Econometric Analysis of the Effect of External Debt on the Economic Growth of Nigeria

Abstract

This study looks at the analysis of the effect of external debt on the Economic Growth of Nigeria from 1980 to 2017 with secondary data sourced .from Central Bank of Nigeria and Debt Management Office statistical/annual bulletins of various years. The Autoregressive Distributed Lag (ARDL) Method is employed in the estimation of the multivariate regression model. In the data analysis, External Debt (EXDT), External Debt service (EXDS), and Exchange Rate (EXCHR) were used as independent variables against the dependent variable of Real Gross Domestic Product (RGDP) which is used as proxy for economic growth. The result of the study showed that external debt has an insignificant and positive linear relationship with the level of economic growth in Nigeria, an increase in external debt by a unit will increase the level of economic growth by 0.091 units. This is an indication that external debt has the potentials of increasing the level of economic progress in Nigeria. External debt service has no significant but positive impact on the level of economic growth in Nigeria. This is not surprising since income from investment of external debts in self-liquidating projects is used in servicing the debts. Exchange rate has no significant and positive effect on the level of economic growth in Nigeria. Based on the findings, the study therefore recommends that economic managers in the country should apply foreign loans only on beneficial capital investments capable of liquidating itself rather than spend it on recurrent expenditure. This will reduce the crowding out effect of debt and debt overhang on the Nigerian economy. Only external loans with favourable terms and conditions should be sort for by the country to avoid excessive debt burden on the economy. Only low cost foreign loans should be sort for after a rigorous evaluation not on exigency to reduce the cost of the debt. Measures that will stabilize exchange rates in the country should be put in place to check its adverse effects on the economy.