Analysis of the Impact of External Debt on Economic Growth in an Emerging Economy: Evidence from Nigeria

Abstract

This study set out to analyse the impact of external debt on economic growth of Nigeria. Data for the study are collected from secondary sources. The variables on which data are collected include; Gross Domestic Product, External debt services, external debt stock, external reserve, and exchange rate. The scope of the study covers the period from 1985 to 2015. Data are analysed using the ordinary least square regression, ADF unit root test, Johansen cointegration and error correction test. Findings reveal that debt service payment has negative and insignificant impact on Nigeria’s economic growth while external debt stock has positive and significant effect on Nigeria’s growth index. The control variables: external reserve and exchange rate have positive and significant effect on growth. The ADF unit root test shows that all the variables are not stationary at levels but at first difference. Johansen cointegration test shows long-run relationship between external debt and growth index (GDP). It also showsed that the variables have at least one common stochastic trend driving the relationship between them. The causality test indicates unidirectional causality between external debt and GDP. From the findings, the study recommended that government should apply external loans to infrastructural development; improve business environment through legislation; initiate proper debt management policies and substitute external borrowing for human capital development.

Key Words: Economic growth, external debt, dependency theory, debt servicing; external reserve, exchange rate