Analysis of External Debt and Real Economic Growth of Developing Economies: Nigeria’s Experience

Abstract

Increase in external debt burden, together with its attendant risk, have become a global phenomenon, ravaging many developing economies, Nigeria inclusive. Global attempts by some economic scholars to validate the relationship between external debt and economic growth have also generated mixed results. Recently, there is an implicit belief by Nigerian public/stakeholders that her increasing level of external debt is adversely affecting her real economic growth (RGDP). This study therefore, empirically investigated the relationship between Nigeria’s RGDP and her external debt (EXD), adding external debt interest charges (EDIC) and nominal foreign exchange rate (NFXR) as control variables. The source of the study data is CBN and it spans for a period of 1980 to 2022. The study applied Co-integration technique, Error Correction Model (ECM) and Granger Causality tests for the econometric analysis. The empirical investigations confirmed that, in the longrun, the selected explanatory variables had significant adverse effect on Nigeria’s RGDP. The Granger Causality test showed that NFXR had unilateral relationship with RGDP, which implies that NFXR determines RGDP without a feedback, while EXD and EDIC established independent relationships with RGDP. The ECM coefficient (-0.154347) is significant and negatively signed. It measures the speed of the adjustment at which equilibrium is restored to RGDP, after the short-run disequilibrium in the selected explanatory variables.  This implies that, in the longrun, Nigeria’s RGDP growth process, adjusts slowly to the variations in the selected time series, which indicates a Policy lag effect.  The study, therefore, recommends effective and sustainable debt management and monitoring to ensure that borrowed funds are spent on productive projects. Government should seriously pursue effective Exchange Rate management. Finally, the Policy makers should design policies that would match the magnitude of the expected changes in order to counter the lag effect.