External Debt and Economic Growth in Nigeria: Does the Role of Governance Matter?

Abstract

This study empirically investigates the effects of external debt on economic growth, and assesses whether effective governance has any influence in this relationship. The scope of the study covers the period from 1996 to 2024. Data are analysed using Autoregressive Distributed Lag (ARDL) Bounds test to cointegration. ADF unit root test shows that all the variables are not stationary at level but at first difference; that is I(1). Findings revealed that, an increase in external debt negatively affects economic growth in the short to long-run in Nigeria. However, foreign exchange reserve (FR) does not seem to have any influence on economic growth both in the short-run and long-run. Meanwhile, foreign direct investment (FDI) impacts negatively on Nigeria’s economic growth in the long-run, pointing to the indispensability of domestic investment. Incidentally, deterioration in governance and political stability impact negatively on growth in Nigeria, both in the short-run and long-run. From the findings, the study recommends that government should apply prudential debt management policy to channel it into productive investments. It should also improve on the quality of governance/institutions by ensuring inclusivity, accountability, control of corruption, and enforcing the rule of law. Lastly, Nigerian government should focus on domestic sources of funding public investments rather than external debt.