NIU Journal of Social Sciences

NIU Journal of Social Sciences Copyright©2024

Nexus International University ISSN: 3007-1682; 10(1): 79-88

Effect of Public Debt on Economic Growth in Nigeria with or without Domestic Investment

KAZEEM FASOYE
Obafemi Awolowo University, Ile-Ife, Nigeria

ABIODUN SUNDAY OLAYIWOLA

Chrisland University, Abeokuta, Nigeria

Abstract. The paper examines the effect of public debt towards productive investment will bring desirable
on economic growth in Nigeria with or without growth.
domestic investment between 1981 and 2020 using a
technique of Dynamic Least Square (DOLS). The Public debt allows a nation to invest and consume
findings of the study reveal that public debt in Nigeria more than the present national income limit. It is an
retards economic growth through reduction in the level essential stimulator for driving economic growth and
of investment. This indicates the possibility that the a means to balance the budget deficit of developing
current levels of public debt in the Nigeria might not countries. It allows a country to finance capital and
have been reducing the volume of growth but have the development projects which help her in building
tendency to create a poorer macroeconomic and production ability and facilitate improved economic
uncertain climate for investment. The implication is growth. However, excessive debt generates serious
that the nonlinear relationship between debt and debt service obligations and a constraint on economic
economic growth is a reality. It is suggested that there growth, which may become a burden to future
should be big push investment into all sectors of the generations (Chiang and Moss, 2020).
economy that serve as engine of growth to the nation
and whenever public debt is acquired, domestic Before the debt relief in 2006, foreign debt constituted
investment must be given priority. the larger part of the total debt in Nigeria. In the early
1970s, Nigeria's foreign debt was below 1billion
Keywords: Effect, Public Debt, Economic Growth, dollar; by 1980s, 1990s and 2004 it had raised to
Domestic Investment, Nigeria 3.4billion, 33billion 36billion dollars respectively
(DMO, 2006). The rationale behind the rapid increase
1. Introduction in external debt in the 1970's and 1980's was the desire
to finance the reconstruction and development projects
Debt as a global phenomenon is seen virtually in all after Nigeria's civil war of 1967 - 1970. Nigeria as an
countries of the world to encourage economic growth. exporter of crude oil, acquired large revenues from the
Fischer and Easterly (1990) stated four different ways upward increase in the price of oil in 1970's up to early
of supporting fiscal deficit, each of them resulted to 1980's, it was regarded as under-borrowed and credit
certain macroeconomic imbalances. The approaches worthy. The sudden breakdown of oil prices in 1982
include minting of currency which may fuel inflation, reduced the revenue based of the country and started
depleting foreign reserves might result into exchange to witness difficulties in meeting its debt payment
rate crisis, borrowing from outside the country might obligation.
end up in an external debt crisis, and borrowing within
the economy might raise interest rates and also result Several government reforms to curtail debt albatross
in debt crisis. The first two scenarios may be initially in Nigeria have been adopted over the years. Some,
fascinating but has harsh macroeconomic implications among them include debt rescheduling and debt relief
on the economy. But, borrowing from within and of Paris and London clubs in 2005 and 2006. More so,
outside the country if properly managed and channeled records from Debt Management Office (DMO) and

