Title: Asymmetric impact of public debt on economic growth of Nigeria

Abstract

Debt overhang is crowding-out private investment and limiting government’s ability to invest in critical infrastructure that supports poverty reduction and inclusive growth in Nigeria. The effect of public debt on economic growth has been extensively analysed by a variety of studies, but the empirical evidence more often than not remains controversial and ambiguous. One common hypothesis of previous studies is that they have assumed that the effect of public borrowing on growth is symmetric. The main purpose of this study is to investigate the asymmetric impact of government debt on economic growth in Nigeria for the period 1980 to 2018 using the Nonlinear Autoregressive Distributed Lag approach. The co-integration test established a long-run nonlinear relationship between economic growth and the indicators of public debt. The findings indicate an asymmetric relationship between inflation rate and economic growth while external debt and debt service payment showed significant evidence of a linear relationship with growth both in the long and short-run. The outcome of the analysis show that an increase in the general price level significantly impedes growth, whereas a decrease in price level inhibits growth in the long-run but motivates growth in the short-run. Positive and negative changes in the stock of external debt indicate the same effects of promoting growth in the long and short-run, while positive and negative changes in debt service payment confirmed the same effect of suppressing growth. Domestic debt had a linear long-run effect on growth but an inverted short-run effect, whereas foreign reserve holding had an asymmetric long run effect and a symmetric short-run effect on growth. Positive and negative changes in domestic borrowing hinder growth in the long and short run whereas an increase in the stock of external reserves stimulated long and short run growth. To mitigate the negative effects of unsustainable public debt, the study advocated for fiscal reforms that effectively reduce deficit financing, improve domestic revenue generation, and infrastructure spending, as well as strong corporate governance and institutions.