Analyzing the Impact of External Debt on Capital Formation in Nigeria: An Autoregressive Distributed Lag Approach

Muhammad Mustapha Abdullahi,Sallahuddin B Hassan,Nor Aznin Bt Abu Bakar

doi:10.5901/mjss.2016.v7n1p173

Muhammad Mustapha Abdullahi, Sallahuddin B Hassan + Show 1 more

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https://doi.org/10.5901/mjss.2016.v7n1p173

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Abstract

This study aimed at examining the impact of external debt to the growth and development of capital formation in Nigeria. Time series data was utilized for a period from 1980 to 2013, employing the Autoregressive Distributed Lag (ARDL) modelling. The result of stationarity tests reported a mixed integration at both I(0) and I(1) hence warranting the use of the ARDL. The ARDL estimation also showed the presence of long run relationship amongst the variables. It was also proved that the variables were independently related in the long run. The impact of external debt on capital formation has been established to be negative and statistically significant while savings came out as the only variable with a bidirectional causal relationship amongst the variables. Interest rate was found to be statistically significant even though weak. The other variables were found to be of unidirectional casual effects. Short-run dynamics of the relationship between the variables have also been examined using ARDL error correction modelling. It was established that the disequilibrium in the previous period will be adjusted within the current period by 68 percent showing a speedy adjustment rate. The coefficient of ECM term has the expected sign and significant at one percent. Going by these findings therefore savings should be giving priority and encouraged internally in order to boost the speed of the growth of capital formation in the economy. DOI: 10.5901/mjss.2016.v7n1p173

Highlights

Economies of the third world are generally characterized by low and weak growth rates due to their inherent nature of under savings, which retards them from providing financial support for investment in both private and public sectors
The function of foreign capital is that it assists third world economies in investing much higher than they might have saved internally; which is a sort of necessity resulting from deficits in domestic savings (McKinnon, 1964)
Even though this work intends to adopt the Autoregressive Distributed Lag (ARDL) framework which does not necessarily require that variables be tested for unit root, testing for the order of integration could be helpful in determining whether ARDL approach is suitable or not (Sulaiman & Abdul-rahim, 2013)

Summary

Introduction

Economies of the third world are generally characterized by low and weak growth rates due to their inherent nature of under savings, which retards them from providing financial support for investment in both private and public sectors. Savings and investment are two major macroeconomics variables that support and sustains economic growth (Hunt, 2007). Linked to this is the fact that economic growth cannot be sustained and maintained unless the level and the structure of capital reaches a certain threshold (Sachs, 2002). The function of foreign capital is that it assists third world economies in investing much higher than they might have saved internally; which is a sort of necessity resulting from deficits in domestic savings (McKinnon, 1964)

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