An Empirical Analysis of Domestic Debt, Foreign Debt and Economic Growth Nexus in Nigeria (1970-2014)

Abstract

This paper investigated the relationship between foreign debt, domestic debt and economic growth in Nigeria based on annual data for the period 1970-2014 using Augumented Dickey Fuller test, Phillips Perron test, Johansen Cointegration test and Ordinary Least Square Regression Analysis via Microsoft 7.1 econometric software. The overall results show that foreign debt shows a statistically significant positive relationship with economic growth proxied by real gross domestic product in Nigeria. The result further revealed that a one naira increase in foreign debt would bring about 44.92 units increase in economic growth.  The results also show that there exists a statistically significant inverse relationship between domestic debt and economic growth. A one naira increase in domestic debt would retard economic growth by 15.92 units. Based on the results, government at various levels should formulate policies aimed at encouraging domestic savings in order to give room for loanable fund to domestic investors; there should be judicious utilization of fund borrowed domestically on productive activities so as to have significant positive contribution  to economic growth in the country; and government should sustain the effective and efficient management of foreign borrowed fund  presently so as to continue to contribute positively to economic growth. In addition, incentives should be given to potential industrialists in form of favorable fiscal policy by the government in order to encourage them to establish different types of industries that would accelerate economic growth.

Keywords: Foreign debt, domestic debt, economic growth, ordinary least square, unit root, cointegration, Nigeria