Munich Personal RePEc Archive

External Debt and Domestic Debt impact on the growth of the Nigerian Economy

Aminu, Umaru and Ahmad Aminu, Hamidu and Salihu, Musa (2013): External Debt and Domestic Debt impact on the growth of the Nigerian Economy. Published in: International Journal of Educational Research , Vol. 1, No. 2 (June 2013): pp. 70-85.

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Abstract

The rationale for this paper is to establish the relationship between economic growth, external debt and domestic debt in Nigeria. Debt has become inevitable phenomenon in Nigeria, despite its oil wealth. This paper therefore is set to investigate the impact of external debt, and domestic debt on economic growth in Nigeria between 1970-2010 through the application of Ordinary least square method to establish a simple relationship between the variables under study, Augmented Dickey-Fuller technique in testing the unit root property of the series and Granger causality test of causation between GDP, external debt and domestic debt. The results of unit root suggest that all the variables in the model are stationary and the results of Causality suggest that there is a bi-directional causation between external debt and GDP while no causation existed between domestic debt and GDP as well no causation existed between external debt and domestic debt. The results of OLS also revealed that external debt possessed a negative impact on economic growth while domestic debt has impacted positively on economic growth (GDP). A good performance of an economy in terms of per capita growth may therefore be attributed to the level of domestic debt and not on the level of external debt in the country; therefore external debt is seen as inimical to the economic progress of a country. The paper found that domestic debts if properly manage can lead to high growth level. A major policy implication of this result is that concerted effort be made by policy makers to manage the debt effectively by channeling them to productive activities (real sector) so as to increase the level of output in Nigeria, hence achieving the desire level of growth. Another policy implication of the study is that most developing countries contract debt for selfish reasons rather than for the promotion of economic growth through investment in capital formation and other social overhead capital. Thus, the paper also recommends that government should rely more on domestic debt in stimulating growth rather than external debt. Government should formulate policies aimed at encouraging domestic savings vis-à-vis domestic investment. The need for borrowing is due to gap between domestic savings and investment; therefore, bridging the gap can be a likely solution to Nigeria’s debt accumulation. For debt to promote growth in Nigeria and other highly indebted countries fiscal discipline and high sense of responsibility in handling public funds should be the Watchword of these countries’ leaders. Debt can only be reduced to the barest minimum by increasing output level (GDP).

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