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Abstract
This paper examines the relationship effects of debt burden on sustainable economic growth using Nigeria as a case study. The country-specific investigation aims to demonstrate how countries debt management practices may influence their ability to utilize this resource to spur economic growth. The current analysis of Nigerias public debt is done by analyzing its economic statistics from the year 2009 to 2019. The researcher sourced data from the World Bank database and the Statistical Packages for the Social Sciences (SPSS) technique was employed to estimate the overall effect of the countrys external debt on economic growth. Two sets of variables emerged in the model: independent variable debt and dependent variable GDP growth. The model was controlled for population, inflation, employment levels, labor and exports.
The present investigation emerges from a background of a rising debt burden among many African nations and growing concerns about their ability to use these funds effectively and still service the loan facilities. The present discussion will include an analysis of systemic risks and domestic vulnerabilities that a huge debt burden would have on a developing country, such as Nigeria. The findings of this analysis are useful in understanding debt trends among developing countries and the efficacy of governments to use the funds to spur economic growth. The findings are also important in developing fiscal management policies for guiding debt management practices in emerging economies. The investigation also provides an updated understanding of debt management practices in Africa, thereby creating a platform for reviewing how its growing economies can better improve the lives of its citizens by using debt as a tool for spurring economic growth.
Rising Sovereign Debt in Emerging Economies
The rising levels of sovereign debt have been a cause of concern for the global economy due to the risk it poses to the economic sustainability of nations. Coming from the aftermath of the 2007/2008 economic crisis, western nations have been leading others in accumulating some of the highest levels of debt seen in more than half a century to rebuild ailing industries (Abbas & Rogoff, 2019, p. 2). Developing countries have also adopted the same model, with debt vulnerabilities emerging as a point of concern among economists, given that some of these countries are on the verge of defaulting on their debt obligations while others have already done so based on their existing debt profiles (Al-Gasaymeh, 2020, p. 1). Reports by the World Bank and the International Monetary Fund (IMF) paint a grim picture of this situation, with their findings suggesting that most emerging economies are in severe debt distress (United Nations, 2020). The focus on emerging economies has been informed by the inadequacy of resources needed to balance debt and developmental needs.
Africa has recently attracted the attention of scholars interested in understanding the impact of loans on emerging economies due to the rising debt levels in many countries (International Monetary Fund African Department, 2021, p. 1). For example, the indebtedness of African nations to the Chinese government has been a cause of concern among observers because of skeptics who question the economic sustainability of the loans taken, given that many African governments are yet to demonstrate tangible results for the current stockpile of debt they have (Raudino, 2016, p. 21). The increase in debt is a paradigm shift in the management of economic affairs in Africa from one that is dependent on aid to another that seeks to promote self-sufficiency.
International lending partners have been willing to lend money to African governments, in line with this new economic approach, but with strict conditions on how such finances should be managed (International Monetary Fund African Department, 2021, p. 1). Additionally, governments have more options to source for money, compared to previous years, given that some creditors are willing to give loans at low-interest rates (Hussein et al., 2021, p. 1). Relative to this development, there has been a keen interest by some nations, such as China, to lend both financial and technical support to African governments, partly through debt, to support their economic growth objectives (Raudino, 2016, p. 105). Based on this development, many African governments have developed ambitious economic programs and plans to create jobs and improve the lives of their citizens.
By taking debt, governments hope to bridge the gap between their revenues and expenditures in government budgetary processes. Although there is the potential danger of default and insolvency, debt may be unavoidable to some governments because of its potential to attract investments by creating the right environment for trade (Saungweme & Odhiambo, 2021, p. 132). Consequently, debt financing is an important resource for managing a countrys economy because it provides additional sources of funds, besides government revenue, to meet short-term and long-term economic growth objectives (Croissant & Millo, 2018, p. 1). Therefore, when used wisely, it could help nations to spur economic growth and improve inclusivity in the management of their economic affairs, but when mismanaged, it could create economic crises and erode investor confidence (Abbas & Rogoff, 2019, p. 7). Therefore, it is important to manage debt efficiently to avoid the risks that come with it.
