Domestic Debt and the Growth of Nigerian Economy

Abstract

The study investigates the relationship between domestic debt and economic growth in Nigeria. The Ordinary Least Squares Method (OLS), Error Correction and parsimonious models are used to analyze  quarterly data between 1994 and 2008. Our result shows that the domestic debt holding of government is far above a healthy threshold of 35 percent of bank deposit as the average over the period of study is 114.98 percent of bank deposit presenting evidence of crowding out of private investments. The study of course affirms that the level of debt has negative effect on economic growth. Government should maintain a debt- bank deposit ratio below 35 percent, resort to increase use of tax revenue to finance its projects and divest itself of all projects the private sector can handle while providing enabling environment for private sector investors such as tax holidays, subsidies, guarantees and most importantly improved infrastructure.

Keywords: Budget deficit, debt size, domestic debt, economic growth and investment base