THE IMPACT OF EXTERNAL DEBTS ON ECONOMIC GROWTH IN NIGERIA

THE IMPACT OF EXTERNAL DEBTS ON ECONOMIC GROWTH IN NIGERIA

Paul Aondona Angahar PhD. 

Department of Accounting, Benue State University, Makurdi

Angahar63@yahoo.co.uk            

Jacob Sesugh Angahar

Department of Economics, Kwararafa University,Wukari,

jacobangahar@gmail.com

ABSTRACT

Nigeria’s debt profile has been on the increase over the years, and the country may soon reach a debt threshold that would affect economic growth negatively. This may lead the economy to a debt trap. The study empirically examines the impact of external debt on economic growth in Nigeria. Descriptive and econometric analytical tools were used in data analyses. Data on Real Gross Domestic Product (RGDP), External Debt Stock, External Debt Service Payment, and Exchange Rate were collected from Central Bank of Nigeria Statistical Bulletin, 2014 and Debt Management Office 2014, various issues. Diagnostic tests were conducted using Augmented Dickey Fuller Unit Root Test, Co-integration, and Error Correction Model. Threshold Autoregressive model (TAR) was used to test the level of debt sustainability in Nigeria within the period under review. The independent variable was RGDP, while the explanatory variables were External debt stock, External Debt Service Payment, and Exchange Rate. The study showed that External Debt had a positive and significant relationship with Real Gross Domestic Product in the long run. The research shows that Nigeria is not in a debt trap and external debt is sustainable in Nigeria.  The study recommended amongst others, utilization of external debt in to productive sectors of the economy rather than recurrent expenditure, currently Nigeria is not in a debt trap, therefore can still borrow for growth purposes and that the current trend in external debt is still viable. The country can borrow within the stipulated threshold. This will affect economic growth positively.

Key words: External Debt, Economic Growth, TAR, Threshold, Debt Trap and Sustainability

INTRODUCTION

No economy is an island on its own; it would require aid so as to perform efficiently and effectively. One major source of finance is external debt. The motive behind external debts is due to the fact that countries especially the developing ones lack sufficient internal financial sources and this calls for the need for foreign aid, (Sulaiman, and Azeez, 2012).  It is also expected that developing countries, facing a scarcity of capital, will seek external borrowings to supplement domestic saving, (Pattillo et al, 2002; and Safdari and Mehrizi, 2011).

Since 1986, Nigeria had taken a decision to limit debt service to no more than 30 percent of oil receipts; this has not brought much relief. Between 1985 and 2001, Nigeria spent 'over US$ 32 billion on servicing external debt. This huge external debt servicing according to Ndikumana (2000) constitutes a major impediment to the revitalization of its shattered economy as well as the alleviation of debilitating poverty. He further observed that Nigeria is among many African economies that have achieved significant lower domestic savings as a result of debt servicing. The low level savings brought about by high level of debt service payment prevented the country from embarking on larger volume of domestic investment, which would have enhanced growth and development. Consequently, poverty and unemployment rates are high; life expectancies are lower than the average.

Soludo, (2003) opined that countries borrow for two broad categories of reasons; macroeconomic reasons to either finance higher investment or higher consumption and secondly to circumvent hard budget constraints. This implies that an economy borrow to boost economic growth and alleviate poverty. It is the objective of every sovereign nation to improve the standard of living of its citizenry and promote economic growth and development of the country. Due to the scarcity of resources and the law of comparative advantage, countries depend on each other to foster economic growth and achieve sustainable economic development (Adepoju, Salau and Obayelu, 2007). The necessity for governments to borrow in order to finance a deficit budget has led to the development of external debt, (Osinubi and Olaleru, 2006; and Obadan, 2004). External debt is one of methods through which countries finance their deficits and carry out economic projects that are capable of increasing peoples’ standard of living and promote sustainable economic development. It is an important resource needed to support sustainable economic growth (Audu, 2004). Therefore, this research seeks to thoroughly and empirically investigate the impact of Nigeria’s foreign borrowing (debt) on her economic growth.

