Public Debt and Economic Growth in Nigeria: Nonlinear Dynamics and Optimal Threshold Analysis

Abstract

Public debt has been generally described as one of the major indicators of the macroeconomic variables that form the image of countries in the international markets. The growth of the economy is often believed to be driven by labour and capital inputs, with an element of technological progress. With the increase in Nigeria’s fiscal deficits and high debt servicing costs, public debts may increase over the medium term. This paper explored the non-linear effect of public debt on the growth of the Nigerian economy from 1981 to 2022. The inspiration for the paper hinged on the rising debt/GDP ratio recorded in Nigeria in recent times, which points to an impending greater debt burden on the economy. In executing this study, the autoregressive distributed lag (ARDL) model and the threshold regression analysis were employed in the analysis. Findings from the analysis indicated there is a non-linear relationship between debt and economic growth, and established a debt/GDP threshold level of 26.85% and the debt-revenue threshold level of 22.86%. It has been established that above this threshold level, public debt has a negative and significant effect on growth, while below the threshold level, debt is growth-enhancing. It therefore follows that the government must not exceed this threshold level to avoid an unbearable burden on the economy. It is recommended that the government take urgent action to meet the fiscal consolidation and public debt reduction imperatives by implementing comprehensive reforms that target both revenue and expenditure.