Public debt and growth in sub-Saharan Africa: Evidence from Nigeria

Christine Makanza and Princewill U. Okwoche
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Princewill U. Okwoche: School of Economics, University of Cape Town

No 2023-01, School of Economics Macroeconomic Discussion Paper Series from School of Economics, University of Cape Town

Abstract: This study examines the relationship between public debt and growth in Nigeria and extends the literature in two unique ways. First, whereas previous studies focusing on Nigeria have mainly assumed a linear debt-growth relationship, this study examines the non-linear threshold effects of the debt. Second, instead of focusing only on external debt as in previous studies, this study employs the total debt measure along with the individual components of debt given the historical importance of both the external and domestic debt in Nigeria. Empirical analyses are carried out using annual time series data sourced from the Central Bank of Nigeria and the World Development Indicators covering the period 1970-2017. Evidence strongly confirms the presence of a nonlinear debt-growth nexus for Nigeria similar to what is widely reported in the literature. This suggests that debt may be good for growth up to a certain threshold beyond which it becomes a drag on growth. Evidence from the Sasabuchi-Lind-Mehlum test for U-shape presents a threshold estimate of 56% for total public debt and 88% for external debt. We could not pinpoint a nonlinear and threshold effect for domestic debt. Rather, the evidence points to a linear negative effect of domestic debt on growth. Policy recommendations based upon these findings are discussed.

Date: 2023
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