IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/75122.html
   My bibliography  Save this paper

External Debt and Domestic Debt impact on the growth of the Nigerian Economy

Author

Listed:
  • Aminu, Umaru
  • Ahmad Aminu, Hamidu
  • Salihu, Musa

Abstract

The rationale for this paper is to establish the relationship between economic growth, external debt and domestic debt in Nigeria. Debt has become inevitable phenomenon in Nigeria, despite its oil wealth. This paper therefore is set to investigate the impact of external debt, and domestic debt on economic growth in Nigeria between 1970-2010 through the application of Ordinary least square method to establish a simple relationship between the variables under study, Augmented Dickey-Fuller technique in testing the unit root property of the series and Granger causality test of causation between GDP, external debt and domestic debt. The results of unit root suggest that all the variables in the model are stationary and the results of Causality suggest that there is a bi-directional causation between external debt and GDP while no causation existed between domestic debt and GDP as well no causation existed between external debt and domestic debt. The results of OLS also revealed that external debt possessed a negative impact on economic growth while domestic debt has impacted positively on economic growth (GDP). A good performance of an economy in terms of per capita growth may therefore be attributed to the level of domestic debt and not on the level of external debt in the country; therefore external debt is seen as inimical to the economic progress of a country. The paper found that domestic debts if properly manage can lead to high growth level. A major policy implication of this result is that concerted effort be made by policy makers to manage the debt effectively by channeling them to productive activities (real sector) so as to increase the level of output in Nigeria, hence achieving the desire level of growth. Another policy implication of the study is that most developing countries contract debt for selfish reasons rather than for the promotion of economic growth through investment in capital formation and other social overhead capital. Thus, the paper also recommends that government should rely more on domestic debt in stimulating growth rather than external debt. Government should formulate policies aimed at encouraging domestic savings vis-à-vis domestic investment. The need for borrowing is due to gap between domestic savings and investment; therefore, bridging the gap can be a likely solution to Nigeria’s debt accumulation. For debt to promote growth in Nigeria and other highly indebted countries fiscal discipline and high sense of responsibility in handling public funds should be the Watchword of these countries’ leaders. Debt can only be reduced to the barest minimum by increasing output level (GDP).

