The Effect of External Debt and Balance of Payment on Economic Growth

The Effect of External Debt and Balance of Payment on Economic Growth

ABSTRACT

The study examines The Effect of External Debt and Balance of Payment on Economic Growth in Nigeria. This study covers a time span of 35 years (1980-2014).

The analytical technique used in this study is multiple regression and the data is secondary and sourced from Central Bank of Nigeria (CBN) publications such as CBN statistical bulletin, CBN annual report as well as economic review documents.

The results were obtained using Eview version 8.0 and the major findings are that External Debt has a negative significant effect on economic growth in Nigeria and Balance of payment does not have a statistically significant effect on the economic growth of Nigeria within the period under review.

INTRODUCTION

It is generally expected that developing countries, facing a scarcity of capital, will acquire external debt to supplement domestic saving (Malik et al, 2010; Aluko and Arowolo, 2010).

Besides, external borrowing is preferable to domestic debt because the interest rates charged by international financial institutions like International Monetary Funds (IMF) is about half the one charged in the domestic market (Pascal, 2010).

However, whether or not external debt would be beneficial to the borrowing nation depends on whether the borrowed money is used in the productive segments of the economy or for consumption.

Adepoju et al (2007) stated that debt-financed investment needs to be productive and well managed enough to earn a rate of return higher than the cost of debt servicing.

The main lesson of the standard “growth with debt” literature is that a country should borrow abroad as long as the capital thus acquired produces a rate of return that is higher than the cost of the foreign borrowing.

In that event, the borrowing country is increasing capacity and expanding output with the aid of foreign savings.

REFERENCES

Adepoju A. A., Salau A. S. and Obayelu A. E. (2007) The Effects of External Debt Management on Sustainable Economic Growth and Developmen:Lessons from Nigeria. Munich Personal RePEc Archive

African Forum and Network on Debt and Development (2007) Nigeria:Foreign  Debts, Stolen Wealth, IFIS and The West, A Case Study. Harare: AFRODAD.

Ajayi, R. (2000). “On the Simultaneous Interactions of External Debt, Exchange Rates, and Other Macroeconomic Variables: The Case of Nigeria” Centre for Economic Research on Africa.

Ajisafe, R. A., Nassar, M. L., Fatokun, O., Soile, O. I., and Gidado, O. K. (2006) External Debt and Foreign Private Investment in Nigeria: test for causality. African Economic and Business Review.

Amoateng, K. & Amoaka, A. B.(1996).Economic Growth, Export and External Debt Causality: The case of African countries, Applied Econ.

Atique, R. & Malik,K. (2012). Impact of Domestic and External Debts on Economic Growth of Pakistan, World Applied Science Journal.