Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.6, No.18, 2015 87 Nigerian Debt Portfolio and Its Implication on Economic Growth Adesola Ikudayisi Olaide Akin-Olagunju Adeola Babatunde Bright Irhivben Victor Okoruwa Department of Agricultural Economics, University of Ibadan, Nigeria Abstract This study examines the relationship between economic growth and debt variables for the period 1981-2012 using Vector Error Correction Model (VECM) approach. Variables were stationary at their first differences at 1% level of significance and there is one co-integrating relationship among the variables at 0.05 level. Granger test reveals that causality flows from GDP to both External debt (EXD) and its servicing (SERV). On the other hand, domestic debt (DDB) granger causes GDP. Bi-causality relationship was also found between EXD and SERV. The error correction value of 55.1% which is significant at 1% means that the speed of adjustment of the short-run to the long-run is slightly above average. Instrumental variable (IV) analysis (GMM) confirms non- linear (inverted-U) relationships between economic growth and the domestic/external debts. Debt-to-GDP ratios of 21.4% (domestic debt) and 26.9% (external debt) reveal that Nigeria can benefit from borrowed funds provided it stays below these limits and the repayment conditions are favorable. Hence, funds channeled towards developmental efforts will have positive ripple effects on the economy. Keywords: Debt stock, debt service, economic growth, sustainability ratio, vector error correction 1. Introduction Nations of the world make use of their resources and endowments in developmental efforts. However, situations arise whereby such innate resources will not be able to cater for the economic and social needs of the country to foster growth. In such situations, sovereign states resort to borrowing. Debt is a specified amount owed to lenders outside or within the debtor’s country. The debtors can be the government, corporations and citizens of such country. Debt could be external or domestic. External debts are economic obligations taken from elements outside the country on behalf of a sovereign state by its government while domestic debts are financial contracts entered into by government or its representatives within the walls of a country. It might come in terms of bonds and treasury bill issuance. Countries can access loan due to various reasons. External borrowing (and by extension domestic debt) is an important and powerful financial tool for an economy if it is used prudently in investment or expended for national development. This can enhance investment growth and increase growth rate in the economy, if the debt servicing cost is lower than the returns of the investment or slow down the growth if the cost is on the high side. Developing countries are often faced with deficient finance and borrow from developed countries, international organizations, and international finance institution mainly to boost their economic growth which invariably leads to infrastructural development, education, health and general wellbeing of the nation. As countries expand their output, they also tend to rely more heavily on domestic public debt issuance to finance growth and a strong cross country relationship has been found between economic growth and the total size of the debt market (Adofu & Abula, 2010). Nevertheless, high debt burden has been found to be detrimental to growth with special reference to low-income countries (Freytag & Penhelt, 2009) which is characteristic of Sub-Saharan Africa. Nigeria is a country blessed with abundant human and natural resources. However, despite the economically advantageous position that the country finds itself as a result of vast deposit of natural resources, it has been embroiled in debt trap. How has this been so? The borrowing spree in Nigeria started around the oil boom era (1971-1981). The crashing of the oil price in the early 80’s made it difficult for the nation to fulfill repayment agreement and this caused buildup of both interest and capital. This was made worse during the military era (1985-1993; 1993-1998) when the government stop paying its debt to the Paris Club due to the refusal of the creditors to substantially reduce Nigeria’s debt (DMO, 2005). Debt Management Office (undated) submitted that the debt situation of Nigeria could be attributed to some key variables. These include: exchange rate/interest rate fluctuations, non- commitment to paying terms which led to accumulation of the principal and the interest overtime, poor debt management practices, inefficient loan utilization and inability to sieve loans for necessity coupled with poor understanding of the loan conditions. A critical look at the factors points to governance problems, essentially. Assessing loan, especially from external sources, brings with it the burden of debt servicing and the evil of debt trap through accumulation of both principal and interest. For example, it is interesting to note that as at December 2000, the structure of debt owed Paris Club of creditors is as follows: principal balance – 7%, principal arrears – 48%, late interest – 24% and interest arrears – 21% (DMO, 2005). This trend of arbitrary rise is similar in many developing countries of the world (Freytag & Penhelt, 2009). In addition, the huge amount of resources usually committed to debt servicing is not limited to the external sources of borrowing. This becomes clear when the amount used in servicing debt post-debt relief is observed: N526.46billion (2008), N542.50billion brought to you by CORE View metadata, citation and similar papers at core.ac.uk provided by International Institute for Science, Technology and Education (IISTE): E-Journals