The Impact of External Debt on Nigeria’s Economic Growth (1980 -2014): VAR, Cointegration and VECM Approach.

Abstract

The research work aimed at determining the impact of external debt on economic growth in Nigeria. Time series data on real gross domestic product (RGDP) and external debt service payment (EDSP) were obtained from the World Bank International Debt Statistics, while data on exchange rate (EXCR) and inflation rate (INFR) were collected from Central Bank of Nigeria (CBN) statistical bulletin, 2014. The period of study was 1980-2014. Model was formulated and data were analyzed employing Augmented Dickey Fuller (ADF) unit root test, Johansen Co-integration and Error Correction (VECM) techniques. Estimation via the unrestricted VAR was conducted to enable appropriate lag length selection while OLS estimation of the main or target equations of the VECM using the HAC consistent covariance estimator was carried out. This enabled objective determination of the impact of external debt on Nigeria’s economic growth. The dependent variable was RGDP, while the explanatory variables were EDSP, EXCR and INFR. Results indicate that external debt service payment had a longrun significant but negative relationship with real gross domestic product while Exchange Rate had a positive although insignificant, relationship with RGDP. The paper concludes that exchange rate fluctuation had positive impact on the Nigerian economy while external debt service payment had significant negative impact on the same economy. The study recommends amongst others, that the Debt Management Office should set mechanisms in motion to ensure that loans were utilized for purposes for which they were acquired as well as set a ceiling for borrowing for states and federal governments based on well-defined criteria.

Keywords: External debt, unrestricted VAR, vector error correction model, cointegrating equations, error correction term, external debt service payment.