Assessment of the effect of external debt overhang on economic growth in Nigeria

Abstract

External borrowing can be a viable option for achieving economic growth in Nigeria that is characterized by the exigencies that can enhance the welfare of her citizens if optimally utilized. However, there are arguments over what account for the low performance of external loans and the break experienced of debt overhang and the crowding effect on the economy. To fill the gaps, the author adopts error correction mechanism and linked data from the Central Bank of Nigeria on various issue to test the hypotheses. The results revealed that exchange rate at lag three and inflation rate lagged by one-year period met their a priori expectations as their coefficient are negatively signed implying that increase in the two variables reduces economic growth in Nigeria. The results also indicate direct relationship between foreign exchange earnings arising from external debt-export ratio, income emanating from external debt-income ratio and economic growth implying that these would have been optimally utilized for investment driven in the economy, hence the result is so. By implication, the study concludes that the outcome enhances economic growth. Based on the results, the study recommends exchange rate stability, tolerable and a well-managed inflation rate (single digit rate) as these could stimulate investment necessary for economic growth in Nigeria.