Does Nigeria's External Debt Contribute to Economic Growth? A Revised Empirical Analysis

Abstract

Following the debt relief and total payment of external debt in 2006, Nigeria's external debt has escalated in recent years without translating into infrastructure development or considerable growth. As a result, whether Nigeria's external debt promotes economic growth is a big question. Thus, using data from 1981 to 2020, this study explores the relationship between external debt and economic growth in Nigeria. The macroeconomic variables utilized are economic growth measured using real gross domestic product while the explanatory variables are total external debt, debt servicing, gross fixed capital formation and inflation rate. The main econometric tools are the Autoregressive Distributed Lag Model (ARDL) estimate and Granger causality tests. The ARDL results indicate that total external debt, gross fixed capital formation and inflation rate have negative significant nexus with economic growth in the short-run but insignificant direct effect in the long-run period. Furthermore, the Granger causality test unveiled bidirectional causation between external debt and real gross domestic product. Following the findings, this study proposed that the utilisation of external loans be aligned with their intended purpose, focusing largely on basic requirements and infrastructure development. Also, government should frequent and promptly pay the debt service in order to avoid accumulating more debt.