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National Bureau Statistics (NBS) in 2017 revealed that studied how public debt impact economic growth. The
Nigeria’s debt profile remained at about $66 billion as studies indicated a point above which debt become
at the fourth quarter in 2017; with the external debt and negative to growth of an economy. The second
domestic debt accounting for $15 billion and $51 category of past studies in Nigeria showed negative
billion respectively. Domestic borrowing has relationship. Studies by Kalu, Okai, Chukwu and
distortionary effects on the economy when excessively Amadi (2016) and Adofu and Abula (2010) revealed
done. The alarming rate of internal debt accumulation that public debt has a negative effect on economic
followed debt relief of 2006 has been a point of growth. The results showing negative relationship
concern; most especially the debt service problem. complement the Classical view that public debt
slowdown development. The third category in
Public expenditure funding using debt is often the literature sees debt as expansionary fiscal policy which
norm in Nigeria. Nigeria’s debt portfolio, just like the aid investment and produces positive growth as argued
case of many developing countries, has increased by the Keynesians. The Classical economists take a
without corresponding increase in GDP growth. much conservative stand on public borrowing unlike
Despite the government conscious effort in managing the Keynesians that are flexible toward it (Majumder,
the nation’s debt, the issue of debt has been a burden 2007). Therefore, increases in public spending
to the Nigerian economy with respect to her large debt stimulate the aggregate demand and employment
services payment and related obligations. Debt burden level.
has depressed investment and economic growth via
illiquidity and disincentive effects. Nigeria has been The conclusion that debt has inverse effect on an
experiencing resource underutilization, high level of economic growth, may inspire nations to see debt as
poverty and decay of infrastructures (Udo and Antai, bad and never to be acquire to argument budget deficit.
(2014); Kalu, Okai, Chukwu and Amadi, 2016). From the perspective of Keynesian, that sees debt as
According to Ijeoma (2003), debt inflict hard string on an injection into an economy to stimulate aggregate
the economy of a nation for a number of reasons; first, demand and employment level. Going by Cecchetti
the foreign debt could be large relative to what the and Mohanty and Zampolli, (2011) debt is two-edged
economy take and this leads to capital flight, disallow sword, it proper usage enhance economic growth up to
investments. Secondly, it could lead to debt burden a point before its retardation on growth. There is need
with its clear problems in underdeveloped economy. to investigate this point.
In all, external debt, just like capital flight, could create
unfavorable macroeconomic environment. Lastly, From the above, studies have clearly explored the
debt service payments absorb a major part of export linear effect of public debt on growth with little
earnings, GDP and other revenues that would have attention paid to non-linear specification as explained
been used to provide essential infrastructures to by the debt-laffer curve hypothesis. The study,
improve the general welfare of the masses. therefore, intends to investigate the amount of public
debt in Nigeria that justifies the intended purpose of
The civilian administration of Olusegun Obasanjo stimulating economic growth. The study leans on the
won the battle for debt relief and this became as an works of Ghosh, Kim, Mendoza, Ostry and Qureshi,
accepted aid because of its expected advantages. In (2011), Shiamptanis, (2015), and Vdovychenko
spite of debt relief received by Nigeria, the evidence (2016).
of rapid economic growth looks dicey (Bakare, 2010).
The effect of this relief which ought to be felt in 2. Literature Review
improved foreign exchange earns, investment and
economic growth is not in place. The output from The study by Igbodika, Jessie and Andabai,( 2016)
education, health and other sectors do not show examined relationship between domestic debt and
evidence of improved poverty status. In the light of economic growth in Nigeria using data covering
debt relief given to Nigeria, its total debt continues to (1987-2014). Ordinary Least Square (OLS) model was
increase. This could be ascribed to internal debt which used for the estimation. There is a positive significant
has been issue within the economy which the relationship between gross domestic debt and Gross
government did not take seriously. This brings another Domestic Product in Nigeria. The result indicates that
phase of government debt, which in itself might not be interest rate has negative significant relationship with
good for the nation. Gross Domestic Product in Nigeria. The coefficient of
determination indicates that about 68% of the
Public debt has been greatly researched in recent variations in gross domestic product can be explained
decades. There are three categories of arguments in the by changes in domestic debt variables in Nigeria.
literature. Balbir and Atr, (2017) and Adesola, (2019) Government should maintain a debt bank deposit ratio

