Effect of External Debt Service on Economic Growth in Nigeria

Abstract

External debt service is major debt variable in economic growth and public debt debate. However, this variable is often ignored in literature. This study investigated the relationship between external debt service and economic growth in Nigeria from 1981 to 2020. A quantitative research approach was adopted for this study. The method for estimation was the Auto-Regressive Distributed Lags (ARDL) model. The ARDL bound test results showed there was co-integration. The speed of change between the short-run and long-run of the co-integrating equations was 88.86%. The study used debt overhang theory, the neo-classical theory and endogenous theory as the theoretical framework. The study provided evidence of a negative relationship between external debt service and economic growth although this is not statistically significant. The result shows resource depletion effect of external debt services on growth. External debt stock has a positive but not significant relationship with growth. There is a positive but not significant relationship between external reserves to external debt ratio with growth. Debt service to export ratio has a positive relationship with growth. The study recommends that policy makers in Nigeria should develop a methodology to compare the return on external debt to be incurred with the cost of debt so that gains that may eventually offset the cost of debt service. This methodology should be a policy or legislation.