Public Debt and Economic Growth in Nigeria

Abstract

This study investigates the effect of public debt on economic growth and development in Nigeria within the VAR methodological framework using annual data for 35 yearly from 1981 to 2015. While economic growth measured by the real GDP, public debt is measured by total domestic debt and total external debt. All variables are converted into logarithms. The results show evidence of a significant causal relationship between domestic debt and real GDP in Nigeria. Real GDP responds negatively to a one standard deviation shock to domestic debt and the effect of this shock stays in the system even after the third period. However, there is no significant relationship between external debt and real GDP. Although, real GDP responds positively to a shock to external debt, the effect of external debt shock dies out at the third period. Further, there is no long-run relationship between public debt and real GDP in Nigeria. Based on these findings, the study recommends that Nigerian authorities should use more of external debt to finance any shortfalls in the National budget.