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below 35 percent and resort to increase in the use of Olasode and Babatunde (2016) employed
tax revenue to finance its projects. Government should Autoregressive Distributed Lag (ADL) model to
divest itself of all projects which the private sector can capture the effect of externals debts on Nigerian
control and handle including refining crude oil and economy growth from 1984 to 2012. The existence of
transportation but should provide good environment long-run relationship between the variables was
for private sector investors to strengthen the growth. confirmed by the Johansen Co-integration test. The
result from the ordinary least squares method confirms
The effect of domestic debt payments on economic the existence of a dual behaviour as the lag of external
growth in Nigeria was examined by Ugwu (2017). debts has positive while external debts of present year
The data are estimated using ordinary least- square posed a negative effect on the performance of the
(OLS) method of multiple regressions. The finding economy. The funds acquired were better used for
shows that domestic debt has significant relationship productive projects compare to the subsequent year
with Gross Domestic Product in Nigeria. The GDP is where the funds were diverted to private pursed and
positive related to domestic debt. Also, there is brought negative impact on Nigerian economic
significant relationship between interest rate and debt growth.
service payment on Gross Domestic Product in
Nigeria but case of negative relationship is established Kalu, Okai, Chukwu and Amadi, (2016) examined the
between the two. A large proportion of gross domestic impact of Debt Service Payment (DSP) on economic
product can be explained by changes in domestic debt growth for the period 1981 to 2013 using empirical
variables. evidence from Nigeria. Description analytical tools
coupled with ordinary least square regression (OLS)
A study by Ijeoma, (2013) examined the impact of method and the Granger Causality Test were
debt on selected macroeconomic indicators in employed. DSP proved to be a positive and significant
Nigerian economy from 1980 to 2010. Empirical function of economic growth while the causality tests
analysis was done using Linear Regression. The study showed a bi-directional causality running for DSP to
found that Nigeria’s external debt stock has a GDP and feedback from GDP to DSP. This goes to
significant effect on her economic growth. It also show that Debt weight evidenced by the quantum of
revealed that there is a significant relationship between servicing payment by the government limits growth
Nigeria’s Debt service payment and her Gross Fixed Nigeria and other economies alike.
Capital Formation. To sustain the economy,
government should avoid borrowing as much as External debt, servicing and debt relief transmissions
possible however since developing countries need to in Nigeria was analyzed by Ekperiware and OladejI
borrow at one time or the other to supplement internal (2014) with using descriptive and structural VAR to
savings. Borrowing then should become an option trace out the structural effect of these variables in the
only when high priority projects are being considered Nigerian economy. Also, the study examined the 2005
and borrowed funds should be strictly monitored and external debt relief to Nigeria by the London Paris club
evaluated to ensure they are used for the purpose for through descriptive techniques to show how the relief
which they are borrowed and government should make was channeled down to other macroeconomic
policies that will promote industrialization which will variables in the economy. The descriptive analysis
in turn attract foreign direct investment. showed that soon after the debt relief, government
expenditure on health and Education improved. Also,
Ajayi and Oke (2012) analyzed the effect of the the position of the foreign exchange appreciated which
external debt burden on economic growth and cumulated to higher economics growth rate in Nigeria.
development of Nigeria. The finding revealed that Results from the structural VAR showed a
external debt burden had an adverse effect on the decomposed shock to exchange rate was absorbed by
nation income and per capital income of the nation. external debt and external debt service after itself. This
High level of external debt led to devaluation of the shows that external debt and debt servicing affects the
nation currency, increase in retrenchment of workers, country’s exchange rate. Decomposed shock from
continuous industrial strike and poor educational health and education outputs were strongly influenced
system. Based on the finding the study suggest that by external debt servicing. The study concluded that
debt service obligation should not be allowed to rise external debt is a crucial variable to developing
than foreign exchange earnings and that the loan countries and the trickle-down effect of its
contracted should be invested in profitable venture, components are felt in the Nigerian economy. The
which will generate a reasonable amount of money for authors therefore, recommend good policies to
debt servicing and debt repayment. effectively transmit the gains from external borrowing
to boost critical infrastructural deficit in the country.

