IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN NIGERIA: THE MODERATING ROLE OF INSTITUTIONAL QUALITY

Abstract

This research examines the impact of external debt on Nigeria’s economic growth between 1986 and 2024, with a specific focus on the role of institutional quality. The analysis carried out with the Fully Modified Least Squares (FMOLS) method indicates that both external debt and debt servicing are linked with slower growth. However, the relationship is not statistically significant. In simple terms, borrowing alone does not guarantee improved economic performance. On the other hand, institutional quality exerts a clear and significant positive impact on economic growth, indicating that good governance, effective legal systems, and reduced corruption are central to long-term development. Government capital expenditure also appears to support economic growth, but its effect is weak and statistically insignificant, which may reflect the challenges in turning investments into real growth. Notably, the interaction between external debt and institutional quality is positive and significant, indicating that robust institutions can offset the growth-limiting effects of debt. Overall, the findings highlight that external debt can only be beneficial if backed up with strong institutions and prudent resource management. Based on this, the study recommends that Nigeria focus on improving institutional frameworks, enhancing the effectiveness of investments, and managing debt wisely to foster sustainable economic growth.