Samson Ogege

Department of Finance, Veritas University, Abuja


Jonathan E. Ekpudu

 Department of Business Administration, Salem University, Lokoja



  This paper sets out to examine the impact of debt burden on the Nigerian economy. It specifically seeks to ascertain the effect of debt burden on the growth of the Nigerian economy. Nigeria’s data set from the CBN Statistical Bulletin volume 18, (2007) during the period 1970-2007 was used. It employs the ordinary least squares (OLS) to test the relationship between debt burden and the growth in the Nigerian economy. The finding shows that there is a negative relationship between debt stock (internal and external debt) and gross domestic product, meaning that an increase in debt stock will lead to reduction on the growth rate of Nigerian economy. Based on the above finding, it is recommended that the nation should avoid both external and internal borrowing in other to avoid huge debt problem.


Keywords: Debt, economy, growth, gross domestic product




The act of borrowing creates debt, debt, therefore, refers to the resources of money in use in an organization which is not contributed by its owners and does not in any other way belong to them. It is a liability represented by a financial instrument of other formal equivalent. Public debts are debt incurred by government through borrowing in the domestic and international markets in order to finance domestic investment. Therefore, the national debt is seen as all claims against the government held by the private sector of the economy, or by foreigners, whether interest-bearing or not (and including bank held debt and government currency, if any); less any claims held by the government against the private sector and foreigners. In the same vein, public debt burden refers to the economic hardship which the public debt imposes. The hardship may take the form of waste of productive efficiency (misdirection of production) for the economy as a whole or undesirable economic burdens imposed upon particular classes. One concept of burden pertains to the current amount of goods and services which the private sector forgoes in order to enable the burden relate to the amount of goods and services forgone by the people during their lifetimes (Anyanwu, 1993). The debt burden in Nigeria has resulted in various distortions in the macro-economy. Essentially, these distortions are structural in nature, and affect the level of per capita incomes and are instrumental to the rising poverty in the country. The latter has become the attention of various authors and Nigerian economic planners. The various points of view are all agreed that the Africa condition in general and Nigeria in particular has now deteriorated to an economic and political catastrophe (Nzotta, 2004). Thus, the major objective of this paper is to assess the extent of debt burden on Nigerian economy from 1970- 2007. A regression analysis is used to show if there is any relationship between debt burden and economic growth of the nation. Though, many authors have written on this subject matter, however their emphasis is on external debt and economic growth. But this work looks at both external and internal debt which we refer to as debt stock (DSK)





Nigeria’s debt and Nigerian economy

Debt management office

Nigeria's External Debt Stock as at 30th June 2010 (In Millions of USD)


Principal Balance


Principal Arrears


Interest Arrears







World Bank Group


























African Development Bank Group







































































Domestic debt




Amounts in naira









Treasury bonds



Development stocts



Promisory note









Source: DMO databank (2010) Abuja, Nigeria



Note:  The decrease in current debt stock compared to that of 31.03.2010 is as a result of Loan Repayments despite additional disbursements on existing loans.



Nigeria received a debt-restructuring deal from the Paris Club and a $1 billion credit from the IMF, both contingents on economic reforms. Nigeria pulled out of its IMF program in April 2002, after failing to meet spending and exchange rate targets, making it ineligible for additional debt forgiveness from the Paris Club. In 2003, the government began deregulating fuel prices, announced the privatization of the country's four oil refineries, and instituted the National Economic Empowerment Development Strategy, a domestically designed and run program modeled on the IMF's Poverty Reduction and Growth Facility for fiscal and monetary management. In November 2005, Abuja won Paris Club approval for a debt-relief deal that eliminated $18 billion of debt in exchange for $12 billion in payments - a total package worth $30 billion of Nigeria's total $37 billion external debt. The deal requires Nigeria to be subject to stringent IMF reviews. Based largely on increased oil exports and high global crude prices, GDP rose strongly in 2007 and 2008, and less strongly in 2009.  (DMO, 2010)


Theoretical framework

Debt cum – growth model:

The first stand of thought in the debtcum – growth theory is the substituting school of thought. It considers external debt as a substitute for domestic savings and investment and therefore domestic savings and investment are crowded out as a result (Krugman, 1988; Alesina & Tabellini, 1990; Tornell & Velusco 1992). The thinking is that the returns from investing in a country are seen as being subjected to a high marginal tax by creditors and this may discourage domestic and foreign investors. This is the familiar debt overhang theory. It is also argued that foreign savings may be used for consumption rather than for investment. However, studies by Cohen and Sachs (1986) and Cohen (1992) present endogenous growth models where capital accumulation is the driving force for growth (Nyong, 2005).


Threshold school of thought (debt - latter curvethesis)

The burden of external debt is the concern of threshold school of thought which emphasizes the non-linear relationship between debt and growth (Calvo, 1998). It links debt and growth to problem of capital flight where at high debt levels growth falls. According to the threshold theory, the fall in growth is due to the higher distortionary tax burden on capital required to service the debt. It leads to lower rate of return on capital, lower investment and hence lower growth. It maintains that low debt regimes have higher growth rate and lower strand of thought in the debt – growth nexus sees external debt as capital inflow with positive effect on domestic savings and investment and thus on growth which leads to poverty reduction via appropriate targeting of domestic savings and investment (Calvo, 1998) .


 Nigeria's external and domestic debt

External debts

Nigeria’s external indebtedness dates back to pre-independence period, the quantum of the debt was small until 1978. The debts incurred before 1978 were mainly long-term loans from multilateral and official sources such as the World Bank and the country’s major trading partners. The debts were not much of a burden on the economy because the loans were obtained on soft terms. Moreover, the country had abundant revenue receipts from oil, especially during the oil boom of 1973-1976.

