PUBLIC DEBT AND FINANCIAL SECTOR PERFORMANCE: EMPIRICAL EVIDENCE FROM NIGERIA

Abstract

The seeming impossibility of financing government goals has continued to be a thorny issue with most developing countries. Therefore, borrowing is regarded as one of the means by which government expenditure is financed. This research work therefore aimed at examining the correlation between public debt and financial sector in Nigeria. It specifically investigated the effect of external debt, domestic debt, total debt and debt servicing on the financial sector. The study’s independent variables were; external debt, domestic debt, total debt and debt servicing, while the dependent variable was financial sector output. Hence, to achieve the articulated objectives, time series data for the period 1981-2022 were obtained from the Central Bank of Nigeria Statistical Bulletin and the Ordinary Least Squared (OLS) technique was used in the analysis of the data. The Augmented Dickey Fuller (ADF) unit root test was used to ascertain if each of the variables were stationary at the first difference or not. The analysis of the result of the OLS revealed that external debt and the performance of the financial sector in Nigeria is negative and significant. But domestic debt and the aggregated public debt- total debt enhanced financial sector performance in Nigeria by 0.6307 and 0.811397 units respectively. Therefore, it is advised that the domestic debt component of public debt should be used to finance the financial sector. It further recommended that since government borrowing from external source has negative multiplier on financial sector output, it should reduce debt servicing by decreasing borrowing from the external sources.