Impact of External Debt on Economic Growth of Nigeria

Abstract

This study investigates the impact of external debt on Nigeria’s economic growth using annual time series data from 1980 to 2023 obtained from the World Bank. Employing econometric techniques including the Augmented Dickey-Fuller test, Ordinary Least Squares regression, and Granger causality analysis, the study examines both the stock of external debt and debt servicing alongside key macroeconomic variables such as foreign reserves, foreign direct investment, gross fixed capital formation, inflation, and exchange rate. The results reveal that external debt and debt servicing exert statistically significant negative effects on real GDP, supporting the debt-overhang hypothesis. Conversely, foreign direct investment, gross fixed capital formation, and foreign reserves positively influence growth, while inflation and exchange rate depreciation have contractionary effects. Granger causality results indicate a unidirectional causality from external debt to economic growth. The concludes that debt management, enhanced investment efficiency, and macroeconomic stability are essential for sustainable growth in Nigeria, thus recommends that, government should implement a comprehensive debt sustainability analysis before contracting new loans, ensuring that borrowing aligns with growth priorities and repayment capacity.