The total external debt outstanding as at 31st December 2004 stood at US$35.94 billion as against US$32.92 billion in December 2003, indicating an increase of US$3.03 billion or 9.20 percent.

As was the case in the year 2003, the increase in the debt stock was largely as a result of the interest component of additional payment arrears that accumulated, and continued depreciation of the US dollar against other currencies in which the debts were denominated. The additional interest of US$1.54 billion was made up of contractual interest of US$1.30 billion and late/penalty interest of US$0.233 billion, while the increase due to the effect of the depreciation of the US dollar was approximately US$1.49 billion. A further breakdown of the total debt outstanding showed that the principal balance was US$30.29 billion; principal arrears amounted to US$1.94 billion, interest arrears and late interest were US$3.36 billion and US$0.357 billion respectively. The increase in the external debt stock was due primarily to arrears that were incurred as a result of non-servicing of the non-ODA (non-official development assistance) bilateral debt: arrears on this debt accounted for 96.6 percent of total arrears.

Domestic debts
Domestic debt is defined as debt denominated in local currency. The management of domestic debt in Nigeria has hitherto been conducted by the Central Bank of Nigeria (CBN) through the issuance of government debt instruments.

Ways and means advances

It is important to note that the above does not include contractor debts and supplier credit owed by the government, which is estimated at about N650 billion. Neither does it include contingent liabilities, which are loans guaranteed by the Federal Government, nor inter-agency debt.

In the year 2004, the Debt Management Office (DMO) made plans to build on the success of the 1st FGN Bonds floatation that were first issued in 2003. The DMO embarked on the arrangements to commence the issuance of bonds on a regular basis in small tranches that the market could accommodate. The DMO commenced the smoothening and restructuring of the Treasury Bills in 2004. The restructuring entailed extending the maturities of the existing Treasury Bills by issuing tenors of 6, 12, 24, and 36 months, to refinance part of the existing 91-day Treasury Bills

Debt servicing
The total external debt service payment for the year 2004 was US$1.75 billion compared to US$1.81 billion in 2003, reflecting a decrease of US$0.054 billion or 3.01 percent. The external debt service payments of US$1.75 billion comprised of principal repayments of US$1.17 billion, and interest payments and commitment charges of US$0.589 billion. This arises from the fact that Nigeria has not fully serviced its Paris Club debts, as an amount of US$2.23 billion was due while only US$0.99 billion was paid. The shortfall transforms into arrears and attracts severe penalty interest. This very process has contributed to the explosion in Nigeria’s external debt stock over the years. (DMO, 2010)


The paper attempts to assess the impact of debt burden on economic growth and development. The knowledge of economic theory suggests that a critical factor in assessment of economic growth is the Gross Domestic Product (GDP). However, our model shall contain Gross Domestic Product as the dependent variable, while

Foreign reserve, debt stock, investment, debt service payment, import and export are the explanatory variables.



GDP = F( FR, DSK, FRINV,DSP, IM,EXP, ) ---- (1)

The economic model becomes

GDP = α + α1FR + αDSK + α3FRINV + α4DSP + α5IM + α6EXP+ μ…

When GDP = Gross Domestic Product

FR = foreign reserve

DSK = total debt stock (foreign and domestic debt)

FRINV = Foreign investment

DSP = Debt service payment

IM = import

EXP = Export

μ =   Scholastic Error sign.                                      


Analysis and interpretation of results

The analysis of data will resolve on 5% of significance. The regression coefficient shall be subjected to T-test hypothesis examination.


If F calculated > F- critical, we accept the alternative hypothesis (H) and vice versa.

A test for the impact of debt burden on the growth of Nigeria’s economy, the dependant variable Gross domestic product, number of observation 36

R = 0.999, R2 = 0.998, F-STATISTIC, 305.047, DW 2.01367

Source: our empirical analysis, it is established that a correlation coefficient (r) of 0.999 shows that the strength of the association existing between the GDP and the seven other variables (FR, DSK, FRINV, DSP, IM AND EXP) is up to 99.9% and therefore it is very strong.


Also the results show that all the independent variable are insignificant except foreign exchange and debt services payment which is significant at 5 percent as revealed by the p- value. For D.W statistic of 2.013674 > 1.9 we therefore conclude that there is no auto correlation in between the dependent variables.


However, the calculated F-statistic is 305.047 which imply that the overall regression result is significant at 5 percent, also at V = K – 1and V = N – K degree of freedom and the value of the cut-off point for the f- ratio at (5.30) from the f- ratio of 2.53 which is less than f-critical of 305.2658 meaning that there is significant relationship between debt burden and economic growth.


Conclusions and policy implications

The major objective of the study was to analyze the effect of debt burden (both internal and external) on the growth of Nigerian economy. Nigeria has relied much on both external and internal debt to finance its development projects in the past two decades ago which put her debt profile so high. From the analysis above it was revealed that GDP which was used to represent the Nigerian economy as well as the dependent variable, has a negative relationship with debt stock (DSK) meaning that an increase in DSK will lead to a decrease of GDP. While on the other hand, the explanatory variables are used to represent debt burden. However the result shows that there is a significant relationship between the dependent and the explanatory variables, meaning that the growth rate of the Nigerian economy relies strongly on the contribution of the explanatory variables. Thus, before the debt write-off by the Paris-club and London club the result shows that the impact on the Nigerian economy was much compared to present time. Though, the exit from the Paris club and London club actually reduce Nigeria external debt, whereas the domestic debt and the effect created by the huge debt before the debt write-off still have lag effect on the economy. Therefore, base on the above findings we therefore recommended that Nigeria should not borrow now either internally or externally. More so with the conformable position of our external reserve we believe that if all things being equal the Nigerian economy will definitely improve tremendously.



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