The Threshold Effect of Domestic Public Borrowing on the Nigerian Economy

International Journal of Research and Innovation in Social Science (IJRISS) | Volume VI, Issue V, May 2022 | ISSN 2454–6186

The Threshold Effect of Domestic Public Borrowing on the Nigerian Economy

Raymond Osi Alenoghena¹*, Justin Amase², Adolphus Arhotomhenla Aghughu^3
1Dept. of Economics, University of Lagos, Akoka Yaba, Lagos, Nigeria.
²Prsidential Economic Advisory Council, Federal Secretariat, Phase II, Abuja, Nigeria
³Auditor General for the Federal Government of Nigeria and Chairperson, African Union Board of External Auditors, Audit House, Central Business District (CBD), Abuja, Nigeria.
*corresponding author

Abstract: Like many other developing countries, the Nigerian government has increased domestic borrowing recently. This study examines the nonlinear relationship between domestic borrowing and economic growth, covering 1980 and 2019. The study adopts the threshold regression approach to establish the switching point between domestic borrowing and economic growth in Nigeria. The results reveal that the domestic borrowing and economic growth threshold is 14.88% of GDP with an inverted U-shaped curve. The maximum turning point of the variables implies the application of the debt Laffer Curve in Nigeria, showing that domestic borrowing is favourable to the economy before the threshold. However, additional domestic borrowing after the threshold induces an adverse effect on the economy. Also, the regression results of the non-varying threshold measures show that while the effect of external debt has been positive and significant on economic growth, gross fixed capital formation and inflation were negative and significant. Therefore, while recommending more rigorous monitoring and efficient utilisation of domestic borrowed funds by the government, the study emphasises the application of the threshold of 14.88% of GDP on domestic borrowing in the country.
Keywords: Domestic Borrowing, Economic Growth, Threshold Regression, Nigeria

JEL Classification: C22, E62, H63, O55

I. INTRODUCTION

Achieving developmental goals is a central objective of governments across the globe. However, a weak tax revenue base and declining external assistance from external-donor countries have become substantial challenges to developing countries’ governments (Al-Refai, 2015). As a follow-up, governments often resort to borrowing to execute social infrastructural development projects to close the resulting fiscal gap. The early emphasis of most developing countries in the 70s was to borrow from bilateral and multilateral international sources of the advanced foreign nations (Gurtner, 2010). However, in the 80s, most borrowing developing countries were confronted with rising interest rates on loans and exchange rate problems following the dollar’s appreciation (Demiroglua & Karagoz, 2016). Also, a number of the foreign borrowings from multilateral sources had some conditionality attached. The associated conditionality worsened the overall welfare of the people in the developing

Read More