In a bid to free the nation from the huge external debt burden, the Nigerian Governments over time embarked on policies/reforms and the establishment of institutions (Debt Management Office). As a result, external debt management policies such as the Structural Adjustment Programme (SAP), debt rescheduling, debt servicing, debt cancellation, have been pursued vigorously with the sole aim of reducing the debt burden on the country.  This led to debt relief of US$36 billion in 2005. With the debt forgiveness granted to Nigeria, one would expect the economic process of the country to be improved. However, Obademi (2013) observed that Nigeria’s debt profile is still on the rise, and the country may soon reach a debt threshold that will affect economic growth rate negatively. Hence push her to debt trap. It is against this backdrop that this study is designed to investigate the extent external debt has impacted on economic growth in Nigeria.

CONCEPTUAL FRAMEWORK

Concept of External Debt

Government borrowing are debt owe by the government within its economy or externally. According to CBN (2010), foreign debt are debt obligations the government owes to multilateral bodies, London Club, Paris Club, foreign promissory notes and other unclassified external borrowings. Oyejide et al (1985), debt is the resources or money in use in an organization, which is not contributed by its owner and does not in any other way belong to them. In a wider economic perspective, external debt is the phenomenon used to describe the financial obligation that ties on one party (debtor country) to another (lender country) Adepoju et al, (2007).       

Debt instruments are I owe you (IOU)   certificates, that is, certificates that acknowledge indebtedness. They are the tools governments often use to borrow money from the public. In principles, state and local government can also issue debt instrument, but limited in their ability to issue such. In Nigeria, public debt instruments consist of Nigerian Treasury certificates, Federal government development stocks and treasury bonds Adofu and Abula, (2010). Out of these, treasury bills, treasury certificates and development stocks are marketable and negotiable while treasury bonds; ways and means advances are not marketable but held solely by the central Bank of Nigeria. The Central Bank of Nigeria (CBN) is the banker and financial adviser to the federal government and as such, it is charged with the responsibility for managing the public debt.

According to United Nation (2010) there are three possible ways to define external debt. The first focuses on the currency in which the debt is issued (with external debt defined as foreign currency debt). The second focuses on the residence of the creditor (external debt is debt owed to non-residents). The third focuses on the place of issuance and the legislation that regulates the debt contract (external debt is debt issued in foreign countries and under the jurisdiction of a foreign court). The first definition does not seem appropriate because several countries issue foreign currency denominated debt in the domestic markets and have recently started to issue domestic currency denominated debt in international markets. Moreover, this definition is problematic for countries that adopt the currency of another country.

The second definition is the one which is officially adopted by the main compilers of statistical information on public debt. This definition makes sense from a theoretical point of view because it focuses on the transfer of resources between residents and non-residents; it allows the measurement of the amount of international risk sharing and the income effects of variations in the stock of debt and to evaluate the political cost of a default on public debt. However, this definition is almost impossible to apply in the current environment where a large share of the external debt due to private creditors takes the form of bonds.

Concept of Economic Growth        

The concept of economic growth has series of definitions: Eleje and Emerole, (2010) see economic growth as a rise in the productive capacity of a country on a per capita basis. It involves the expansion of the economy through a simple widening process. It is the increase in the national output or GDP of the nation Hogendorn, (1992). Ajayi (1996) perceived economic growth as the increase overtime of country’s output of goods and services. Schumpeter (1973), defines economic growth as gradual and steady change in the long-run which comes about by gradual increase in the rate of savings and population.

Thus, economic growth is related to the quantitative and sustained increase in the countries per capita output or income accompanied by expansion in its labour force, consumption level, capital and volume of trade. However, for the purpose of this research, economic growth means an increase in country’s Real Gross Domestic Product over a period of time usually one fiscal year.

Economic growth is the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Of more importance is the growth of the ratio of GDP to population (GDP per capita), which is also called per capita income. An increase in growth caused by more efficient use of inputs is referred to as intensive growth. GDP growth caused only by increases in inputs such as capital, population or territory is called extensive growth (Schema, 2004).

THEORETICAL FRAMEWORK

It is no doubt a fact that it is rational to import foreign capital to foster economic growth in the face of insufficient funds domestically and employ measures to manage it. The following theories are applicable to this study for proper assessment of the impact of external debt on economic growth in Nigeria.