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for analysis. The result revealed that domestic debt

Study by Adesola (2019) examined the implications of plays an important role in the growth process of
debt on economic growth in Nigeria. It discusses how Nigerian economy. The variance decomposition
public debts can be managed. The data for the analysis analysis revealed that federal governments of Nigeria
covers from 1990 to 2011 and Ordinary Least Squares bonds exert more pressure on the growth rate of gross
Method (OLS) model was used to analyze. The result domestic product in Nigeria. This was followed by
shows that the debt holding of government far above shocks received from treasury bonds, while
certain healthy threshold has negative effect on development stocks and interest rate contributed the
economic growth. The loan becomes debt crisis when least to shocks in gross domestic product. The findings
such it is mismanaged or not channeled to of the impulse response function in support of the
development-oriented project. The burdens of variance decomposition analysis showed that
principal and interest payments drain the nation economic growth responded positively to shocks in
resources and limit the possible expenditure on other federal government of Nigeria bonds and inversely to
productive resources. It can also lead to capital flight shocks in treasury bonds throughout the ten-year
and discourage private investment. Hence, the period. Meanwhile, the response of gross domestic
dramatic growth in the domestic debt /GDP ratio has product to shocks in development stocks and interest
raised many doubts about fiscal sustainability of the rate was unstable.
current economic policy.
Nazif (2014) investigated the causality between debt
Chiang and Moss, (2020) examined the empirical service payments and provision of social services in
issues concerning the structure and composition of Nigeria from 1980-2010. Ordinary Least Square
domestic debt and its impact on private investment in (OLS) technique was used for empirical analysis.
Nigeria. The study used multiple regression models Total social services spending by the federal
complied secondary data from 1970 to 2019. The government serve as dependent variable, while
result showed that domestic debt has a significant internal debt, external debt, debt service payments and
negative impact on domestic private investment in exchange rate as independent variables. The results
Nigeria. The domestic debt has a significant negative show a positive relationship between internal debt,
impact on foreign private investment in Nigeria with exchange rate and social services provision, while an
exchange rate and debt servicing having positive effect inverse relationship exist between external debt and
on foreign private investment in Nigeria. The study social service provision. Increase in domestic debt and
concluded that domestic debts if unchecked and not exchange rate led to increase in social infrastructural
well managed will crowds-out private investment in development which aid economic growth in the
the country. country.

Angela and Frida, (2016) investigated the influence of The effect of debt service payment on economic
the two components of public debt which comprises of growth using a time series data of 20 years (1996-
internal and external public debt burden on the 2015), was examined by Hope and Eugene (2016). To
economy growth in Nigeria using data which covered achieve the research objective data collected were
the periods from 1961 to 2013. The study employed analyzed using unit root, co-integrations and ordinary
both descriptive research design and Vector Error least square regression. The analysis result revealed a
Correction Estimation (VECM) to determining the significant long run relationship between real gross
impact of public debt accumulation on the long-run domestic product (RGDP) and external debt (EDEBT)
economic growth in Nigeria. The empirical results and debt service (DEBT) and an insignificant long run
from the study confirmed that public debt has a relationship between real gross domestic product
negative short-run and long-run impact on the (RGDP) and domestic debt (DDET). More so, the
Nigerian economic growth. The implication of this regression analysis results revealed that external debt
current finding is that an accumulation of public debts and debt servicing has a positive significant effect on
retards the growth of Nigerian economy. He suggests economic growth in Nigeria. Real gross domestic
that policy makers should always strive to ensure that product and external debt services exhibit the inelastic
debt-GDP ratio does not go beyond international ratio relationship which implies a change in external debt
for debt sustainability in Nigeria to ensure economic has little or no effect on RGDP.
growth.
With respect to private investment and domestic debt
Donatus and Mordecai (2016) examined the role in Nigeria, Obudah and Tombafa (2013) assessed the
domestic debt play on economic growth of Nigeria. effect of interest rate and domestic debt on private
They employed Vector Autoregressive (VAR) method equity investment growth in Nigeria covering the

