An Analysis of the Effect of Public Debt on Economic Performance in Nigeria
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Background of the Study
Public debt is a critical aspect of fiscal policy that influences economic stability and growth. In Nigeria, public debt has increasingly become a tool for financing budget deficits and developmental projects. Over the period from 2023 to 2025, the government has relied on both domestic and external borrowing to finance infrastructural development, social programs, and economic reforms. While borrowing can stimulate growth by mobilizing additional resources, it also poses risks such as higher debt servicing costs and potential crowding out of private investment (Ibrahim, 2023). The debate centers on whether the benefits of increased public debt outweigh its potential negative effects on macroeconomic performance. Proponents argue that strategic borrowing, when coupled with sound fiscal management, can boost economic growth and enhance public service delivery. In contrast, critics point to the risks of unsustainable debt levels, fiscal indiscipline, and the long-term burden on future generations (Adekunle, 2024).
The background of this study examines the evolution of Nigeria’s public debt profile, its composition, and its relationship with key economic indicators such as GDP growth, inflation, and employment. Recent initiatives have focused on debt restructuring, improved borrowing strategies, and tighter fiscal controls to manage debt levels more effectively. However, the impact of these measures remains a subject of debate. Empirical research suggests that while moderate levels of debt may contribute to growth, excessive borrowing can lead to economic instability and constrain fiscal flexibility. This study aims to provide a comprehensive analysis of the effect of public debt on Nigeria’s economic performance, considering both the opportunities for development and the inherent risks associated with high debt levels.
Statement of the Problem
Despite efforts to manage public debt prudently, Nigeria faces persistent challenges related to the sustainability and effectiveness of its borrowing practices. Excessive reliance on debt financing has raised concerns about the long-term implications for economic growth and fiscal stability (Olu, 2024). The primary problem is that while public debt is intended to bridge fiscal gaps and finance critical investments, mismanagement and inefficient utilization of borrowed funds have resulted in suboptimal economic outcomes. Rising debt servicing costs have strained the national budget, reducing the fiscal space available for essential public services and infrastructure projects. Additionally, there is evidence that debt-funded projects do not always translate into commensurate economic growth due to issues such as corruption, poor planning, and execution inefficiencies (Nwankwo, 2023). Furthermore, external shocks such as fluctuations in global interest rates and oil price volatility further complicate debt management. These challenges highlight the need for a detailed examination of how public debt affects economic performance in Nigeria, and whether current borrowing strategies are sustainable in the long run.
Objectives of the Study
- To evaluate the relationship between public debt and key economic performance indicators in Nigeria.
- To identify the challenges in managing and utilizing public debt effectively.
- To propose policy measures to ensure sustainable debt management and optimal economic outcomes.
Research Questions
- How does public debt influence economic growth, inflation, and employment in Nigeria?
- What are the major challenges in the effective management of public debt?
- Which policy interventions can improve the sustainability of Nigeria’s debt strategy?
Research Hypotheses
- H1: Increased public debt is inversely related to economic growth in Nigeria.
- H2: Inefficient debt management practices contribute to fiscal instability.
- H3: Implementation of rigorous debt management reforms improves economic performance.
Scope and Limitations of the Study
The study focuses on the period 2023–2025, analyzing public debt data alongside key economic indicators. Data sources include government financial reports, international financial institution records, and scholarly analyses. Limitations include the potential impact of external economic shocks and the difficulty of isolating debt effects from other macroeconomic variables.
Definitions of Terms
– Public Debt: The total amount of money borrowed by the government to finance public expenditures.
– Economic Performance: Indicators such as GDP growth, inflation, and employment levels that reflect the overall health of an economy.
– Debt Servicing: The process of repaying principal and interest on borrowed funds.
– Fiscal Space: The budgetary room that allows a government to provide public services without compromising fiscal sustainability.
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