Relationship between Debt and Economic Growth in Emerging Economies
It is difficult to measure the effects of debts on economies due to a multiplicity of factors. For example, cyclic adjustment of fiscal balances by various types of governments could impact debt utility in a nation (Cevik, 2019, p. 4). Therefore, the use of debt has implications on peoples lives and their economies through its effect on taxes and household expenditures. This relationship draws attention to the need to adopt prudent use of debt management techniques as instruments of economic control and management because they could spur economic investments if used effectively and efficiently (Bhattacharya & Ashraf, 2018, p. 137). However, some governments use debt inappropriately, while, in some instances, changes in macroeconomic policies have made it difficult to service existing financial obligations (International Monetary Fund African Department, 2021, p. 7). These actions are detrimental to economic growth and development because debt is supposed to spur economic growth and improve the lives of its citizens.
High levels of debt in selected African countries have raised concern about the economic sustainability of such loans because of the lack of a commensurate rate of economic growth to justify them (Raudino, 2016, pp. 133). Additionally, there is scanty information about the effects of debt on African economies and whether the money sourced has achieved their intended purpose, or not. Stemming from this background, of immediate concern is the lack of evidence showing how African countries are using debt. The failure to understand their fiscal management policies undermines the role of debt in helping emerging economies to meet their developmental objectives (Cevik, 2019, p. 1). Of greater importance to this discussion is the potential that poor management of debt could lead to economic losses and poor services if funds that should be used towards financing programs or services to improve human welfare are redirected towards debt payment and servicing.
Based on the above concerns and the lack of adequate data to address them, there is a knowledge gap regarding the justification for taking sovereign debts and the process of allocating the same resources to areas that should spur economic growth. The growing appetite for economic development through loan financing in several African states has further made it difficult to interrogate these issues due low levels of accountability, and increased availability of lending options (International Monetary Fund African Department, 2021, p. 9). Consequently, questions have been raised regarding whether African countries can sustain these debts and if they are spurring economic growth, as they should.
Nigerias Debt and Economic Growth Record
Given the importance of Nigerias economy to the prosperity of the wider African continent, it is prudent to take a closer look at the nations debt management plan with the aim of proposing solutions to make better debt management policies. This analysis will be a microcosm of the effects of debt management on emerging economies in Africa because Nigeria is among many countries that have revamped their physical planning strategies to address local and domestic economic challenges through debt management (Databod, 2017, p. 1). Given that the oil-producing giant is among the strongest economies in Africa, there is potential that it could be a beacon of prudent fiscal management on the continent after improving its economic planning. This is why many African nations look up to Nigeria as a leader in many areas of social, economic, and political development. Consequently, this case study will be instrumental in understanding debt management strategies in Africa and identifying its successes or failures with the aim of developing proposals for improvement.
This paper is structured into five main sections. The first one is the introduction chapter, which highlights the background to the research topic and its importance to the management of public debt in Africa and, by extension, low-income countries. The second section provides descriptions of key terms, concepts, and descriptions that are relevant to the study. Its goal is to highlight the nature of the extant literature and the research gap justifying the present study. In the third part of this paper, the researcher will highlight the methods chosen by the researcher to undertake data analysis. The fourth section of the study will highlight its findings and their contribution to answering the research questions. In this part of the study, the main findings will be critically evaluated, relative to how Nigeria manages or uses its debt to spur economic growth and development. The last section of the study is the conclusion part, which summarizes the main findings of the investigation, its limitations, and policy implications.
Overall, the main objectives of this study are: (i) to determine Nigerias safe debt limit (ii) to find out why debt financing has not positively impacted sustainable economic growth in Nigeria and (iii) to identify effective strategies for managing Nigerias present and future debt. Based on these objectives, the researcher will be intending to answer three research questions: (a) what is the appropriate extent or nature of debts that can help Nigeria avoid unsustainable debt? (b) Why has debt financing not impacted sustainable economic growth in Nigeria? and (c) What debt strategies will be effective to manage Nigerias present and future debt obligations? From these questions, three hypotheses are derived: (H1) Nigeria can avoid unsustainable debt by maintaining levels that are lower than 60% of GDP, (H2) Debt financing has not positively affected sustainable economic growth in Nigeria because of inefficient debt management practices, and (H3) improvements in Nigerias cash flow management will help enhance the countrys debt management record.
