Optimal Debt and Economic Growth in Nigeria: A Dynamic Threshold Model Approach
DOI:
https://doi.org/10.51137/wrp.ijarbm.534Keywords:
Debt, Threshold, Interest Rate, Debt Overhang, Crowding-OutAbstract
Nigeria has historically relied on domestic borrowing as a key tool to promote economic growth. However, the persistent rise in government domestic debt has raised concerns about its impact on the nation's economic well-being. To empirically investigate this issue, this study examined the threshold effects of public debt on Nigeria’s economic growth from 1970 to 2024 using a threshold regression approach. The results reveal the existence of critical debt levels beyond which debt adversely affects growth. Domestic debt has a threshold of 34.09%, below which its effect on growth is positive but insignificant and above which it significantly reduces growth. External debt exhibits a much lower threshold of 2.47% and exerts a negative effect on growth both below and above this level. Similarly, total public debt shows a threshold of 34.13%, beyond which its impact on growth becomes significantly negative. The findings support the debt overhang and crowding-out hypotheses, indicating that excessive debt accumulation undermines economic performance. The study recommends prudent debt management, strict adherence to sustainable debt thresholds, and the allocation of borrowed funds to productive, growth-enhancing investments to promote long-term economic growth in Nigeria.
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