An Econometrics Analysis of the Impact of External Debt Crisis on Nigeria Economy (1986-2010)

Abstract

The study examines the impact of external debt crisis on Nigeria economy using time series data from 1986-2010. This study adopted both descriptive and econometric tool for its analysis. Regression analysis was used to examine the relationship between external debt crisis and Nigerian economy. The result revealed a positive relationship. The correlation coefficient (R- squared) is 0.993. This showed the strength of the model, 99% indicate a strong model. The result also showed that the model has a good fit as shown with 0.993% which implies that external debt, external debt service, government capital expenditure, gross capital formation, inflation rate and interest rate accounts for about 99.3% systematic variation in Gross Domestic Product while the remaining 0.7% are other factors which affects the Gross Domestic Product but were not captured in the model, the adjusted R-squared showed that the model still has a good fit of 99.0% whereas the remaining 1% are other factors which affects Gross Domestic Product but were not captured in the model which was earlier represented with the error term. F-test is used to test joint statistical significance among the variables; the result of f-statistics (368.9) showed that there is joint statistical significance between Gross Domestic Product and external debt, external debt service, government capital expenditure, gross capital formation, inflation rate and interest rate as shown with low probability value at 5% level of significance. The Durbin Watson (1.93)- statistics showed that the serial correlation is minimal ( that is, there is no evidence to show the presence of autocorrelation). Augmented Dickey Fuller methodology was adapted to test for the stationary of the data used, Error Correction modelling was used to test for the short-run correcting mechanism that can bring the disequilibrium back to equilibrium and the long run relationship was carried out using the Johansen co-integration test. The value of Error correction model given as 0.01% indicates a feedback of or an adjustment of 0.01% from the previous period disequilibrium of the present level of gross domestic product in the determination of causality between the past level of gross domestic product and the present and past level of the explanatory variables. The Johansen co-integration result indicates that there is existence of long run relationship between gross domestic product and the fundamental used in the model. The study therefore conclude that external debt has a great link with  the gross domestic product and should therefore be managed effectively through various fiscal, monetary and external debt control policies. The study therefore recommends that spending of external debt on productive self-liquidating investment must be strictly adhered to while projects to be financed with external loan must be properly appraised and that government and regulatory agencies must try as much as possible to reduce both internal and external debt while focusing on capacity building using domestic available resources to promote economic activities.

Keywords: external debt, external debt service, inflation rate, interest rate, government capital expenditure, gross capital formation  and gross domestic product.