Definitions of Debt Management, Economic Sustainability, and Fiscal Management
The concepts of debt management, economic sustainability, and fiscal management are central to understanding the effects of sovereign debts on a countrys economic growth. More importantly, they are pivotal in evaluating the economic sustainability of debt in the emerging markets context. Key issues that will be explored in this section include the justification for taking loans, theoretical underpinnings of prudent debt management, and the experiences of other countries with debt. The aim of undertaking this review is to understand how the current research on debt management in emerging economies is positioned within the greater body of literature that has explored the effects of debt growth on the economic sustainability of nations.
Debt Management Background, Concepts, and Paradigm
How Countries Manage Debt: Empirical Evidence
Debt is a financial instrument at the disposal of a country, which allows it to pay a principal or interest sum of money obtained in the future. Countries often accrue debt from different sources, including their own financial institutions, commercial banks, other nations, and global financial institutions, such as the World Bank (International Monetary Fund African Department, 2021, p. 1). In one study, the effect of debt was investigated by analyzing its impact on the economic freedom of the Jordanian-banking sector and those of other countries from the Gulf Cooperation Council (GCC) and using the Stochastic Frontier Approach (SFA) to control for country-specific variables, it was established that debt increased country risk and reduced economic freedom (Al-Gasaymeh, 2020, p. 1). By analyzing data from 90 banks in Jordan and the wider GCC region, the study also pointed out that poor debt management reduce the economic freedom of the financial institutions and increases their transaction costs (Al-Gasaymeh, 2020, p. 1). Therefore, effective debt management was considered an important attribute in improving the capability and capacity of financial institutions to compete with their peers and create a robust banking system.
Definitions of debt management stem from a broader understanding of financial planning based on the need to balance the total amount of money owed to creditors by state governments, federal governments, and their respective agencies (Hakura, 2020, p. 1). Using the debt dynamics equation, researchers have affirmed the impact of these different types of debt on economic performance by highlighting its importance in evaluating debt sustainability in two equations (Chandia et al., 2019, p. 25). The first one is the debt dynamics equation model for the overall debt owed by a country and the second one is for external debt sustainability management (p. 25). This definition of public debt not only encompasses money owed to creditors by the central government but also its financial and nonfinancial corporations. The same definition of public debt also encompasses debts covered by governmental agencies that are not held by public agencies and corporations but that the government has an obligation to cover (International Monetary Fund African Department, 2021, p. 4). External debt, which is held by nonresidents of a country, is also covered under this classification. Therefore, to understand a countrys public debt risk, it is vital to review all factors that could influence public finances.
On the contrary, adopting a narrow definition of public debt could lead to sudden increases in debt positions and a weakening of a countrys credit rating because several intertwined components of debt have to be taken into account when computing a nations financial obligations. For example, if a government or state agency defaults on its debt, the financial responsibility of the default falls on the central bank because it is publicly guaranteed (Hakura, 2020, p. 1). When this happens, it leads to the weakening of a countrys debt position and currency, as seen through an Indian-based study, which evaluated the effects of debt on manufacturing firms traded in the BSE 200 Index between 2009 and 2016 (Pandey & Sahu, 2019, p. 267). The investigation was designed to understand the relationship between debt financing, agency costs, and corporate performance. Using panel data estimations, the findings revealed that debt was detrimental to corporate performance (p. 267). However, it shared a positive correlation with agency cost, meaning that high debt burdens often lead to increases in agency costs (p. 267). Therefore, the negative effect of debt on corporate performance is affirmed through this empirical investigation and the high agency cost highlighted above is linked to high debt levels.