Debt Overhang Theory:

Debt overhang, first formalized by Myers (1977) cited by (Douglas and Zhiguo, 2014), captures the insight that investment often leads to external benefits that accrue to the firm’s debt claims. These external benefits consequently lead equity holders (or equivalently, man-agers who are paid inequity) who make investment decisions to internalize only part of investment benefits, and hence to under invest relative to the level that maximizes the total value of the firm. A situation in which the external debt-stock of a country exceeds the country’s capacity to repay such debts in the immediate future is referred to as a debt overhang. This situation is often synonymous with a country’s precarious economic imbalance. When the cost of sustaining her external debt stock impact negatively on her trade balance, and infrastructural build-up.

Chlenery (1966) in his two-gap theory approach stipulate that external debt stock on their own have no bearing with the debtor nation’s development. But what actually matters is the use to which such loans have been put. Invariably, he meant how well the borrowed funds (Loans) is managed can translate to national development. Some individual finance theories such as Krugman (1988), Sachs (1989), and Ndulu (1991) have ferociously argued that such external borrowings only amount to a future tax on return to capital, they said except the amount borrowed have been judiciously managed can actually inspire and instigate developmental purposes for the debtor nation. Some financial expert in (Seriaux and Krugman, 2001) subscribe that a good number of Sub-Saharan African Countries have attempted to counter the effects of debt overhang, pointing out that some of the mechanisms used in this respect include debt equity swap or scrap, reduced debt servicing, debt restructuring, debt rescheduling and organized pleas For corporate debt relief. The theory then concludes that, if and when debtor nations adopt and implement appropriate domestic macroeconomic policies even with or without a debt relief package, economic growth could still be stimulated to reposition such debtor nations along the path of economic recovery.

The Dependency Theory of Underdevelopment:

Dependency theory developed in the late 1950s under the guidance of the Director of the United Nations Economic Commission for Latin America, Raul Prebisch. Prebisch and his colleagues were troubled by the fact that economic growth in the advanced industrialized countries did not necessarily lead to growth in the poorer countries. Indeed, their studies suggested that economic activity in the richer countries often led to serious economic problems in the poorer countries. Such a possibility was not predicted by neoclassical theory, which had assumed that economic growth was beneficial to all (Pareto optimal) even if the benefits were not always equally shared, Momoh (1988).The dependency theory states that, the dependence of less developed countries (LDCs) on developed countries (DCs) is the main cause for the underdevelopment of the former. Though the theory has so many aspects, focus in on the foreign capital dependence which has a bearing in the topic under study.

The dependency theory divides partners into two categories. The less developed countries it termed the “peripheries”. According to the theory, the peripheral LDCs are heavily dependent on the “centre” (DCs) for foreign capital. As it, the less developed countries exports primary products while importing manufactures and making them dependent for industrialization of their economics. Progressively, this leads to stagnation of agriculture, high concentration on primary products for exports, high foreign exchange content of industrialization and growing fiscal deficit in the peripheral countries which necessitate foreign financing for them.

According to Momoh (1988) these conditionalities were to the advantage of the International Monetary Fund (IMF) against Nigeria since they did not conform to the development pattern of the country. The theory has a relationship with this study from the perspective of external borrowing. Since the focus of the theory is on the dependence of less developed countries (LDCs) on developed countries (DCs) as the main cause of underdevelopment of less developed countries (LDCs). An external borrowing is also an aspect of poor countries depending on developed countries for financial aid to fill the investment gap. Therefore the resultant effect of these debts on borrowers is the underdeveloped nature of borrowers and the overhang implication.

Harrod-Domar Growth Model:

The Harrod-Domar model was developed independently by Sir Roy Harrod in 1939 and EvseyDomar in 1946Tejvan, (2012). It is a growth model which states that the rate of economic growth in an economy is dependent on the level of saving and the capital output ratio. If there is a high level of saving in a country, it provides funds for firms to borrow and invest. Investment can increase the capital stock of an economy and generate economic growth through the increase in production of goods and services.

The capital output ratio measures the productivity of the investment that takes place. If capital output ratio decreases the economy will be more productive, so higher amounts of output is generated from fewer inputs. This again, leads to higher economic growth (Tejvan, 2012).

Rate of growth (Y) = Savings (s)/ capital output ratio (k)

It suggests that if developing countries want to achieve economic growth, governments need to encourage saving, and support technological advancements to decrease the economy’s capital output ratio. It is argued that in developing countries saving rates are often low, if left to the free market. Therefore, there is a need for governments to increase the savings rate in an economy. Alternatively, developed countries could step in and transfer capital stock to the developing countries, which would increase the productive capacity (Tejvan, 2012).

