Understanding the Growth Implications of Debt Servicing in Nigeria

Abstract

This study examined the effect of external debt servicing on economic growth in Nigeria. The specific objectives are to determine the effects of multilateral debt service, total debt service and external debt stocks on gross domestic product (GDP) growth. Time series data required for the investigation were sourced from the World Development Indicators and International Debt Statistics. The data analysis techniques include descriptive statistics, unit root tests, Johansen cointegration test and parsimonious error correction model (ECM) in addition to the post- estimation tests. The unit root results showed that all the variables are stationary at first difference. In other words, this finding revealed that the variables are integrated into order one [I(1)]. Evidence of two cointegrating equations was established from the Johansen cointegration test results, which implies that GDP growth has a long-run relationship with multilateral debt service, total debt service and external debt stocks. The parsimonious ECM showed that multilateral debt service has a negative and significant effect on GDP growth. This implies that an increase in multilateral debt service is detrimental to economic growth. The results further showed that total debt service and external debt stocks negatively and significantly impacted GDP growth. This finding indicates that Nigeria has not productively utilized the growing stocks of foreign loans to enhance its contributions to economic growth. The error correction parameter (-0.432) is negative and significant, which suggests that short-run disequilibrium can adjust to a long-run equilibrium position at a speed of 43.2 per cent. Based on the findings, this study concludes that debt servicing undermines the growth of the Nigerian economy. Thus, it is recommended that among others the government should gradually reduce its debt stock to reduce the total debt service obligations and make more resources available for economic grow