Economic Sustainability of Debt: Empirical Evidence
In the context of this analysis, the sustainability of an economy refers to how well it can be able to meet its debt obligations. In one Bangladesh study aimed at evaluating the economic feasibility of the countrys debt management policy, researchers conducted simulation exercises on economic data and reported that the economic sustainability of debt was achieved when the country had high economic growth rates (Bhattacharya & Ashraf, 2018, p. 137). Using the debt-stabilizing primary balance approach (DPSBA) to analyze economic data for the period 2017 -2026, the researchers established that the economic sustainability of debt was only achieved when the rate of economic growth was high enough to cover the real interest rates attributed to its servicing (p. 138). This cash flow model was deemed the best in evaluating the economic sustainability of debt but the analysis was focused on Bangladesh, where researchers pointed out that it will continue to struggle to realize debt sustainability because of the tradeoff between debt and investment (p. 139). In other words, Bangladesh was diverting most of its resources towards debt repayments at the expense of its investment objectives.
Based on the above statement, governments strive to adopt prudent debt management policies to manage their financial and debt commitments. More importantly, they strive to promote growth and stability by taking debt without negatively affecting the existing socioeconomic balance in the countries. If incorrectly done, unsustainable debt is likely to cause financial distress in an economy, thereby leading to the creation of extraneous circumstances that may lead to restructuring plans or the forfeiture of assets guaranteeing debts. The link between the economic sustainability of debt and its trade-off with investment returns that was mentioned in Bangladesh was also mirrored in a South African-based study (Saungweme & Odhiambo, 2021, p. 132). Using data gathered between 1970 and 2017 and analyzing it using the autoregressive distributed lag (ARDL), it was established that poor debt management policies affected investment returns both in the short-term and long-term (Saungweme & Odhiambo, 2021, p. 132). Therefore, the relationship between aggregated poor debt management and Return on Investments (ROI) was statistically significant and negative at the same time (Aybarç, 2019, p. 1). Nonetheless, the results also showed that effective management of domestic debt had a statistically significant and positive relationship with economic growth, only in the short-term (Saungweme & Odhiambo, 2021, p. 132). Therefore, the findings highlighted in the investigation highlighted the need for effective debt management and the importance of redirecting resources to high growth and return sectors of the economy.
Fiscal Management as a Function of Debt Management: Empirical Evidence
Governments use multiple tools to control, direct, or plan resource use for purposes of promoting economic growth and meeting debt obligations. Fiscal management practices are part of such tools because they are macroeconomic management instruments that are relevant to debt management. From this statement, it is implied that improved governance could lead to a decline in budget deficits, thereby improving a countrys strength to service its debt. In one study designed to understand the dynamic relationship between fiscal planning and debt management, data relating to 12 West African countries were analyzed using the Pooled Mean Group and Mean Group estimator technique and a positive relationship between fiscal performance and deficit management was established (Fagbemi, 2019, p. 97). The empirical data used to come up with the findings related to the 1984 to 2016 period and the researchers argued that the inculcation of democratic values in governance had the highest potential of instilling fiscal discipline in debt management (p. 97). Therefore, the proportion of public debt could have a direct impact on the quality of fiscal management practices adopted by governments worldwide.
In a different study, the importance of fiscal planning was highlighted by estimating the impact that adjustments to macroeconomic policies would have on the economic growth of Pakistan (Hussein et al., 2021, p. 1). The investigation assessed the impact that spending and tax-based policies would have on the economic growth of the nation using the Autoregressive Distributed Lag (ARDL) to analyze data (p. 1). The findings revealed that spending-based adjustments had a positive impact on economic growth levels, while tax-based adjustment measures had a negative impact on economic growth in the end. They were deduced by using the granger causality test and included looped feedback from the economic activities of Pakistans economy to inform its fiscal management policies (p. 1). Based on these findings, the main point that emerges from the investigation is the effective use of spending-based fiscal management policies to promote economic growth. Through this economic growth, government can better get the finances needed to service their debts. Therefore, fiscal management planning is an important part of debt management.
