THE EFFECT OF EXTERNAL DEBT AND BALANCE OF PAYMENT ON ECONOMIC GROWTH IN NIGERIA

THE EFFECT OF EXTERNAL DEBT AND BALANCE OF PAYMENT ON ECONOMIC GROWTH IN NIGERIA

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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 is that External Debt has a negative significant effect on economic growth in Nigeria and Balance of payment does not have statistical significant effect on economic growth of Nigeria within the period under review. The study thus recommended that; External debts should be contracted solely for economic reasons and not for social or political reasons to avoid accumulation of external debt stock overtime and Debt Management Office (DMO) should set mechanisms in motion to ensure that loans are utilized for the purpose for which they were acquired among others, to ensure Nigeria in the long run aside having a favourable balance of payment would attain

the status of an industrialized Nation at the barest debt.

Background of the Study

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 need 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. The debt, if properly utilised, is expected to help the debtor country’s economies (Hameed et al, 2008) by producing a multiplier effect which leads to increased employment, adequate infrastructural base, a larger export market, improved exchange rate and favourable terms of trade. But, this has never been the case in Nigeria and several other sub-Saharan African Countries (SSA) where it has been misused (Aluko and Arowolo, 2010).


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