The Impact of Internal Debt on Economic Growth and Development in Nigeria

1.0 Introduction

1.1 Background of Study

Historically, the Nigerian government has relied on internal debt as a major source of revenue, especially during periods of economic instability and declining oil revenues. According to Obadan (2016), internal debt became particularly prominent in the 1980s and 1990s, when Nigeria faced severe economic challenges including declining oil prices, rising fiscal deficits, and external debt burdens. During this period, the government increasingly turned to domestic borrowing as a means of financing development projects and maintaining public services. They reported that this borrowing, while necessary, often led to mounting debt servicing obligations that strained government finances and limited investment in productive sectors.

Adebayo and Oladipo (2018) affirmed that the post-2000 era saw a significant surge in internal debt as Nigeria pursued ambitious infrastructure and social development programs. They contended that domestic borrowing was used to complement external financing, yet the growth of internal debt raised concerns about sustainability and the crowding out of private investment. High-interest rates on government securities reduced the availability of credit to the private sector, thereby constraining economic expansion (Adebayo and Oladipo, 2018).

Internal debt, also referred to as domestic debt, is the borrowing undertaken by a government within its own borders, usually from financial institutions, citizens, or local investors, to finance budgetary deficits, fund development projects, or stabilize the economy (Iyoha, 2017). According to Obadan (2016), internal debt is often seen as a less risky alternative to external debt because it does not involve foreign currency obligations. However, the growth of internal debt in Nigeria has become a subject of debate due to its potential implications for economic growth and development.

Adebayo and Oladipo (2018) reported that Nigeria's internal debt stock has steadily increased over the years, largely as a result of persistent budget deficits and the government's effort to finance recurrent and capital expenditures. They asserted that while internal debt provides an immediate source of revenue, excessive borrowing from domestic sources often leads to higher debt servicing costs, which diverts resources away from critical sectors such as education, healthcare, and infrastructure. Furthermore, Sanusi (2015) stated that high levels of internal debt may crowd out private sector investment because the government competes with businesses for the limited pool of available credit, raising interest rates and reducing investment opportunities.

Ojo (2019) affirmed that inefficient management of internal debt exacerbates fiscal imbalances and poses a threat to macroeconomic stability, limiting the government's ability to achieve sustainable development objectives. On the other hand, some scholars contend that internal debt, when properly managed, can serve as a useful tool for stimulating economic growth. Obadan (2016) contended that borrowing from domestic sources enables the government to fund infrastructure projects, provide social services, and stimulate economic activities without the pressures and vulnerabilities associated with external debt (Obadan, 2016).

Similarly, the World Bank (2020) reported that well-structured internal debt management strategies can enhance fiscal discipline, promote resource mobilization, and support developmental initiatives. It is clear that internal debt in Nigeria presents both opportunities and challenges. The government's reliance on domestic borrowing is often driven by the need to bridge financing gaps and implement development programs, yet the consequences of high debt levels on economic growth remain a concern. This study is set against the backdrop of understanding the impact of internal debt on Nigeria's economic growth and development.

1.2 Statement of Problems

Investigation revealed that the issue of internal debt in Nigeria is increasingly becoming a major concern for policymakers, economists, and scholars. Over the past decades, the Nigerian government has relied heavily on internal borrowing to finance budget deficits, stimulate economic activities, and meet public sector obligations. However, the rising level of internal debt is threatening to undermine the country's economic growth and development. Studies have shown that excessive internal debt is associated with increased debt servicing costs, which diverts public funds away from critical sectors such as education, health, and infrastructure (Iyoha, 2017; Ojo, 2019).

Furthermore, internal debt is seen to affect fiscal stability. The persistent reliance on domestic borrowing to fund recurrent expenditure, instead of long-term investment, raises concerns about debt sustainability and macroeconomic stability (World Bank, 2020). The lack of effective monitoring and management mechanisms intensifies these problems, resulting in inefficient allocation of resources and limiting the government's ability to achieve developmental objectives. On the other hand, improved debt management strategies are recognized as having the potential to harness internal debt for productive purposes, stimulating growth while minimizing adverse effects (Sanusi, 2015). It is against this backdrop that this study seeks to examine the impact of internal debt on Nigeria's economic growth and development.

1.3 Aim and Objectives of Study

The aim of this study is to examine the impact of internal debt on Nigeria's economic growth, government development expenditure, and private sector investment in Nigeria, highlighting the opportunities and challenges associated with domestic borrowing. The specific objectives of the study include:

1. To examine the effect of internal debt on Nigeria's economic growth.
2. To evaluate the impact of internal debt on government development expenditure.
3. To analyze how internal debt affects private sector investment.
4. To identify strategies for effective management of internal debt to enhance economic development.

1.4 Research Questions

Based on the stated objectives, the research study seeks to answer the following questions:

• What is the effect of internal debt on Nigeria's economic growth?
• How does internal debt impact government development expenditure?
• In what ways does internal debt affect private sector investment in Nigeria?
• What strategies can be implemented to improve the management of internal debt for sustainable economic development?

1.5 Research Hypotheses

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: Internal debt has no significant impact on economic growth and development in Nigeria.
• H1: Internal debt has significant impact on economic growth and development in Nigeria.

Hypothesis Two

• H0: Internal debt has no significant effect on Nigeria's economic growth.
• H1: Internal debt has a significant effect on Nigeria's economic growth.

Hypothesis Three

• H0: Internal debt does not significantly influence government development expenditure.
• H0: Internal debt significantly influences government development expenditure.

Hypothesis Four

• H0: Internal debt does not significantly affect private sector investment.
• H1: Internal debt significantly affects private sector investment.

1.6 Significance of Study

The outcome of this research will help policymakers design effective debt management strategies that maximize developmental outcomes while minimizing adverse effects on fiscal stability. The study will also contribute to the existing body of knowledge by offering empirical insights for researchers, economists, and financial analysts.

Furthermore, the findings of this study will inform future fiscal and monetary policies by emphasizing the importance of sustainable debt levels and effective debt management strategies. In addition, this research will assist the government in designing borrowing policies that support long-term economic growth without compromising fiscal discipline.

Lastly, the study will help bridge the gap between theoretical knowledge and practical policy application, ensuring that internal debt serves as a tool for economic development rather than a burden.

1.7 Scope of Study

This study focuses on the impact of internal debt on economic growth and development in Nigeria, with a specific emphasis on the operations and fiscal practices of the Central Bank of Nigeria (CBN) and selected state governments, such as Lagos State. The study examines trends in domestic borrowing, debt servicing, and expenditure allocation from 2000 to 2024 to provide a comprehensive view of the issue.

1.8 Limitations of the Study

During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this research work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
3. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
4. Initial Cooperation Delay from Respondents: A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.

1.9 Definition of Terms

Internal Debt:

Internal debt, also referred to as domestic debt, is the borrowing undertaken by a government from local sources such as financial institutions, citizens, and domestic investors to finance budget deficits and development projects (Iyoha, 2017).

Economic Growth:

Economic growth is the increase in the production of goods and services in a country over time, typically measured by the growth of Gross Domestic Product (GDP) (Adebayo & Oladipo, 2018).

Economic Development:

Economic development refers to the improvement of living standards, reduction in poverty, employment generation, and the provision of infrastructure and social services in a country (Obadan, 2016).

Debt Servicing:

Debt servicing is the payment of interest and principal on borrowed funds within a stipulated period, which can affect government expenditure on development projects (Sanusi, 2015).

Private Sector Investment:

Private sector investment refers to capital spending by businesses and individuals in productive ventures, which is influenced by government borrowing and interest rates (Ojo, 2019).