Deficit financing, debt servicing and economic development in Nigeria

Abstract

The study empirically investigated the relationship between deficit financing, debt servicing and economic development in Nigeria over the time period from 1981 - 2022. Government External Debt (GED), Government Domestic Debt (GDD), Cost of Serving Debt (CSD), Inflation rate (INFL) and Interest rate (INTR) were used as dimensions of independent variables, while Human Development Index (HDI) was used as the dependent variable. Annual time series data on the targeted variables were obtained from secondary sources, including the Central Bank of Nigeria annual statistical bulletin, World Bank development indicators. The Unit root test shows that cost of debt servicing, government domestic debt, government external debt, interest rate and human development index are all stationary after first difference (I(1)), while inflation rate was stationary at level I(0). The data were analyzed using the Autoregressive Distributed Lag (ARDL). The empirical results show that human development index has a negative relationship with the variables of CSD, GED, INF and INTR both in the long run and short run, while GDD is positively signed and statistically significant only in the long run. The study recommends amongst others that the Federal government should reduce the rate at which it results to loans, especially foreign loans as a means of financing budget deficits.