Abstract
Abstract This study considers the consequences of external loan on capital investment in Nigeria. Data for the study have been collected from the World Bank and Central Bank of Nigeria Statistical Bulletin, 2018 edition. The variables on which data are sourced include government capital expenditure, external debt accumulation, debt servicing cost, inflation rate, and exchange rate. Government capital expenditure is the dependent variable, while external debt accumulation and debt servicing cost are the key independent variables. Inflation and exchange rates are used as the moderating variables. The scope of the study covers the period from 1996 to 2018 and the data are analysed using the ordinary least squares multiple regression method. The regression results indicate that external debt has a significant negative impact on capital investment while debt servicing cost has a strong and significant positive effect on capital investment. Under this circumstance, the controlling variables are not significant in influencing capital investment. Hence, the study suggests more focus on profitable capital investments if external borrowing must be embarked upon. The need for the development of untapped natural resources, establishment of industries and revival of abandoned industries to boost debt repayment has been emphasized. The study also strongly recommends that the existing governments (state and federal) should endeavour to complete capital projects of past administrations in order to drive the economy and to avoid wastage of financial resources including the borrowed funds.
Highlights
External debt is both useful and harmful to an emerging economy (Shahzad, Zia, Ahmed, Fareed & Zulfiqar, 2014)
The principal goal of this study is to examine the effect of external debt and debt servicing cost on the government capital investment in Nigeria
The findings further revealed that domestic debt and macroeconomic factors such as inflation rate, real interest rate and exchange rate were insignificant in explaining economic growth while capital stock positively influenced economic growth
Summary
External debt is both useful and harmful to an emerging economy (Shahzad, Zia, Ahmed, Fareed & Zulfiqar, 2014). If it is used for a lucrative public capital investment and infrastructural provisions, it becomes very beneficial to a developing country. Borrowing for economic development and execution of capital projects is common among unindustrialized countries. Foreign loans are usually acquired to finance public investments required to unlock economic growth opportunities of a nation (Mahmoud, 2015). It is imperative for emerging countries to apply the external loans to financing of developmental projects such as schools, licenses/by/4.0), in the manner agreed with Sciendo
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