The main contention the model is stated in three (3) ways:

(1) Every economy must generate its savings by setting aside a certain proportion of its national income for investment.

(2) Investment must be productive if more capital is to be generated.

(3) In the event of a gap between domestic savings and investment for development, the model favours foreign investment in the form of loan or aids and direct investment.

Theoretical Link with the Research Problem:

This research adopted the dependency theory and the Harrod—Domar Growth theory The Harrod-Domar Growth theory specifies basically that savings accumulation is required to increase the capital stock of an economy to achieve growth. This implies that savings capital output ratio is highly required for real GDP to grow. The resultant effect of large accumulation of debt exposes the nation to high debt burden. Nigeria is about the richest on the continent of Africa, yet due to the numerous macroeconomic problems, such as inflation, unemployment, sole dependency on crude oil as a major source of revenue, corruption and mounting external debt and debt service payment, majority of her citizen fall below the poverty line. It is therefore as result of the savings and investment gap that Nigeria has involved seriously in external borrowings. This is because of the high deficiency in this process of capital formation through organized savings. Nigeria operates as periphery in world economic management determined by the centre’ developed economies. In this vain, less developed countries require foreign assistance or debt for acquiring capital to achieve economic growth. This is the thrust of the dependency theory of development. To make up for the capital savings deficiency to achieve capital formation which would lead to growth of GDP, these LDCs require borrowing from DCs as linked by the Harrod-Domar and dependency theories of growth.

EMPIRICAL LITERATURE

There have been several attempts to empirically assess the external debt-economic growth link. Most of the empirical studies include a fairly standard set of domestic debt policy and other exogenous explanatory variables. The majority find one or more debt variables to be significantly and negatively correlated with investment or growth (depending on the focus of the study).

James (2014) examines the interaction between external debt and economic growth, and analyses the sustainability of Nigeria’s foreign debt. Given the several rescheduling and persistent accumulation of the debt arrears, and consistently high debt burden ratios. This study employed analytical method and the findings from the analysis show that the effect of external debt on growth is negative. The role of debt overhang in precipating debt crisis is crucial. Moreover, to a greater extent the Nigerian debt situation is highly unsustainable. This unsustainability of Nigeria’s external debt could be associated with high initial debt stock, high interest rate, lower real GDP growth, and large trade deficits. It is difficult to stabilize the debt ratio when interest rate is rising, growth rate is falling and the initial levels of the debt ratios are high. The findings showed that debt relief would have positive impact on investment and growth. Furthermore, government needs to step-up its growth performance and use concessional debt with lower interest rate in order to keep the debt at sustainable level. Furthermore, as long as revenue (export income) continue falling, the external debt strategy becomes highly unsustainable because it constraints import capacity and hence lower growth.

Hameed et al, (2008) conducted a research on the impact of external debt on Investment and economic growth, the objectives was to determine the effect6s of external debt on economic growth, the research adopted OLS and found out positive relationship between external debt and economic growth. The study recommends that external debt should be utilized economically to achieve desired growth. Therefore  too much of external debt could dampen growth by hampering investment and productivity growth because of the fact that when greater percentages of reserves (foreign currency) are consumed in meeting debt service, exchange rates fall and creditworthiness erodes; causing reduction in access to external financial resources.

Iyoha (1999) examined the impact of external debt on growth in African countries south of the Sahara from 1970 to 1994 using an econometric simulation model. He noted that the variables related to the external debt have a negative effect on investment, showing that an accumulation of outstanding debt discourages investment through two effects: the discouragement and eviction. From a simulation of relief debt policies in order to highlight the impact of this reduction on investment, he reached the following results:

-           If the debt is reduced by 20%, the investment will grow by 18% over the study period.

-           If the same reduction is applied, the GDP will grow by 1%.

He concluded that the results of his research have proved that the debt relief would stimulate investment and encourage the resumption of economic growth in South Sahara Africa. In search of the link between debt and growth.

Boyce and Ndikumana (2002) conducted cross sectional survey on sub-saharan African countries, the objectives was to determine whether or not these countries have the ability to meet their social needs and escape from debt is, to a large extent, a result of the fact that the borrowed funds have not been used productively. The study adopted OLS and found out that instead of financing domestic investment or consumption, a substantial fraction of the borrowed funds was captured by African political elites and channelled abroad in the form of capital flight, they revealed which indicated negative relationship between external debt and economic growth. The research recommends that t in order to prevent diversion of borrowed fund through capital flight, there is need for greater accountability on the creditor side as well as the establishment of mechanisms of transparency and accountability in the debtor countries’ own decision-making processes with regard to foreign borrowing and the management of borrowed funds.