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period 1987-2010. Co-integration technique, standard RGDPt = 1 + 2 INVt + 3 M 2t + 4OPNt + 5 LFt + 6 PUDt +  t
OLS and error correction methods were employed by 3
the authors. The study utilized domestic private equity The above model assumed a linear relationship
investment and borrowing. The parsimonious ECM between public debt and economic growth. RGDPt and
result indicated that the domestic debt and GDP had PUDt are Real Gross Domestic Product and Public
positive effect on equity investment in Nigeria while debt comprises domestic and external debt. INV is the
monetary policy rate showed a negative effect on gross domestic investment, M2 as money supply, OPN
equity investment in Nigeria. On the basis of the as index of openness and LF represents growth rate of
findings, the authors recommended further expansion the labour force.
in the stock of domestic debt in Nigeria but indicate
that the funds from the debt should be used for The linear model in equation 3, the coefficient of PUD
productive and avoid misappropriation. can either be negative or positive (because it does not
consider diminishing returns). In reality, on the basis
Investigating domestic debt crowding-out existence in of debt laffer curve hypothesis, as debt rises beyond
Nigeria, Apere (2014) studied the nonlinear effect of certain point, we expect diminishing return to set in.
public debt on private investment in Nigeria over the To depict this, equation 3 can be re-modified in a
period 1981-2912. He employed instrumental variable quadratic form or nonlinear form, as follows:
technique of estimation and bootstrapping approach
for the computation of normal standard errors for the
RGDPt = 1 + 2 INVt + 3M 2t + 4OPNt + 5 LFt + 6 PUDt + 7 PUDt 2 +  t
domestic and external debt turning points. The results 4
2
confirmed a linear and positive effect of domestic debt Here, PUDt represents public debt-squared which
on private investment in Nigeria. External debt, on the
other hand, showed a U-shape impact on private makes 6  0 and 7  0 . This indicates that unlike
investment, having it turning point at about 124.69 before it is expected that the response of growth to a
percent. Private consumption expenditure showed a change in debt to be positive when debt is zero (that is
negative impact on private investment. 6  0 ). Also, to achieve diminishing returns, the
3. Methodology marginal effect of change in debt must decline as
public debt rises (that is, 7  0 ). It implies that
Model Specification public debt increases growth at lower levels and when
it reaches higher levels, negative impact on growth
The baseline model of the study is anchored on prevails (Balbir and Atri, 2012).
production function which is specified in this form:
Yt = f ( X t , PUDt ) 1 To evaluate the impact of public debt on economic
The function is augmented with public debt as input, growth in Nigeria with or without domestic
showing government borrows both home and abroad investment, the study followed the works of Partillo et
to stimulate consumption and investment so as to al., (2011); Abbas and Christensen, (2017) which
promote economic growth. More so, equation 1 is estimated debt-growth model with and without
expressed in an explicit form as: investment variable under the nonlinearity
Yt = 1 +  X t +  PUDt +  t 2
assumptions as follows;
RGDPt = 1 +  2 INVt + 3OPNt +  4 LFt + 5 INFt + 6 DeFt +
The standard debt-cum growth model in equation 2 is
adapted following the work of Partillo, Poirson and 7 PUDt + 8 PUDt 2 +  t
Ricci (2011); Balbir and Atri (2014) and many others 5
who also used the same to examine the non-linear and
impact of public debt on growth.
Where Yt represents the real gross domestic product
RGDPt = 1 +  2 INVt + 3OPNt +  4 LFt + 5 INFt + 6 DeFt +
(RGDP), Xt stands for set of explanatory variables 7 PUDt + 8 PUDt 2 +  t ( INV = 0)
(like domestic investment, money supply, openness,
growth rate of labour force, population),  and  are
6
Where in equation 5 and 6, 𝛽2 > 0, 𝛽3 > 0, 𝛽4 >
slope coefficient,  t is the error term which is
0, 𝛽5 < 0, 𝛽6 < 0, 𝛽7 > 0⬚ , 𝛽8 < 0 𝑎𝑛𝑑 8 <


assumed to iid (0,  ) . Specifically, the study

2
0 . It is also expected that 8 > 𝛽8 significantly.

