Determinants of External, Domestic, and Total Public Debt in Nigeria: The Role of Conflict, Arms Imports, and Military Expenditure

ABSTRACT

Nigeria’s external and domestic debt have been rising very rapidly in recent years despite the crushing weight of debt burden that almost crippled its economy in previous decades. This study examines the likely determinants of public debt in Nigeria over the period 1970–2020 with a focus on the effects of armed conflict, arms imports, and military spending. Unlike most previous studies that focus only on external debt, this study employs the three separate measures of public debt, namely, government gross debt, external debt, and domestic debt. In addition to being more applicable to the case of Nigeria, this also allows us to investigate whether the drivers of public debt vary with the measure of debt used. Employing the ARDL approach to cointegration and a number of robustness checks, findings suggest that whereas conflict, arms imports, and military spending have statistically positive effects on external debt, they do not have a significant effect on domestic debt. Conflict and arms import have positive effects on gross government debt which is unsurprising given that gross debt includes foreign currency denominated debt. Policy recommendations based upon these findings are discussed.

KEYWORDS:

• Total public debt
• external debt
• domestic debt
• socio-political factors
• Nigeria
• conflict

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1. One notable incidence is the popular Armsgate’ scandal of 2015 which is associated with the embezzlement of over $2 billion dollars.

2. Ogunyemi (2011) further notes that Nigeria’s debt position as of 2005 made it one of the world’s most heavily indebted countries.

3. See Barro (1979) and Lucas and Stokey (1983) for the discussion of the tax smoothing model which emphasises the role of economic factors. For the political-economy approach to budget deficits and debt see Buchanan & Wagner (1976) Persson and Svensson (1989); Alesina and Tabellini (1990). Further, Alesina and Perotti (1995) and Alesina and Passalacqua (2016) provide a comprehensive review of the literature.

4. The argument here is that the growth rate of the advanced countries can lead to improvements in Nigeria’s terms of trade through increases in demand for oil and other primary commodities’ exports

5. Nigeria, like many other developing countries, is a victim of the original sin, a concept used to refer to the inability of a country to borrow abroad in its domestic currency (Eichengreen, Hausmann, and Panizza 2003).

6. Within the single equation framework, Engle and Granger (1987) and Phillips and Ouliaris (1990) discuss the residual-based two-test technique. The multivariate cointegration approaches proposed by Johansen (1988, 1996) and Johansen and Juselius (1990), are within the system-based and maximum likelihood frameworks.

7. This mixture of stationary and non-stationary variables is, however, only allowed for I(0) and I(1) variables. That is, non-stationarity may not exceed the first order.