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

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. Consideratio