adopted Partillo et al., (2011) which specified debt-
growth model in the form; The study restricts domestic investment in equation (6)
by equating INV= 0. This is to depict the importance

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of public debt when it is devoted to viable domestic sample and dynamic source of bias. Also, as a single
investment and when it is not. Unlike the past studies equation estimation approach, it corrects for possible
identified above alters the original nonlinear model by endogeneity in the model by using lead and lags.
incorporating variables like inflation (INF) and budget DOLS provides robust results when compared to other
deficit (DEF). techniques such as OLS and Maximum Likelihood
approach (Stock and Watson, 1983).
For modeling perspective, exclusion of INV in To employ DOLS on the model in equation 7, we
equation (6) will bring about a change in magnitude of simply regress RGDP on the explanatory variables in
8 , the study restrict investment where actually its the model, leads and lag of these variables are first
differences and constant term using Ordinary Least
coefficient may not be zero (Nazif, I. A. (2014). Square (Gunduz, 2017).
p
Estimation Technique Yt =  0 +  X + d
j =− q
j X t − j + t
The study employs a technique of Dynamic Ordinary
7
Least Square (DOLS) to actualize the research
Where Yt is dependent variable proxy for RGDP in this
objective. The non-linear effect of debt on economic
growth will also be captured using Dynamic Least study, X is a matrix of explanatory variables, stand

Square (DOLS) method on quadratic model in for co-integrating vector indicating long run
equations 4, 5 and 6. The DOLS works on the cumulative multiplier, p is lead and q is the lag. Lag
assumption that there is co-integration relationship and lead in DOLS regression work to make its
among the variables of interest. It has some special and stochastic error term independent of all past shocks in
attractive features. It has the ability to copy with small stochastic regressor (Gunduz, 2017).

Data Description and Measurement of Data

Table 1: Description of Variables and Sources

Variables Symbol Description And Measurement Sources
Real Gross Domestic Product RGDP This measures the production capacity of the economy. It indicates
the overall wellbeing of a nation.

Public debt PUD This comprises of domestic and external outstanding loan acquired
the by central government in Nigeria. Central of Nigeria (CBN)
Investment INV Investment is proxy by the gross fixed capital formation, express by Statistical Bulletin, 2022
as the ratio for real GDP
Openness OPN It stands for transfer of knowledge and efficient gains that measures
the level of economy competitiveness. It is a sum of export and
import of a nation express as a ratio of GDP
Inflation INF It is the measure of the consumer price index (CPI). It is the
percentage change of price index over time.
Budget deficit Def This measures as the balance of receipt over expenditure and
expressed as a ratio of RGDP

Labour force POP The economically active of the population between ages of 15-65. World Development
Indicator (WDI)

4. Results and Analysis

Time Series Nature of the Data

In the use of regression analysis, non-stationary time series data posed some challenges. To prevent the outcome of
spurious regression, unit root testing was performed on all the variables used in this study to determine their
stationarity properties. From Table 2, it was observed that LRGDP, LINV, LM2, public debt and public debt square
(PUD and PUD2) were stationary at first difference I(1) using Augmented Dickey – Fuller test and Phillip Perron test.
Trade openness (OPN) was stationary at first different using Phillip Perron test. Since the application of DOLS
requires our variable to be I(1), I(0) or the combination of the I(1) and I(0). The series are all I(1), thus, DOLS was
used.
Table 2: Unit Root Test results

