The Effect of Public Debt on Economic Growth in Nigeria

Chapter One

1.1 Background of the Study
Public debt has become a major concern for many developing economies. Governments often borrow to finance infrastructure, stimulate growth, and support fiscal stability. However, excessive debt accumulation can lead to economic challenges. In Nigeria, both domestic and external debts have grown significantly over the past two decades (Debt Management Office, 2024).

Ideally, moderate borrowing can stimulate economic development if funds are invested productively. However, when borrowed funds are mismanaged or used for consumption, debt servicing becomes a burden. Consequently, rising debt levels reduce funds available for social and economic projects. Furthermore, high debt servicing costs can crowd out investment and hinder growth.

In recent years, Nigeria’s debt sustainability has raised public concern. Although borrowing has financed key projects, repayment obligations continue to increase. Therefore, understanding how public debt affects economic growth is vital for sound fiscal management.

1.2 Statement of the Problem
Nigeria’s public debt profile has increased rapidly in recent years. Although the government argues that borrowing is necessary for development, the economy still struggles with low growth and weak revenue. Moreover, heavy debt servicing limits spending on education, healthcare, and infrastructure. Therefore, it is necessary to examine the actual effect of public debt on economic growth.

1.3 Objectives of the Study
The main objective is to analyze the effect of public debt on economic growth in Nigeria.
Specific objectives are to:

1. Examine the trend of Nigeria’s public debt.

2. Assess the relationship between public debt and GDP growth.

3. Identify the implications of debt servicing for economic development.

1.4 Research Questions

1. What is the trend of public debt in Nigeria?

2. How does public debt influence economic growth?

3. What are the consequences of rising debt servicing?

1.5 Significance of the Study
This study is significant because it provides insights into the sustainability of Nigeria’s borrowing practices. Furthermore, it guides policymakers in managing debt more effectively. In addition, it contributes to economic literature on the relationship between public finance and development.

1.6 Scope of the Study
The research covers Nigeria between 2000 and 2024. It considers both domestic and external debts as well as their impact on GDP.

1.7 Definition of Terms

• Public Debt: The total amount of money owed by a government to domestic and foreign creditors.

• Economic Growth: The sustained increase in a nation’s output of goods and services.

• Debt Servicing: The payment of interest and principal on borrowed funds.