Implications of External Debt on the Nigerian Economy: Analysis of the Dual Gap Theory

Abstract

Government debt and its importance to revenue generation have generated a lot of debate over the years in Nigeria particularly with respect to economic growth. This paper examines the effect of government debt on economic growth in Nigeria between 1986 and 2013 – using the ordinary least square method. The study reveals that the impact of government debt on economic growth over the period under review is insignificant – with external debt which has been enormous over the years contributing minimally to real gross domestic product. The findings of the study reveal that, if the course of consistent borrowing is not curbed, the economy will slump further: resorting to surplus budgeting, and igniting; increases in unemployment, decreases in total investment, falling reserves, increased exchange rate, higher inflation and consequently increased poverty. It is therefore recommended among others that borrowing should be a last recourse by the government to revitalize the economy, and if necessary, the loans should be sourced within the economy so that when the principal and interest on the loans are paid back, it will serve as a crowd-in-effect which in turn further accelerates economic activities in the country. Also, other alternative sources of government revenue especially taxation hitherto neglected should be explored to minimize dependence on borrowed funds to revamp the economy. Finally, power should be made stable so that the cost on industries that depend on alternative power sources to thrive can be reduced. Thus, such monies can be utilized for remunerative alternative employments.

Key Words: Economic Growth, Internal Debt, External Debt, Dual Gap Analysis, Nigeria economy.