Optimal Government Debt and Economic Performance in Nigeria

Abstract

Developing economies rely on government debts in financing its budget deficit. Nevertheless, debt incurred beyond a limit becomes detrimental to the economy. This study examined the optimal point beyond which government debt impairs economic performance in Nigeria. Data from the Central Bank of Nigeria (CBN) Statistical Bulletin from 1986 to 2017 were employed for the study. Dynamic Ordinary Least Square (DOLS) was used to estimate the magnitude of the coefficients. The unit root test showed that the variables of the study were stationary at a 5% significant level and the co-integration test confirmed a long-run relationship between the variables. The estimation showed a significant relationship between government debt and Nigeria’s economic performance. Government debt is growth-enhancing at low levels but growth-retarding at a high level with the optimal government debt estimated as 9.98% of the gross domestic product (GDP). This implies that borrowing beyond such a limit becomes growth-retarding in the economy. The study concluded that an increase in government debt elevates Nigeria’s economic performance. However, it becomes detrimental to the economy when surpasses the threshold level estimated in this study. Therefore, the study recommends that the government should focus on other sources of revenue to fund its budget deficits to decrease the debt burden. Also, the debt management office (DMO) of the federal government should introduce debt forgiveness measures that may encourage lending nations or entities to relax debt conditions, thereby reducing the debt profile of the country.