables. Gómez-Puig and Sosvilla-Rivero (2017) explored the relationship between government debt and economic growth of Euro Area countries using time series data for the period 1961–2013 and the ARDL method. The results indicated a significant negative influence of public debt on long-run performance of the Euro Area member states while the short-run effects may be positive depending on the country. The study looked at Euro countries and provided a basis to examine the impact of public debt on economic growth from a Nigerian-specific perspective. Thao (2018) analysed the effect of government debt on economic growth in six ASEAN countries, namely, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam over the period 1995– 2015. The General Method of Moments (GMM) estimation technique was adopted to measure the effect of government debt indicators on economic growth. The findings revealed a significant and positive impact of public debt, FDI, GFCF and real effective exchange rate on economic growth while population growth had a significant negative effect on the growth rate of these countries. The study was based on ASEAN countries data whose findings cannot be directly applied to Nigeria. Akhanolu et al. (2018) examined the effect of public debt on economic growth of Nigeria using annual data from 1982 to 2017 and two-stage least square regression technique. The study modelled GDP as a function of internal debt, external debt, savings and capital expenditure. The results revealed that external debt had a significant negative impact on growth while internal debt showed a positive impact. However, the study suffered from significant variable omission bias and the methodology used was inadequate in accounting for complex relationship between the study variables. Mhlaba et al. (2019) employ the ARDL method and quarterly data from 2002 to 2016 to examine the long-run and short-run effects of public debt on economic growth for South Africa. The study modelled GDP as a function of gross and net debt, investment, inflation and terms of trade. The empirical results indicated a significant negative impact of public debt on economic growth. The study was based on South African data and provided a basis to examine the impact of government debt on economic growth from a Nigerian-specific perspective. Saungweme and Odhiambho (2019) explored the causal relationship between government debt, debt servicing and economic growth in Zambia for the period 1979 to 2017 using a dynamic multivariate ARDL approach. To achieve this objective, RGDP was modelled as a function of stock of public debt, fiscal balance and savings as a share of GDP. The empirical results indicated a unidirectional causal relationship from economic growth to public debt in Zambia. The study findings supported the hypothesis that the pace of economic growth matters in defining the level of public sector indebtedness. The study setting was in Zambia thereby creating a geographic gap and the need for a Nigerianspecific study. In differing from most empirical studies previously conducted for the Nigerian economy, the current study contributed to the literature in three ways. Firstly, the current study is a countryspecific study whereas some previous studies have been panel based. This is significant since the panel-based studies tend to generalize the findings from a singular regression estimate for a host of economies with varying country-specific characteristics. Secondly, previous Nigerian studies (Adofu & Abula, 2010; Akhanolu et al., 2018; Egbetunde, 2012; Elom-Obed et al., 2017; Udeh et al., 2016) have adopted the two-stage least square, VECM, OLS and VAR estimation techniques which are inadequate in generating consistent and robust coefficient estimates about the study variables, thereby providing a gap in the methodology used . The current study adopted the more advanced ARDL method, which allows for a more robust cointegration relations between a mixture of I(0) and I(1) variables that perform exceptionally well with small sample sizes. Through this method, it becomes methodologically possible to deal with model selection, estimation, inference and determine the long- and shortterm effects of government debt on economic growth in Nigeria simultaneously. Additionally, the ARDL method also postulates the speed of adjustment to restore the economy to long-term Yusuf & Mohd, Cogent Economics & Finance (2021), 9: 1946249 https://doi.org/10.1080/23322039.2021.1946249 Page 7 of 19 The estimated coefficient of present level of domestic debt stock D(LOGDDS) in contrast with the longrun results was negatively related to the current rate of economic growth and significant at 1% level. Based on Table 3, a percentage increase in the present level of government domestic debts, holding other explanatory variables constant, inspired a fall in current level of RGDP by approximately 0.17%. The result indicated that government accumulation of domestic debt results in higher tax on future output and thus crowds-out private investment and retards growth in the short-run. However, the coefficient of one-year lagged measure of domestic debt stock (LOGDDS(−1)) in agreement with the long-run result showed a negligible positive effect on the current rate of economic growth