Analysing the Incidence of External Debt Stocks and Exchange Rate Fluctuations on Economic Growth in Nigeria

Abstract

The overdependence of Nigeria on external borrowing to finance capital projects amidst persistent fluctuations in exchange rate had posed challenges for economic growth in Nigeria. This study analysed the impact of external debt stock and exchange rate fluctuations on economic growth. Time series data on the variables were sourced from the world development index and the Central Bank of Nigeria from 1981-2021. The outcome of Zivot-Andrews indicated that all variables were integrated of order I(1), the Johansen cointegration confirmed the existence of long run relationship among the variables. The study found from the analysis of structural VAR that external debt stock and external debt service had significant negative impact on economic growth in Nigeria while exchange rate fluctuations positively impact on economic growth. However, the analysis of the transmission effect revealed that external debt stock negatively affects economic growth through exchange rate volatilities. The study therefore recommended borrowing to finance only capital projects and not recurrent expenditures, and the execution of these projects should be paid in domestic currencies to increase demand for naira.