Impact of External Debt on Economic Growth in Nigeria: An ARDL Bound Testing Approach

Abstract

In order to achieve the ultimate goal of sustainable economic growth, governments require substantial amount of capital finance through investment expenditures on infrastructural and productive capacity development. Due to the unavailability of adequate capital because of low savings, most developing nations therefore resort to borrowing from external sources to bridge the resource gap. Nigeria external debt profile has increased over the years with the aim of achieving economic growth but this has culminated to low economic performance as evidenced in her high unemployment and poverty rate and low standard of living. This has informed the need to embark on the present study with a view to investigating the impact of external debt on economic growth in Nigeria. Using the ARDL bound testing approach to cointegration and error correction models for the period 1970 – 2013; in order to investigate the existence of long-run equilibrium relationship among the variables. In addition, the Granger causality test was also used to check for the direction of causality among the variables. The result of this study indicates a long-run relationship among the variables. External debt impacts negatively significant on output. The finding also established a unidirectional causality between external debt and economic growth. Consequently, the study recommends, government should embark on prudent borrowing and encourage export-oriented growth.

Keywords: External debt, economic growth, bound testing, cointegration