The Impact of Domestic and External State Debt on State Gross Domestic Product in Nigeria

The impact of state indebtedness, both external and domestic, on the GDP of each state, was investigated in this study utilising panel data gathered from 22 Nigerian states between 2013 and 2017. Past studies conducted on the debt-growth relationship have concentrated on the national level with little attention given to the sub-national level. This study fills that gap with the intention of having a better understanding of the debt-growth relationship at the state level. Using panel regression techniques, results showed that total debt has a non-linear relationship with the state GDP; whereby as total debt increases, the state GDP also increases until it reaches a threshold when a rise in state total debt produces a negative impact on the state GDP. A similar result was obtained while using domestic debt. On the contrary, external State debt was found to have a linear, positive and significant relationship with the state GDP. The implication of this is that external state debt is beneficial to the state GDP. The study recommends that state governments should borrow to finance capital projects or high-yielding investments and not recurrent expenditures. Also, state governments should have a debt threshold which would guide them whenever they incur debts.