External Debt and Economic Growth Relationship in Nigeria: A Reconsideration

Abstract

This paper examines the relationship between external debt and economic growth over the period 1981-2021 in Nigeria using the ARDL econometric technique. As economic growth is elusive amid a high and increasing stock of external debt, the country is on the verge of losing access to international financing. Thus, the problem provokes raging discussion on whether, or not, external debt is growth-enhancing in Nigeria. As such, in an attempt to contribute to the discussion and proffer a solution to the problem, this paper builds on an earlier study. Consequent upon preliminary diagnostics, a one-way causality is established to run in a specific pairwise relationship as each of external debt and domestic investment Granger causes economic growth. Moreover, following the affirmation of the long-run relationship among the variables, estimation results reveal an inverse relationship between real interest rate and economic growth in the short-run. The results further establish that external debt impacts negatively, as against openness to trade and domestic investment averagely impacting positively, on economic growth in both the short-run and long-run. In essence, if it becomes pertinent for the country to borrow for growth-enhancing investments, the government is advised to borrow at a zero rate of real interest.