Does public debt disrupt economic growth in Nigeria? A two-stage least squares approach

The impact of Nigeria's public debt on economic growth was investigated in this study. Additionally, it confirmed the validity of Nigeria's debt burden and crowding-out hypotheses. The time series data used ranged from 1981 to 2021. For analysis, the Two-Stage Least Squares and Toda Yamamoto Causality tests were employed. The findings contradicted the debt overhang effect hypothesis by showing that public debt had a positive and significant influence on economic growth. This proves that Nigeria's public debt has no adverse effects on the economic growth of the nation. Additionally, debt service has a detrimental effect on economic growth. This demonstrated that the crowding-out effect, often known as the crowding-out hypothesis, existed in Nigeria. Thus, servicing the national debt has a negative impact on Nigeria's economic expansion. The results of the public debt model, however, showed that trade openness and real gross domestic product had a favourable effect on public debt. A bidirectional relationship between public debt and economic growth was revealed by the findings of the causality test. The results also showed a one-way relationship between debt service and economic growth. As a result, the study implies that the government can simultaneously pursue its two policy goals of economic growth and public debt. Furthermore, decisions about debt repayment in Nigeria should be made in a way that promotes the growth of the economy. Nigeria should also improve institutional performance and boost its macroeconomic policy in the areas of inflation, foreign direct investment, trade, and exchange rates.