while a percentage increase in the two-year lagged value of domestic debt, D(LOGDDS (−2)) was associated with a positive effect of increasing the current rate of RGDP by about 0.05% that was significant at 5% level. Table 4 showed evidence of a significant negative relationship between the present level of debt service payment D(LOGDSP) and the current rate of economic growth at the 5% level of significance, suggesting that a percentage increase in the present level of debt service payment will, other things remaining equal, produce a decrease of about 0.012% in the current rate of economic growth. In contrast with the long-run result however, the one period lagged value of debt service payment D (LOGDSP(−1)) demonstrated a positive relationship while the two-year lagged value of debt service payment D(LOGDSP(−2) also showed a positive effect on current level of economic growth and were both significant at 1% level. In conformity with the long-run results, the present level of foreign reserve holding D(LOGFRP) was associated with a positive effect on current rate of economic growth that was significant at 1% level, indicating that a percentage increase in current level of foreign reserve holding, motivated about 0.9% increase in current rate of economic growth. The one-year Table 4. Short-run estimated ARDL results Variables Coefficients Std. Error t-Statistics Prob. Value D(LOGRGDP(−1)) − 1.1533 0.1699 −6.7862 0.0005*** D(LOGRGDP(−2)) − 0.8460 0.1201 −7.0453 0.0004*** D(LOGEDS) 0.1034 0.0089 11.6239 0.0000*** D(LOGEDS(−1)) − 0.0377 0.0056 −6.6730 0.0005*** D(LOGDDS) − 0.1743 0.0171 −10.1696 0.0001*** D(LOGDDS(−1)) 0.0146 0.0167 0.8781 0.4137 n D(LOGDDS(−2)) 0.0475 0.0151 3.1523 0.0198*** D(LOGDSP) −0.0124 0.0040 −3.0841 0.0215** D(LOGDSP(−1)) 0.1066 0.0089 12.0197 0.0000*** D(LOGDSP(−2)) 0.0509 0.0065 7.8020 0.0002*** D(LOGFRP) 0.0860 0.0077 11.2294 0.0000*** D(LOGFRP(−1)) −0.1059 0.0097 −10.8807 0.0000*** D(LOGFRP(−2)) 0.0342 0.0076 4.4774 0.0042*** D(INTR) −0.0120 0.0012 −9.7322 0.0001*** D(INTR(−1)) 0.0019 0.0007 2.8359 0.0297*** D(GFCF) 0.0077 0.0007 11.6302 0.0000*** D(GFCF(−1)) −0.0022 0.0008 −2.7782 0.0321** D(GFCF(−2)) −0.0022 0.0007 −3.2637 0.0172*** D(FDI) 0.0188 0.0036 5.1685 0.0021*** D(FDI(−1)) −0.0034 0.0039 −0.8511 0.4274 n D(FDI(−2)) 0.0116 0.0026 4.3659 0.0047*** Constant 7.9710 0.6087 13.0961 0.0000*** ECM(−1) − 0.6323 0.0482 −13.1077 0.0000*** Yusuf & Mohd, Cogent Economics & Finance (2021), 9: 1946249 https://doi.org/10.1080/23322039.2021.1946249 Page 14 of 19 period lagged value of the variable D(LOGFRP(−1)) showed the opposite effect of decreasing investment and the current rate of economic growth that was significant at 1% level while the two-year lagged value of the variable D(LOGFRP(−2)) revealed a positive relationship with the current RGDP growth that was significant at 1% level. In contrast with the long-run result, the current interest rate D(INTR) was associated with a negative effect on current level of economic growth that was significant at 1% level, supporting the neoclassical view that low interest rate promotes investment and economic growth. Low interest rates encourage economic agents to undertake investment activities thereby stimulating growth. The one-year lagged value of interest D(INTR(−1)) indicated a positive effect on current rate of economic growth that was significant at 5% level. The coefficient of present level of domestic capital formation D(GFCF) in conformity with the long-run results exhibited a significant positive effect on the current rate of economic growth and was significant at 1% level. The result suggests that domestic investment was an important factor which promoted economic growth in Nigeria during the reviewed period. The lagged values of the variable however demonstrated the opposite effect of retarding the current rate of economic growth that was significant at 5% level at one and two-year lagged level, respectively. Unlike the longrun result, Table 4 showed evidence of a significant positive impact of present level of FDI inflow D(FDI) on the current rate of economic growth at 1% level of significance, suggesting that a percentage increase in present level of FDI inflow will generate an increase of about 0.02% in the current rate of economic growth ceteris paribus. FDI is an important source of capital, which complements domestic investment, creates new job opportunities and is the main channel through which technology transfer takes place. The transfer of technology and technological spill overs lead to an increase in factor productivity and efficiency in the utilization of resources, which promote growth.The one-year lagged value of FDI inflow D(FDI) showed a negligible negative effect on the current rate of economic growth while the two-year lagged value of FDI inflow (D(FDI(−2)) exposed a positive relationship that was significant at 1% level. 