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

Vincent. N. Ezeabasili, Hamilton O. Isu, Joseph N. Mojekwu

Abstract


This study investigates the relationship between Nigeria’s external debt and economic growth, between 1975 and
2006. 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 Johansen
cointegration approach also confirms the existence of one cointegrating relationship at the 1 percent and 5
percent level of significance. In addition, error correction estimates revealed that external debt has negative
relationship with economic growth in Nigeria. For example, a one per cent increase in external debt resulted in a
decrease of 0.027 per cent in Gross Domestic Product, while a 1 per cent increase in total debt service resulted to
0.034 per cent (decrease) in Gross Domestic Product. These relationships were both found to be significant at the
ten per cent level. In addition, the pairwise Granger Causality test revealed that uni-directional causality exists
between 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 to
ameliorate the negative influence of external debt on economic growth, debt accumulation for projects must be
matched with the timing of repayment. Nigeria must be concerned about the absorptive capacity. Consideration
about low debt to GDP, low debt service/GDP capacity ratios should guide future debt negotiations. Finally the
portfolio of debt must be diversified in terms of sources and types to avoid harmful concentration and a
reoccurrence to the past.

Full Text: PDF DOI: 10.5539/ijbm.v6n5p156

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This work is licensed under a Creative Commons Attribution 3.0 License.

International Journal of Business and Management   ISSN 1833-3850 (Print)   ISSN 1833-8119 (Online)

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