Abstract
The role of external debt in economic growth of developing countries has been questioned since there has been a high incidence of default, low economic growth and high levels of poverty, all of which are associated with high stocks of external debt. Also, the uncertainties about country external debt sustainability position as well as whether countries are already trapped in the debt-overhang situation have underlined point of debate among scholars. This study investigates the dynamic relationship between external debt and economic growth of Nigeria for period of 1985 to 2017 using Johansen approach to cointegration, vector error correction model (VECM) and granger causality test. Data for the study was collected from the CBN statistical bulletin. The findings revealed that debt service payment has negative and insignificant impact on Nigeria’s economic growth while external debt stock has negative and significant effect on economic growth. The causality test indicates no-directional causality between external debt and GDP. From the findings, the study recommends that policy-makers should reformulate the external debt management strategy to minimize sovereign risk through diversification of the external borrowing. This could potentially be achieved by reducing the dependency on one specific debt instrument or currency. Hence, the strategy will be effective if it is carried out in parallel with a comprehensive surveillance and debt-monitoring system.
Highlights
In late decades, studies on economic growth and its determinants has pulled in significant consideration
The role of external debt in economic growth of developing countries has been questioned since there has been a high incidence of default, low economic growth and high levels of poverty, all of which are associated with high stocks of external debt
The results revealed that causality does not exist between external debt and economic growth in Nigeria
Summary
Studies on economic growth and its determinants has pulled in significant consideration Be that as it may, studies on external debt on economic growth are as yet falling behind, prompting equivocal answers. The increasing level of stock of debt has raised worries about whether the external debt borrowing could help to boast economic growth or whether it could turn into a burden that future would need to pay for. The savings gap and foreign exchange gap indicate that there are inadequate and insufficient resources to support the expected level of growth in the economy, revealing the role of external borrowings. The role of external borrowing in economic growth has been discovered even though it depends on the two gaps of either savings investment or import-export. MohdDauda, Ahmad and Azman-Saini (2013) the foreign borrowing will increase until the gaps are narrowed and the expected marginal product of capital is equivalent to the marginal cost of funds [1]
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