Although various economic indicators, such as debt to Gross Domestic Product (GDP) ratio, are used to evaluate debt management performance, citizen awareness, and their understanding of debt management could also play a significant role in instilling fiscal and monetary discipline in debt management. This is especially true in emerging economies, which are taking high levels of debt without significant citizen participation (International Monetary Fund African Department, 2021, p. 15).
Effects of Debt on Economies: Theoretical Evidence
The effects of debts on economies are underpinned by economic theories that have analyzed their impact on firms and national growth. Four main schools of thought explain debt management practices in economics. The first one is the classical theory of economics, which emphasizes the importance of countries to manage their fiscal and monetary issues in the way households do (Theory of public debt, 2019, p. 3). This approach to managing public resources stems from a largely pessimistic view of society, which deems government expenditure as wasteful and lacking the fiscal discipline required to manage such resources prudently (Washington Center for Equitable Growth, 2015, p. 1). Proponents of this school of thought hold this cynical view about state intervention in the management of economic affairs because they believe that private interests are better custodians of financial resources compared to the government (Theory of public debt, 2019, p. 5). This ideology stems from the understanding that public debt and expenditures are wasteful and unproductive.
The second theoretical foundation for understanding the impact of debt on economies is characterized by proponents of the classical view of economics, who caution against state borrowing by arguing that it eventually leads to bankruptcy due to the lack of strong accountability standards (Abbas & Rogoff, 2019, p. 6). Classical theorists, like Adam Smith, paint a far grimmer picture of public debt and state borrowing by suggesting that it reduces accountability of governments to their citizens by creating a new channel of resource pilferage debt, as opposed to taxes, which is more difficult to misuse (Theory of public debt, 2019, p. 8). The classical view of economics is often matched with the irresponsibility of governments in sovereign debt management, as has been seen in the case where nations wage meaningless wars against enemies (Washington Center for Equitable Growth, 2015, p. 1). The counter argument presented in this debate is that government would be hesitant to enter into wars or sustain them for long periods if they were financing such ventures purely with state taxes. Therefore, the classical economist view of public debt is overly pessimistic about the role of the state in initiating economic reform among nations using debt.
The third view of public debt management is based on the Ricardian basis of economics, which highlights the irrelevance of fiscal policies in correcting balance of payments, especially when there are budget deficits. Researchers have supported this philosophy by emphasizing the importance of meeting debt-servicing requirements without paying much attention to the interest rate regime in place (Khurram et al., 2019, p. 23). This view is partly explained in studies that have highlighted the importance of maintaining budget surpluses as a basis for prudent debt management (Abbas & Rogoff, 2019, p. 34). An example is given of the US government between 1916 and 1995 when it enjoyed a budget surplus, which meant that the country could effectively service its debt (p. 37). Studies that have investigated the effects of government expenditure on economic output more intricately suggest that debt investments spur growth but taxes have the opposite effect (Chandia et al., 2019, p. 25). Overall, Ricardian economics suggest that debt should only be taken when a country has adequate surplus cash to pay for its repayments.
The fourth school of thought explaining debt management in economics is based on the Keynesian school of economics, which outlines a framework for analyzing economic growth through deficit spending. Deficit spending often arises when governments have expenses that surpass their revenue collections (Theory of public debt, 2019, p. 5). Therefore, the Keynesian school of economics supports a governments quest to seek financial resources, through loans, and use its purchasing power to spur economic growth by creating demand for goods and services in the economy when making expenses on it. The Keynesian theory of public debt management has gained credence in the 21st century as economists view the process of managing national budgets as akin to those associated with debt management in the corporate arena (p. 7). In this arrangement, the state is viewed as a corporation and, like companies use debt to expand their markets or improve their production processes, they are allowed to take debt to spur their economic activities (p. 1). This modern view of economics departs from the classical view of debt management, which is suspicious about the role of the state in spurring economic activities. The Keynesian school of thought stems from economists who have adopted a liberal view of public debt management, by suggesting that it does not necessarily have to be wasteful.
