External Debt and Inclusive Growth in Nigeria

Abstract

The growing savings-investment gap in developing economies has focused policy and research attentions on debt-growth nexus. Although a handful of literature has continued to emerge on the impact of external debt on indicators of inclusive growth, relatively very few researches have centered on the different sources of external borrowing. This study examines the link between external debt and inclusive focusing on poverty reduction as the key indicator. The specific objectives are to: determine the impact of external loans from foreign institutions, especially the Paris Club, London Club and Bretton Woods’ institutions on poverty reduction in Nigeria. The estimation technique relied on the Stock-Watson Dynamic Least squares (DOLS) method. The Phillips-Perron procedure to unit root test was applied to examine the time series properties of the variables and the result indicates that all the variables are non-stationary at levels.  However, the variables are stationary upon differencing, indicating that they are integrated of order one. The result of the Johansen cointegration test indicates that the variables are cointegrated at 5 percent level. The result of the estimated cointegration result reveals that borrowing from the Bretton Woods institutions tends to intensify the problem of poverty in Nigeria. Again, loans from the London Club and servicing of public debt are found to exert insignificant positive influence on poverty reduction in Nigeria. However, the result shows that loan from the Paris Club is negatively related to poverty reduction. The Grander causality test reveals that unidirectional causality runs from poverty headcount to loan from the Paris Club. Similarly, a unidirectional causality runs from poverty headcount to loan from the London Club. More important, it was found that the Nigeria’s debt to the Bretton Woods institutions causes poverty. In view of the findings, this study recommended that the Debt Management Office (DMO) and Federal Ministry of Finance should draw up plan on the source, allocation and utilization of future loans from external sources with a view to achieving inclusive growth.

Keywords: Inclusive growth, external loans. Bretton Woods, Poverty