External Debt Relief and Economic Growth in Nigeria

Abstract

This study examined the structural break relationship between external debt and economic growth from 1980 to 2009 with a view to examine the effect of external debt relief on economic growth in Nigeria. The effect of huge external debt of less developed countries is believed to impede investment resources. This has resulted in debt restructuring of various kinds in Nigeria with some concessional loans, as well as the external debt relief in 2005. A decade after the debt relief critical sectors of the economy such as education, health, electricity, transport and exchange rate etc. suppose to show evidence or sources of such debt relief. Some studies found the effect of external debt relief to be doubtful especially on economic growth. Hence, a scientific study of the debt relief granted Nigeria by the Paris club in 2005 is here evaluated in respect of the effect on economic growth in the country. The study used quarterly time series of external debt, external debt service and real gross domestic product to determine the structural break effect of external debt on economic growth in the Nigeria as a result of the debt relief. The result of the chow test showed that the 2005 external debt relief caused a structural break in economic growth relationship with external debt in Nigeria. The study further showed that beside the reduction in aids, resources were freed for economic growth projects in health and education sectors. Conclusively, the external debt relief did make available resources for economic growth in Nigeria. Countries are therefore recommended toward discretional concessional borrowing and see external debt relief as a good option for poor unsustainable indebted countries as a way of making resources available for economic growth. The real sector should be the focal point where value is created rather than impeding it with mismanagement and servicing debt.