Domestic Debt and the Nigerian Economy

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Domestic Debt and the Nigerian Economy
BEN MORDECAI DADDY, Member, Student (University), Nigeria

The federal government of Nigeria has over the years accumulated enormous amount of domestic debt for development purposes. This however has the tendency of crowding out private sector investment in the economy due to high interest payments that results from government borrowing in the capital market as shortages of loanable funds is created. Hence, the end result will be smaller total output in the economy.

One viable option for the government to continue financing projects in order to grow the economy is by issuing debt instruments. A review of Nigeria’s domestic debt profile shows that it has been on the increase over the years. However, with the debt increasing at an alarming rate, no rapid economic growth has been recorded. We examined the impact of domestic debt on the Nigerian economy over the period of 29 years i.e. 1986-2014 employing annual time series data and Used the OLS technique. We found that domestic debt is significant and positively related to RGDP, while interest rate has an indirect and significant relationship with RGDP. The findings agree with Onyeiwu (2012) who found that domestic debt through interest rate, portends a crowding-out effect on private investment which reduces aggregate demand of the economy and hence, output. Hence, keeping the rate of interest low accompanied with less debt burden will help secure a sustainable economic growth in the economy.

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