External Debt and Nigeria's Economic Growth: Determinants and Implications

Abstract

Nigeria's economy has been largely dependent on external borrowing, which has resulted in an increasing debt burden. Policymakers and economists have debated the influence of external debt on economic growth. Therefore, this study analyzed how external debt affects Nigeria's economic growth and explored the factors that determine external debt in the nation. The study utilizes an Ex Post Facto research design, and data from the Central Bank of Nigeria and the World Bank report from 1990 to 2020 was used. Vector error correction regression model, granger causality test, unit root and co-integration tests were employed for the analysis. Findings revealed that external debt servicing, exchange rate and external debt have significant but adverse effect on economic growth, confirming the debt overhang effect. However, external reserves portends positive and significant effect on GDP. Moreover, empirical results revealed that trade openness, government expenditure, inflation and exchange rates are salient factors that affect external debts in Nigeria. In terms of causality, all the tested variables have causal relationship with external debt. The study recommends that Nigeria government needs to adopt a sustainable borrowing and debt management strategy to avoid excessive external debt accumulation and its negative implications for the economy.