FOREIGN DEBT AND ECONOMIC GROWTH DYNAMICS: FURTHER EVIDENCE FROM NIGERIA

Abstract

This paper examines the relationship between foreign debt and economic growth in Nigeria. It covers the period from 1970 to 2017, and evaluates the impacts of macroeconomic variables on growth. Specifically, it analyses the average impacts of gross fixed capital formation, openness and real interest rate on growth. By employing the ADF, PP and KPSS techniques to test the stationarity of the series, the Bai and Perron (2003) methodology is however adopted to confirm the presence of structural breaks. The linear and polynomial relationships connecting the variables are used as the basis for analysis by adopting OLS and ARDL techniques. Whereas one way causality is established running from foreign debt to growth, a no-causal relationship is rather revealed between growth and the square of foreign debt. Furthermore, the linear analysis establishes an inverse relationship in the short-run, while the polynomial analysis reports insignificant relationship between the variables in both the short-run and long-run. Thus, in conclusion, an inverse relationship is established between foreign debt and economic growth in Nigeria. It is therefore suggested that government should take caution in obtaining more loan from foreign sources.