Acta Universitatis Danubius. Œconomica, Vol 14, No 4 (2018)

Abstract

In the last five decades Nigeria has witnessed decline in investment and growth prospect due to high debt burden known as debt overhang. From the foregoing, the paper examines how external debt affects economic growth in Nigeria by taking a critical look into its origin and the process of its metamorphosis to the state of unsustainability before after the debt relief in June 2005. The secondary data collected for this study from Central Bank of Nigeria and World Bank database between 1981 and 2016 were subjected to both short and long-run periods. The results show that ratio of external debt to gross national income, ratio of reserves to total debt and foreign exchange rate have a minimal long run positive effect on growth. In the same manner, all variables have positive effect on growth except foreign exchange rate which has negative impact. The Error Correction Model shows that there is 106 percent adjustment taking place each year towards the long run periods. In conclusion, it is evident that debt can only be productive if properly managed and this will make the rate of return higher than the cost of debt servicing. In spite of this, the study recommends among others, that to achieve a long-term solution to the external debt problem, the spending must be of high priority and use on productive self-liquidating investment.