An Empirical Analysis of the Impact of Public Debt on Economic Growth: Evidence from Nigeria 1975-2005

Abstract

This paper focuses on the impact of public debt on economic growth using Nigeria as a case study. An analysis of the long-run relationship and impact of debt from the perspective of the value impact and proportional impact was done. The value impact variables used herein include the external debt value, domestic debt value, total debt value and budget deficit figures. The proportional impact variables are ratios of the value impact to the gross domestic product (GDP). An augmented Cobb Douglas model was used and subsequently a dynamic version of the functional relationship was estimated using Co-integration technique to capture the long-run impact of debt variables on economic growth. 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. In the study, the speed at which the short-run equation converges to equilibrium in the long-run as shown by the Error Correction Mechanism coefficient was found to be slow. The conclusion from this study is that though in the short-run the impact of borrowed fund on the Nigerian economy was positive, the impact of debt in the long-run depressed economic growth as a result of incompetent debt management. Key words: