External Debt and Nigeria’s Real Economy

Abstract

In recent times, there have been several agitations by stakeholders on the increasing level of Nigeria’s external debt while her real economic growth (RGDP) has remained sluggish and suboptimal. Global attempts to validate the relationship between external debt and RGDP by economic scholars have also generated mixed results. It is therefore pertinent for this study to reexamine the problem empirically and holistically.  The study applied co-integration procedures, unit root test, error correction model, and Granger causality test, using time series data sourced from CBN, spanning from 1980 to 2020.  The empirical finding demonstrates that external debt, external debt interest charges and foreign exchange rate are adversely affecting the growth of the real economy. The study recommends measures to ensure that borrowed funds are spent on projects they are tied to.  Furthermore, policy makers should take cognizance of policy lag effect, which was also uncovered in the study, and select policies in line with the expected magnitude of expected changes.

Keywords: external debt, exchange rate, real economy, co-integration, error correction model

JEL: E00 H63