Effect of Intergenerational Debt Burden on Economic Growth in Nigeria

Abstract

An equitable proportion of government borrowing from internal and external creditors exerts a positive and significant impact on the economy. When the funds borrowed are used for unproductive investment without sufficient marginal returns to service the debts, debt becomes burdensome reduceing all the indicators of economic growth. This study uses quarterly data from 2006 to 2018 to investigate the effect of intergenerational debt burden on economic growth in Nigeria, testing the hypothesis with the ARDL model to estimate the longand short-term cause- effect relationship. The findings reveal that borrowed funds are habitually used in Nigeria to pay salaries and allowances, resulting in debt overhang and intergenerational debt burden. The impact of debts to other creditors is significant on economic growth and human capital development, but negative by multilateral and bilateral creditors. The negative effect is probably because of the poor management and investment of the funds borrowed into unproductive ventures. The results show long-term cointegration, while the speed with which the disequilibrium, caused by the mismanagement of borrowed funds in earlier years, returns to long-term equilibrium is 26% in the current year, according to the error correction coefficient. Thus, Barro’s provocative Hypothesis is valid in the long term and Lerner’s view in the short term for Nigeria.