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ADF PP
Variables Levels First Difference Status Levels First Difference Status
LRGDP 0.032145 -3.339751 I(1) 0.857782 -3.179804 I(1)
0.9553 0.0205 0.9937 0.0298
LINV 1.494421 -5.473272 I(1) -1.49442 -5.462625 I(1)
0.5250 0.0001 0.5250 0.0001
PUD 2.380352 -4.243958 I(1) 2.192748 4.25075 I(1)
0.1542 0.0020 0.2123 0.0020
PUD2 -2.28035 -4.243958 I(1) -2.19275 4.25075 I(1)
0.1542 0.0020 0.2123 0.0020
LM2 -1.47462 -2.526489 I(1) -0.55166 -3.043854 I(1)
0.5333 0.1186 0.8690 0.0.405
LPOP 1.428992 0.255323 I(1) 1.733415 0.255323 I(1)
0.9987 0.9723 0.9995 0.9723
OPN -1.83678 -1.947480 I(1) -1.92813 -5.894548 I(1)
0.3576 0.3072 0.3162 0.0000
Source: Author’s computation
Note “*” means significance at 5% level, ADF= Augmented Dickey – Fuller test, PP = Phillip Perron test. The automatic maximum
lag length based on Schwarz information criterion was used.

Cointegration Test

The results of the unrestricted cointegration rank tests (Trace and Max-Eigen) for the data series used in this study
were presented in the Table 3 below. The relevance of the cointegration test statistic is very imperative as; first, it is
used to verify if there exists at least one (linear), or nonlinear as the case may be, long run relationship among the
variables in the model. More so, it guides on the technique(s) of analysis to be used. Both the Trace and Max-Eigen
statistics reported here indicated the existence of at least six cointegraion and five cointegrating vectors among the
variable in the study at 5% level of significance. Thus, this shows that there exists long run relationship among the
economic growth, public debt, domestic investment and other variable used in this study in Nigeria. The correlation
indices also showed this collaboration when correlation coefficients recorded high values for these variables. All these
supported the use of Dynamic Ordinary Least Squares (DOLS) model in equation 7 of this work. Therefore, DOLS
was applied within the framework of cointegrating vector existing among the variables to produce robust results.

Table 3: Unrestricted Cointegration Rank Test (Trace)

Hypothesized Max-Eigen 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.800195 56.36451 46.23142 0.0031

At most 1 * 0.780079 53.00707 40.07757 0.0011
At most 2 * 0.650329 36.77671 33.87687 0.0219
At most 3 0.483543 23.12674 27.58434 0.1681
At most 4 0.429961 19.67178 21.13162 0.0790
At most 5 0.196600 7.661570 14.26460 0.4141

At most 6 0.148917 5.643589 3.841466 0.0175

Max-eigenvalue test indicates 3 cointegratingeqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Table 4: Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

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Hypothesized Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.800195 56.36451 46.23142 0.0031

At most 1 * 0.780079 53.00707 40.07757 0.0011
At most 2 * 0.650329 36.77671 33.87687 0.0219
At most 3 0.483543 23.12674 27.58434 0.1681
At most 4 0.429961 19.67178 21.13162 0.0790
At most 5 0.196600 7.661570 14.26460 0.4141
At most 6 0.148917 5.643589 3.841466 0.0175

Max-eigenvalue test indicates 3 cointegratingeqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Investment as a Channel by which Public Debt Affect Economic Growth in Nigeria

The results of estimation of debt growth-model in equations 5 and 6 are reported below. This represents information
on the role of domestic investment as a line between public debt and economic growth.

Table 5: Effect of Public Debt on Economic Growth with Investment in Nigeria

Dependent Variable: LRGDP Regression Result of equation (5)
Method: Dynamic Ordinary Least Square (DOLS)
Variables Coefficient Std. Error t-Statistic Prob.
LINV 0.267703 0.072383 3.698429 0.0343
LOPN -0.086831 0.188362 -0.460982 0.6762
LPOP -6.524537 6.337844 -1.029457 0.3790
DEF -0.028737 0.014565 -1.972997 0.1430
INF 0.000870 0.001177 0.739089 0.5134
PUD 0.686015 1.572305 4.371516 0.0221
PUD2 -0.131455 0.049241 -2.669612 0.0757
R2 = 0.999896 R2 Adjusted = 0.998860
Source: Author’s Computation

