Domestic Debt Sustainability in Nigeria: Evidence from Evaluation of Alternative Methodologies.


1.1 Background of the Study

One of the major macroeconomic goals is economic growth. Any responsible country or government will be under obligation to ensure the growth (or at least a non-decreasing state) of her economy.

The concern of a nation for economic growth, in the absence of immediate resources, naturally necessitates a government’s expenditure being greater than her revenue.

Given the resources required in development, the need to achieve minimum standards of living, the urgency to alleviate poverty and the importance of creating employment, infrastructure and fostering growth, governments may at times run up expenses that is greater than her revenue.

At such time the need to cover the gap by borrowing becomes inevitable. Financing such a gap could be done in so many ways like increased taxation, ways and means, debt creation and/or reduction in expenditure.

Whatever fiscal alternative adopted, like every other economic planning concept, needs adequate management to achieve the desired goal.

Debt financing has become one of the most used fiscal alternatives, even though such theory like Ricardian equivalence (also known as the Barro-Ricardo equivalence theorem) does not see any significant difference between debt financing and tax financing.

Yet debt financing seems to have received much attention among many scholars and economic managers, possibly because deficit financed by public borrowing shifts the IS curve to the right, resulting in output expansion together with a higher nominal interest rate in the short run when prices are supposedly fixed.

Hence it is observable to state that the creation of debt is a normal and usual result of economic activity.

The different agents in an economy: households, firms and government take decisions to spend, to consume and to invest.

Whenever the income of one of the agents is greater than its consumption they have a surplus.

And exactly the opposite, in a similar way, when some of the agents decide to consume and/or invest in excess of their income, they have to complement their income with borrowed financial resources.

This shortfall or deficit has to be covered or financed, and it is then, at that moment, that debt is created.


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