Two scholars, Miller and Modgliani, have proposed additional theories on debt management by suggesting that a countrys economic growth potential should not be affected by capital restructuring through debt management (Atsede & Brychan, 2017, p. 90). Their arguments are predicated on the assumption that, in a perfect market setting, debt should not affect the economic value of a nation. Similarly, the financing arrangements employed by a country to spur economic investments should not have an effect on its overall value (Global Economy, 2020, p. 1). Closely linked to the views of Miller and Modgliani is the tradeoff theory, which suggests that countries are prone to exploiting low costs of borrowing without linking it with a commensurate increase in financial risk that would cover debt and capital repayment obligations (Aybarç, 2019, p. 1). Therefore, this theory encourages governments to strike a balance between the economic costs of borrowing and the associated liabilities and costs associated with interest and financial payments. Under these conditions, the tradeoff theory encourages firms to use debt when interest rate payments are low and avoid it when the same are high or unsustainable (Atsede & Brychan, 2017, p. 91). The relationship between debt and interest rates draws comparisons with the concept of economic sustainability of debt identified in this paper because debts that cannot be serviced effectively are deemed economically unsustainable, while those that can be effectively serviced using a countrys positive cash flow are sustainable.
The political business cycle theory has also been proposed to explain public debt management in developing countries. It advances a political explanation to public debt management by arguing that politicians often increase their demand for loans when election nears (Theory of public debt, 2019, p. 3). The justification for doing so is embedded in the belief that governments use debt to initiate development projects for re-election, as opposed to catalyzing economic growth. To support this view, some researchers opine that such practices are often initiated by corrupt government officials to manipulate voters through debt-initiated development, which has a low short-term cost, as opposed to tax-funded development, which could disgruntle voters due to high taxes (Khurram et al., 2019, p. 22). Therefore, much of debt-initiated development are taken to fulfill short-term goals, but the ramifications on the economy are widespread and may last a long time.
Benefits of Debt to Host Countries
The link between debt and economic growth has been discussed in various forums and it is established that it could have a positive and negative impact, depending on how it is managed or used (Onyemelukwe, 2016, p. 1). For instance, debt could have a positive or negative effect on an economy, depending on how state officers negotiate for its terms and its use in financing investment projects. Its positive effects emerge when governments use loans prudently to support economic growth, such as through the construction of industries, roads, and other income generating activities (Atsede & Brychan, 2017, p. 7). Alternatively, debt could have a negative effect on economies if authorities misuse or fail to direct it towards funding activities that would add value to the economy. Therefore, countries take loans to achieve varied goals, including promoting the realization of long-term economic objectives, stabilization of macroeconomic conditions, and asset management, as outlined below.
Promoting Long-term Economic Growth: One of the major benefits of debt is the promotion of long-term economic growth in a country. This objective is achievable through sustained investments in human and physical capital for spurring economic growth (Pham, 2017, p. 5). Economists have hailed this positive contribution of debt to economic growth by linking it with gains in socioeconomic development, such as poverty reduction (Kose et al., 2020, p. 6). The World Bank makes the case for public debt in developing countries by arguing that it is important in sustaining significant levels of economic growth that would yield positive socioeconomic outcomes (Washington Center for Equitable Growth, 2015, p. 1). For example, recent forecasts show that most developing nations may experience a 0.5% reduction in economic activities between the years 2018 and 2027, if they do not get debt support (Kose et al., 2020, p. 6). Compared to the sustained economic growth of 5.7% reported between 1998 and 2017, the case for increased public spending in developing countries is made to achieve such levels of economic growth in future (p. 8). Therefore, the economic growth of developing nations is tightly knitted in the need for prudent public debt management and maintenance. Particularly, Africa is seen to be in need of debt to provide resources needed to meet its financing gaps (International Monetary Fund African Department, 2021, p. 1). These resources are estimated to cost African governments more than $93 billion annually and the continent is expected to get financing through debt to meet this financial cost, without which it would be unable to compete with other regional markets of the world (p. 38). Therefore, in this context of analysis, debt is considered an essential tool for promoting long-term e
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