3.5. Short-run diagnostic tests Various diagnostic and robustness tests performed to ensure that the errors are well-behaved, and the econometric estimates are reliable and stable are reported in Table 5. The respective diagnostics checking statistics reported in Table 5 failed to reject the null hypothesis, thus indicating no evidence of non-normality, serial correlation, heteroscedasticity, and model misspecification error. Similarly, the parameters stability test conducted via CUSUM and CUSUM of squares tests (Figures 1 and 2) indicated that the parameters of the estimated model are within the critical bounds at a significant level of 5% suggesting that the estimated model was dynamically stable and the estimated results are reliable and satisfactory for policy inferences. 4. Conclusion and recommendations This study investigated the long- and short-run impact of government debt on economic growth in Nigeria using annual time series data covering the period 1980–2018. To accomplish this task, a growth model function was specified and estimated using disaggregated components of public debts and a set Table 5. Short-run diagnostics tests results Test Null Hypothesis F-Statistic Prob. Value Jarque-Bera There is Normal Distribution 1.4867 0.4755 Breusch Godfrey No Serial Auto- Correlation 5.5859 0.0695 Breusch-Pagan-Godfrey No Heteroscedasticity 1.0499 0.5261 Ramsey RESET No misspecification 0.1571 0.7081 Yusuf & Mohd, Cogent Economics & Finance (2021), 9: 1946249 https://doi.org/10.1080/23322039.2021.1946249 Page 15 of 19 of control variables such as debt service payment, foreign reserve position, effective interest rate, gross fixed capital formation and FDI inflow. The ARDL cointegration approach was used for data analysis after achieving data stationarity. The empirical results indicated that external debt retarded long-term economic growth while its short-run effect was growth-enhancing. Domestic borrowing showed a significant effect of promoting economic growth in the long-run and an opposite effect of curbing growth in the short-run. Debt service payment significantly reduced growth in the long- and short-run while foreign reserves position and gross domestic investment accelerated growth in the long- and short- -8 -6 -4 -2 0 2 4 6 8 2013 2014 2015 2016 2017 2018 CUSUM 5% Significance -0.4 0.0 0.4 0.8 1.2 1.6 2013 2014 2015 2016 2017 2018 CUSUM of Squares 5% Significance Figure 1. Stability test (CUSUM) TEST Stability tests (CUSUM) of squares test.. Yusuf & Mohd, Cogent Economics & Finance (2021), 9: 1946249 https://doi.org/10.1080/23322039.2021.1946249 Page 16 of 19 run. Interest rate significantly improve growth in the long-run but inhibited growth in the short-run. Foreign direct investment inflow exhibited a crowding-out effect on growth in the long-run while its short-run effect was significant and positive. The coefficient of co-integrating equation indicated a moderately fast adjustment speed parameter of 63% convergence to long-run equilibrium after a shock while the parameter stability and robustness checks proved that the estimated parameters of the model are structurally and dynamically stable. As for policy implications, projects to be financed with government borrowing should be properly appraised and their technical feasibility, financial viability and economic desirability ascertained before the funds are committed. This would help to restore financial discipline and curtail the misapplication and inefficient management of public debts. Domestic debt rather than external debt will stimulate higher rate of economic growth in Nigeria. This is because the repayment of the principal and interest on such domestic debt is a reinvestment into the economy which would usually have a multiplier effect on domestic investment in the economy. But with respect to external debt, more resources would be needed to repay and service the debt and this would weaken the anticipated positive effect of this debt on economic growth. Fiscal reforms that boost domestic revenue generation by broadening the revenue base, improving the capacity to tax, and curtailing unproductive government expenditure should be encouraged. Furthermore, government should ensure that borrowings are done on terms that are consistent with entrenching debt sustainability and borrowed funds are productively invested in the value-added sectors of the economy to engender greater growth in the long-run. This is necessary if the country is to outgrow its debt problem, restore creditworthiness and achieve sustainable growth. As in every empirical analysis, the results of this study must be regarded with caution since they are based on a country specific characteristic, data spanning a certain period and a given econometric methodology. Although the present study offers fresh insights on the impact of government debt on economic growth in Nigeria, it is subject to some limitations related essentially to data availability and the econometric methodology. Future research in this area might examine possible non-linear effects of public debt on economic growth in Nigeria using a time varying modelling technique such as the Quantile ARDL. Funding The authors received no direct funding for this research. Author details Abdulkarim Yusuf 1 E-mail: [email protected] ORCID ID: http://orcid.org/0000-0003-4952-7906 Saidatulakmal Mohd 2 E-mail: [email protected] ORCID ID: http://orcid.org/0000-0002-7947-7324 1 Economics Programme, School of Social Sciences, Universiti Sains Malaysia (USM). 2 Department of Economics, School of Social Sciences, Universiti Sains Malaysia (USM). 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