The Impact of External Debt on Economic Performance in Nigeria: An ARDL Approach.

Abstract

This study examines the impact of external debt on Nigeria's economic growth between 2010 and 2022. Emphasis is given to rising debt levels from commercial sources (Eurobonds) and bilateral loans (China), which particularly impact economic performance and the country's long-term viability. Debt overhang theory was adopted, while an Auto-Regressive Distributed Lag (ARDL) model was employed utilizing quarterly time-series data. The research examines the relationship between external debt levels and GDP growth, with the exchange rate, inflation and Federal government capital expenditure as control variables. The findings highlighted that while external debt can occasionally stimulate economic growth by financing infrastructure and other developmental projects, the rising costs of debt servicing significantly strain fiscal resources, corroborate the debt overhang theory, and could potentially impede long-term economic growth by consuming a substantial portion of the national budget and limiting public investment. The study contributes to the existing literature by providing empirical evidence of the complex dynamics between external debt and economic growth in Nigeria, offering insights crucial for policymakers to formulate strategies that balance debt management with sustainable economic growth.