External Debt and Economic Growth in Nigeria

Decades of Unending Dilemma

Abstract

This study investigates the empirical relationship between external debt and the performance of the Nigerian economy using annual time series data from the Central Bank of Nigeria Statistical Bulletin, the Debt Management Office, and the World Development Indicators. Gross Domestic Product (GDP) was employed as the dependent variable representing economic growth, while external debt, debt servicing, interest rate, exchange rate, gross capital formation, labour force participation rate, and foreign direct investment were used as explanatory variables. Employing the unit root test, bounds test for co-integration, and the Autoregressive Distributed Lag (ARDL) model, the findings reveal that external debt has a statistically significant negative impact on economic growth, with a 1% increase in debt reducing output by approximately 0.7%. Similarly, debt servicing negatively affects growth in the short run, reducing output by about 0.11%. These results imply that debt servicing exerts a greater dampening effect on the economy than the debt itself. The study concludes that the external debt-growth relationship in Nigeria is inverse and nonlinear. It recommends aligning external debt management with growth-maximizing debt thresholds and implementing fiscal reforms to enhance debt sustainability and economic performance.