Nigerian Debt Portfolio and Its Implication on Economic Growth

Abstract

This study examines the relationship between economic growth and debt variables for the period 1981-2012 using Vector Error Correction Model (VECM) approach. Variables were stationary at their first differences at 1% level of significance and there is one co-integrating relationship among the variables at 0.05 level. Granger test reveals that causality flows from GDP to both External debt (EXD) and its servicing (SERV). On the other hand, domestic debt (DDB) granger causes GDP. Bi-causality relationship was also found between EXD and SERV. The error correction value of 55.1% which is significant at 1% means that the speed of adjustment of the short-run to the long-run is slightly above average. Instrumental variable (IV) analysis (GMM) confirms non-linear (inverted-U) relationships between economic growth and the domestic/external debts. Debt-to-GDP ratios of 21.4% (domestic debt) and 26.9% (external debt) reveal that Nigeria can benefit from borrowed funds provided it stays below these limits and the repayment conditions are favorable. Hence, funds channeled towards developmental efforts will have positive ripple effects on the economy.

Keywords: Debt stock, debt service, economic growth, sustainability ratio, vector error correction