Re-visiting the Drivers for Increasing External Debt

Abstract

This paper investigates the drives for increasing external debt in an open economy Nigeria over the period 1970 to 2017 using general to specific approach (GETS) approach (Hendry, 1995). The Johansen cointegration test confirms that variables have long run relationship. The empirical results for both long run and short run estimates indicate oil price, domestic savings and fiscal deficits play a significant role in increasing external debt in Nigeria. The study also found evidence that the dummy variables for exchange rate and debt relief also accelerate the growth of external. This finding indicates that, after the multilateral debt relief between 2005 and 2006, fresh loans are still coming to Nigeria. To this end, Nigeria should focus on investment in real sectors especially in agriculture and manufacturing to increase export performance. This would enable the country to generate adequate foreign earnings and stimulate domestic savings, and reduce reliance on oil revenue.

An empirical investigation into the determinants of external debt in Asian developing and transitioning economies

“…The value of the debt increases as a result of the depreciation (rise in the exchange rate) of the domestic currency. Past studies, such as Udoh and Rafik (2017) and Adamu (2019), have reported a similar relationship.…”

“…The results revealed that military expenditure increases external debt, whereas domestic investment and trade reduce it. Adamu (2019) investigated the determinants of external debt for Nigeria over the period 1970-2017. The results from the general to specific (GETS) approach and Johansen cointegration showed that oil price, domestic savings, exchange rate, debt relief, and fiscal deficits increase external debt.…”

“…Common determinants of external debt reported in existing literature are economic growth, imports, population, foreign exchange reserves, total debt service, poverty, income instability, depreciation of the currency, budget deficit, exchange rate, trade openness, terms of trade, inflation, interest rate, national savings, and financial development (Abdullahi, Bakar, and Hassan 2015;Bittencourt 2015;Lau, Lee, and Apir 2015;Vighneswara 2015;Lau and Lee 2016;Al-Fawwaz 2016;Belguith and Omrane 2017;Özata 2017;Udoh and Rafik 2017;Chiminya, Dunne, and Nikolaidou 2018;Chirwa and Odhiambo 2018;Adamu 2019;Brafu-Insaidoo et al 2019;Fatukasi et al 2020). For instance, Vighneswara (2015) and Beyene and Kotosz (2020a) asserted that government expenditure is one of the key factors that increase external debt due to budget deficits, which compel governments to borrow.…”

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

“…Using the panel fully modified ordinary least squares method, the study revealed that corruption, government spending, and population growth increase external debt, while economic growth decreases it. Adamu (2019) conducted research to investigate factors influencing Nigeria's external debt and he concluded that external debt favorably affected oil price, domestic savings, exchange rate, debt relief, and fiscal deficits. Meanwhile, in 2020, Fatukasi et al utilized the fully modified ordinary least squares method and data from 1981 to 2018, and found that debt servicing and trade openness were negatively associated with external debt in Nigeria.…”

“…This is crucial because understanding the determinants of ex-ternal debt can provide valuable insights into how to manage a country's debt, minimize debt vulnerabilities, and promote sustainable economic growth. Previous research has identified several common determinants of external debt, including economic growth, imports, population, foreign exchange reserves, total debt service, poverty, income instability, currency devaluation, budget deficit, exchange rate, and trade openness, as noted by Adamu (2019);Brafu-Insaidoo, Ahiakpor, Vera Ogeh, and William G (2019). By investigating these determinants, negative consequences can be avoided.…”