Nigeria’s External Debt and Economic Growth: An Error Correction Approach

Abstract

This study investigates the relationship between Nigeria’s external debt and economic growth, between 1975 and2006. The choice of period was guided by data availability and the the escalation of Nigeria’s external debt.Econometric evidence revealed stationarity of the variables at their first difference while the Johansencointegration approach also confirms the existence of one cointegrating relationship at the 1 percent and 5percent level of significance. In addition, error correction estimates revealed that external debt has negativerelationship with economic growth in Nigeria. For example, a one per cent increase in external debt resulted in adecrease of 0.027 per cent in Gross Domestic Product, while a 1 per cent increase in total debt service resulted to0.034 per cent (decrease) in Gross Domestic Product. These relationships were both found to be significant at theten per cent level. In addition, the pairwise Granger Causality test revealed that uni-directional causality existsbetween external debt service payment and economic growth at the 10 percent level of significance. Also,external debt was found to granger cause external debt service payment at the 1 percent level of significance.Statistical interdependence was however found between external debt and economic growth. In order toameliorate the negative influence of external debt on economic growth, debt accumulation for projects must bematched with the timing of repayment. Nigeria must be concerned about the absorptive capacity. Considerationabout low debt to GDP, low debt service/GDP capacity ratios should guide future debt negotiations. Finally theportfolio of debt must be diversified in terms of sources and types to avoid harmful concentration and areoccurrence to the past.