The Threshold Effect of Domestic Public Borrowing on the Nigerian Economy

Abstract

TLike many other developing countries, the Nigerian government has increased domestic borrowing recently. This study examines the nonlinear relationship between domestic borrowing and economic growth, covering 1980 and 2019. The study adopts the threshold regression approach to establish the switching point between domestic borrowing and economic growth in Nigeria. The results reveal that the domestic borrowing and economic growth threshold is 14.88% of GDP with an inverted U-shaped curve. The maximum turning point of the variables implies the application of the debt Laffer Curve in Nigeria, showing that domestic borrowing is favourable to the economy before the threshold. However, additional domestic borrowing after the threshold induces an adverse effect on the economy. Also, the regression results of the non-varying threshold measures show that while the effect of external debt has been positive and significant on economic growth, gross fixed capital formation and inflation were negative and significant. Therefore, while recommending more rigorous monitoring and efficient utilisation of domestic borrowed funds by the government, the study emphasises the application of the threshold of 14.88% of GDP on domestic borrowing in the country.