External Debt and Economic Growth in Nigeria: Empirical Insights from the Bound Testing Approach

Abstract

This study investigates the effect of external debt stock on economic growth in Nigeria for the period of 1981-2017. The paper used Augmented Dickey Fuller to test the unit root test and Autoregressive Distributed Lagged Model (ARDL) to find the long-run relationship and estimate both short and long run estimates. Real GDP was regressed on external debt stock, debt service payment, exchange rate, gross capital formation and labour force. The result found that the short-run parameter of the external debt stock and labour force was found positive and statistically significant at 5% indicating their influence on output growth in the short-run, whereas debt service payment, exchange rate and gross capital formation were also significant in the period but has a negative effect on output growth in the short-run. The result also found that in the long-run external debt stock has a negative impact on economic growth while debt service payment , exchange rate, gross capital formation enhances economic growth. Thus, there is need for government to ensure that funds sourced from external borrowings were used for capital investment that can pay itself back with its interest and not recurrent expenses in order to ensure sustainable and pro-poor growth.

Keywords: External debt stock, debt service, investment, labour, exchange rate, real income

DOI: 10.7176/JESD/10-12-08

Publication date:June 30^th 2019