Suggested Citation

  • Aminu, Umaru & Ahmad Aminu, Hamidu & Salihu, Musa, 2013. "External Debt and Domestic Debt impact on the growth of the Nigerian Economy," MPRA Paper 75122, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:75122
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/75122/1/MPRA_paper_75122.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Geske Dijkstra & Niels Hermes, 2001. "The Uncertainty of Debt Service Payments and Economic Growth of HIPCs: Is there a Case for Debt Relief?," WIDER Working Paper Series DP2001-122, World Institute for Development Economic Research (UNU-WIDER).
    2. Nicolas Depetris Chauvin & Aart Kraay, 2005. "What Has 100 Billion Dollars Worth of Debt Relief Done for Low- Income Countries?," International Finance 0510001, University Library of Munich, Germany.
    3. Cohen, Daniel, 1993. "Low Investment and Large LDC Debt in the 1980's," American Economic Review, American Economic Association, vol. 83(3), pages 437-449, June.
    4. repec:bla:kyklos:v:45:y:1992:i:3:p:363-78 is not listed on IDEAS
    5. Jeffrey Sachs, 1986. "Managing the LDC Debt Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 397-440.
    6. Andrew M. Warner, 1992. "Did the Debt Crisis Cause the Investment Crisis?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(4), pages 1161-1186.
    7. Cohen, Daniel, 1995. "Large external debt and (slow) domestic growth a theoretical analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 1141-1163.
    8. Eaton, Jonathan, 1993. "Sovereign Debt: A Primer," The World Bank Economic Review, World Bank, vol. 7(2), pages 137-172, May.
    9. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    10. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
    11. Lora, Eduardo & Olivera, Mauricio, 2007. "Public debt and social expenditure: Friends or foes?," Emerging Markets Review, Elsevier, vol. 8(4), pages 299-310, December.
    12. Andreas Savvides, 1992. "Investment Slowdown in Developing Countries During the 1980s: Debt Overhang or Foreign Capital Inflows?," Kyklos, Wiley Blackwell, vol. 45(3), pages 363-378, August.
    13. Erdal Karagol, 2002. "The Causality Analysis of External Debt Service and GNP : The Case of Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 2(1), pages 39-64.
    14. Henry, Peter B. & Arslanalp, Serkan, 2003. "Helping the Poor to Help Themselves: Debt Relief or Aid?," Research Papers 1838, Stanford University, Graduate School of Business.
    15. Lora, Eduardo & Olivera, Mauricio, 2007. "Public debt and social expenditure: Friends or foes?," Emerging Markets Review, Elsevier, vol. 8(4), pages 299-310, December.
    16. Deshpande, Ashwini, 1997. "The debt overhang and the disincentive to invest," Journal of Development Economics, Elsevier, vol. 52(1), pages 169-187, February.
    17. Sylvain Dessy & Désiré Vencatachellum, 2007. "Debt Relief and Social Services Expenditure: The African Experience, 1989–2003," African Development Review, African Development Bank, vol. 19(1), pages 200-216.
    18. David J. Smyth & Yu Hsing, 1995. "In Search Of An Optimal Debt Ratio For Economic Growth," Contemporary Economic Policy, Western Economic Association International, vol. 13(4), pages 51-59, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nizar Ben Abdallah & Lamia Daly & Imed Mtir, 2024. "An Empirical Analysis of Public Debt and Economic Growth: Tunisia as a Case Study," Business and Economic Research, Macrothink Institute, vol. 14(1), pages 23-40, December.
    2. Udi Joshua & David Babatunde & Samuel Asumadu Sarkodie, 2021. "Sustaining Economic Growth in Sub-Saharan Africa: Do FDI Inflows and External Debt Count?," JRFM, MDPI, vol. 14(4), pages 1-13, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Erdal Karagol, 2004. "A Critical Review of External Debt and Economic Growth Relationship: A Lesson for Indebtedness Countries," Ege Academic Review, Ege University Faculty of Economics and Administrative Sciences, vol. 4(1), pages 69-78.
    2. Naeem Akram, 2013. "Empirical examination of debt and growth nexus in South Asian countries," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 20(2), pages 29-52, December.
    3. Naeem AKRAM*, 2017. "Role of Public Debt in Economic Growth of Sri Lanka: An ARDL Approach," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 27(2), pages 189-212.
    4. Marin Ferry & Marc Raffinot, 2019. "Curse or Blessing? Has the Impact of Debt Relief Lived up to Expectations? A Review of the Effects of the Multilateral Debt Relief Initiatives for Low-Income Countries," Journal of Development Studies, Taylor & Francis Journals, vol. 55(9), pages 1867-1891, September.
    5. Presbitero, Andrea F., 2008. "The Debt-Growth Nexus in Poor Countries: A Reassessment," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-28.
    6. Saungweme Talknice & Odhiambo Nicholas M., 2019. "Does Public Debt Service Expenditure Crowd-Out Economic Growth? Empirical Evidence from an African Developing Country," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 64(3), pages 23-38, December.
    7. Geske Dijkstra, 2013. "What Did US$18 bn Achieve? The 2005 Debt Relief to Nigeria," Development Policy Review, Overseas Development Institute, vol. 31(5), pages 553-574, September.
    8. Johansson, Pernilla, 2008. "Debt Relief, Investment and Growth," Working Papers 2008:11, Lund University, Department of Economics.
    9. Doğan, İbrahim & Bilgili, Faik, 2014. "The non-linear impact of high and growing government external debt on economic growth: A Markov Regime-switching approach," Economic Modelling, Elsevier, vol. 39(C), pages 213-220.
    10. Bernardin Senadza & Agbemavor Korsi Fiagbe & Peter Quartey, 2017. "The Effect of External Debt on Economic Growth in Sub-Saharan Africa," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 11(1), pages 61-69, December.
    11. Adegboyega Raymond Rahaj, 2018. "Eternal Debt and Economic Growth in Nigeria: An ARDL Approach," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 14(4), pages 581-596, AUGUST.
    12. Hasan Shahzad & Attiya Yasmin Javid, 2015. "Impact of Debt on Aggregate Investment and Productivity in Developing Asian Countries," PIDE-Working Papers 2015:127, Pakistan Institute of Development Economics.
    13. Serhan ÇIFTÇIOĞLU & Amin SOKHANVAR, 2018. "External Debt- Economic Growth Nexus in Selected CEE Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 85-100, December.
    14. Imbs, Jean & Ranciere, Romain, 2005. "The overhang hangover," Policy Research Working Paper Series 3673, The World Bank.
    15. Andrea F Presbitero, 2012. "Total Public Debt and Growth in Developing Countries," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 24(4), pages 606-626, September.
    16. Ortiz, Isabel, & Cummins, Matthew. & Karunanethy, Kalaivani., 2015. "Fiscal space for social protection and the SDGs options to expand social investments in 187 countries," ILO Working Papers 994877663402676, International Labour Organization.
    17. Kashif Munir & Nisma Riffat Mehmood, 2018. "Exploring the Channels and Impact of Debt on Economic Growth," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 19(2), pages 171-191, September.
    18. Johansson, Pernilla, 2010. "Debt Relief, Investment and Growth," World Development, Elsevier, vol. 38(9), pages 1204-1216, September.
    19. Toan Quoc Nguyen & Mr. Benedict J. Clements & Ms. Rina Bhattacharya, 2003. "External Debt, Public Investment, and Growth in Low-Income Countries," IMF Working Papers 2003/249, International Monetary Fund.
    20. Mr. Tito Cordella & Mr. Luca A Ricci & Marta Ruiz-Arranz, 2005. "Debt Overhang or Debt Irrelevance? Revisiting the Debt-Growth Link," IMF Working Papers 2005/223, International Monetary Fund.

    More about this item

    Keywords

    External debt; Domestic debt; Economic growth (GDP) and Causality;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:75122. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.