Table 6: Effect of Public Debt on Economic Growth without Investment in Nigeria

Dependent Variable: LRGDP Regression Results of equation (6)
Method: Dynamic Ordinary Least Square (DOLS)
Variables Coefficient Std. Error t-Statistic Prob.
LOPN -0.074886 0.079312 -0.944202 0.3765
LPOP 12.68531 2.386387 5.315699 0.0011
DEF -0.074656 0.007427 -10.05244 0.0000
INF 0.004378 0.000746 5.872242 0.0006
PUD 0.533405 1.431305 3.521865 0.0005
PUD2 -0.228847 0.037518 -6.099729 0.0015
R2 = 0.999745 R2 Adjusted = 0.998797
Source: Author’s Computation

It is important to clarify the behavior of public debt or domestic investment. This is because the least squares
to consider its effect on domestic investment and thus estimates remained unbiased as the impact of the
on economic growth. From tables 5 and 4.6, the levels of high public debt square did not produce
estimation of public debt square from the model with significant difference on the growth when domestic
domestic investment (model 5) is not significantly investment is added and removed from the models
different from that of the model 6 which excludes (Gunduz, 2017). The result otherwise means there is
domestic investment. Public debt and public debt need for efficient and quality domestic investment
square with domestic investment can only explains rather than the volume of investment in Nigeria to
0.69 and -0.13 growth Nigeria economy respectively ensure economic growth via public debt acquisition.
while without domestic investment it explains 0.50
and -0.229 growth of an economy. This implies that Keynes view of public debt states that a large public
only small proportion of the public debt goes into debt is not a burden on an economy but national asset.

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He asserted that the rise in public debt would raise the Babatunde, (2016) and Abbas and Christenen (2017)
national production through multiplier effect. He which validate the expectation that trade openness
linked public borrowing with deficit financing and contributes positively to growth.
authorized government to borrow for all reasons in
order to enhanced job opportunity and production. The inflation coefficients are positive but
Consumption borrowing was as desirable as insignificant. This conforms to the findings by
borrowing for investment because consumption Igbodika, Jessie and Andabai, (2016) and Abbas and
expenditure induced investment to rise. The study Christensen (2017) that empirically supported that low
findings are in line with Keynes’s perspective of inflation is a pre-condition for growth. Most of these
investment as a means of stimulating economic growth findings often obtained the relationship between
via public debt. Nigeria government is needed to put growth and inflation at insignificant levels.
public debt on productive activities.
5. Conclusion
The above result is consistent with the findings by
Abbas and Christensen (2017) on the domestic debt It has been demonstrated that the nonlinear
market in LICs and in developing countries and relationship between debt and economic growth is a
Pattillo et al. (2002) on the external debt in developing reality. Even, when debt is still contributing to
countries. The studies revealed that the results of the economic growth such country should maintain the
specification with and without investment as a control optimal level of public debt. Hence, excessive debt
variable were not particularly difference from each acquisition will automatically translate to negative
other in their respective studies. According to them, growth and reduce investment. Furthermore, the study
this thus indicated that the channel of influence of debt concludes that public debt in Nigeria retards economic
in developing countries is through efficiency of growth through reduction in the level of investment.
investment that works through total factor productivity This thus indicates the possibility that the current
rather than the volume or the level of investment in levels of public debt in the country might not have
those countries. been reducing the volume of growth but have the
tendency to create a poorer macroeconomic and
The outcome produces result that explains that uncertain climate for investment and consequently,
inclusion of both public debt and investment in the impact long-term growth negatively. It is therefore
growth model relies on investment effectiveness rather suggested that attention should shifted to factors than
than the level of domestic investment. This implies reduce and make domestic investment inefficient in
that in the midst of high debt level, efficiency of the country. There should be big push investment into
investment tends to be retarded. This emanates from all sectors that serve as engine of growth to the nation.
some thought in the literature that tend to provides Whenever public debt is acquired, domestic
more possible explanation for the existence of debt investment must be given priority.
overhang in developing nations. Debt overhang posits
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