ECONOMETRIC ANALYSIS OF EXTERNAL DEBT, EXCHANGE RATE AND ECONOMIC GROWTH IN NIGERIA

Abstract

(ProQuest: ... denotes formulae omitted.)INTRODUCTION:In a study linking public debt to development, Udoka and Ogege (2012) stated that Nigeria has a long history of external indebtedness that dates back to the pre -independence period. But the magnitude of the debt was small until 1978, and the debts incurred before 1978 were mainly long -term loans from multilateral and official sources such as the World Bank and Nigeria's major trading partners. The impact of the debts on the economy was not much as the loans were obtained on soft terms. However, the huge revenue receipts from the oil sector especially during the oil boom of 1973 -1976 was enough to absorb any negative impact the debt burden would have on the economy (DMO, 2011).Prior to the debt cancellation deal of the 18 billion US Dollars in 2005, Nigeria ranked the largest debtor nation in Sub-Saharan Africa. Available statistics has shown that the external debt stock of Nigeria has been on the increase after the debt cancellation deal in 2005. The country's external outstanding debt stood at N451,461.70 Million in 2006 and 1,026,904.00 Million in 2012 respectively (CBN, 2012). The outstanding external debt stock of Nigeria stood at USD9,711.45 Million at the end of December 2014, compared to USD8,821.55 Million at the end of the corresponding period in 2013 (CBN, 2014).According to the Debt Management Office (DMO) 2014 annual report the increase was largely attributed to additional disbursement from existing and newly approved loans that became effective during the period, as well as net adverse cross exchange rate movements between the different currencies in the external loan portfolio. From the DMO annual report (2014), bilateral creditors comprised of loans contracted from China and France on semi concessional terms. The debt owed to bilateral creditors amounted to USD1,412.08 Million at the end of 2014 compared to USD1,025.70 Million at the end of 2013, and this was largely due to loans contracted from the Exim Bank of China during the referenced period. The multilateral loans accounted for USD6,799.36 Million or 70.01 per cent of the external debt portfolio in 2014. The trend analysis of the external debt stock between 2010 and 2014 revealed that the share of multilateral debt decreased marginally from 71.13 per cent in 2013 to 70.01 per cent in 2014.Aluko and Arowolo (2010) observed that despite the fact that external debt has hardly expended, the management of the debt by way of servicing repayment, which usually is in foreign exchange, has affected the macroeconomic performance of the Nigerian economy. Also, Pattillo, Poirson and Ricci (2002) observed that large debt service is expected to have negative impact on economic performance because of the uncertainty regarding the portion of the debt that will be serviced with the country's own resources.The main objective of this study is to examine the relationship between external debt, exchange rate and economic growth in Nigeria. Several researchers in the past have investigated the relationship between external debt, exchange rate and economic growth. But these studies have come out with diverse views without a consensus in their findings. This study is therefore designed to contribute to existing knowledge and find if an empirical consensus can be reached.The rest of the paper is structured as follows: section two provides a brief review of related empirical literature followed by the methodology of the study in section three. The succeeding section presents the empirical results of the study and discussions while section five provides the conclusion of the study and the recommendations based on the study findings.REVIEW OF EMPIRICAL LITERATURE:The issue of external debt and economic growth has been well documented in the body of literature in recent times with diverse views with no consensus conclusion by scholars and researchers. In addition, Nigeria experiences dynamism in exchange rate movement due to the fact that major currencies of the world are traded freely in the autonomous market. …