Were (2001) objectives was to discover the impact of external debt on economic growth sustainability, the study adopted econometrics method of analysis and found out that Sub Sahara Africa countries were plagued by their heavy external debt burden. He argued that the debt crisis, compounded by massive poverty and structural weaknesses of most of the economies of these countries made the attainment of rapid and sustainable growth and development difficult. It then became widely accepted that the heavily-indebted countries require debt relief initiatives beyond mere rescheduling to have a turn-around in their economic performance and fight against poverty.

Ajayi (2012) investigated the impact of external debt on economic growth in Nigeria for the period 1980-2012. Time series data on external debt stock and external debt service was used to capture external debt burden. The study set out to test for both a long run and causal relationship between external debt and economic growth in Nigeria. An empirical investigation was conducted using time series data on Real Gross Domestic Product, External Debt Stock, External Debt Payments and Exchange Rate from 1980-2012. The techniques of Estimation employed in the study include Augmented Dickey Fuller (ADF) test, Johansen Co-integration, Vector Error Correction Mechanism and Granger Causality Test. The results show an insignificant long run relationship and a bi-directional relationship between external debt and economic growth in Nigeria, the study recommended that external debt be managed properly to achieve desired growth.

Ngassam (2000) conducted a study on cross section data among countries in Africa. The objective was to investigate the impact of external borrowing on the competitive nature of their economies. He adopted an analytical method of analyses. He however, noted that African countries that are undergoing external debt crisis may improve their situation by liberalizing their economies in order to bring competitive pressures on domestic private business activities, adjusting the exchange rate so that exports are encouraged and imports are restrained, and reducing inflation through strong policies of fiscal and monetary adjustment. He concluded that because of the structural difficulties facing most African countries, a comprehensive policy package for managing external debt has to aim at addressing not only demand management issues, but also the structural problems.

Amaeteng and Amoako-Adu (2002) conducted a research on foreign debt service and GDP. The major objective was to determine the relationship between foreign debt service and GDP. The study adopted linear regression as methodology. The empirical study declared that there is a unidirectional and positive causal relationship between foreign debt service and GDP growth after excluding exports revenue growth for Africa and South of Saharan countries during 1983-1990. {Afxention and Serletis, 2004(a)}. These people argued that whether indebtedness impacts on the economic activity of developing countries. It is also argued that if foreign loan are converted into capital and other necessary inputs, development will occur. On the other hand, if borrowing countries misallocate resources or divert them to consumption, the economic development is negatively affected. This study employs the frame work of granger. In doing so, six measure of indebtedness were used as proxies for the multiple mechanisms.

Ocampo (2004) proclaimed that the external debt situation for number of low income countries, mostly in Africa has become extremely different. For these countries, even fill use of traditional mechanism of rescheduling and debt resection together with continued provision of confessional financing and purist of sound economic policies may not be sufficient to attain sustainable external debt levels within a reasonable period of time and without additional external support. Despite the efforts made by countries themselves and the commitment made by the international communities; they are failing behind in their endeavour to achieve the “Millennium Development Goals”.

Asley (2002) opined that high level of external debt in developing country negatively impact their trade capacities and performance. Debt overhang affects economic reforms and stable monetary policies, export promotion and a reduction in certain trade barrier that will make the economy more market friendly and this enhances trade performance. Furthermore, debt decreases a government ability to invest in producing and marketing exports, building infrastructure, and establishing a skilled labour force.

According to Nweke (1990) a correct analysis of external debt in a third world countries such as Nigeria must be replace in the content of the country’s forceful integration into the western structural and dominated world capitalist economy as a peripheral appendage that provide natural resources and cheap lab our for the industrialization process in the west include lucrative markets for surplus of the advanced country’s manufacturers and the advance countries get a very high cost of the manufactured product of the west.

METHODOLOGY

Data were analyzed using descriptive statistics and econometrics analytical tool. The descriptive statistics consisted of tables, charts, graphs, percentages and averages (means). The econometrics tool on the other hand includes Augmented Dickey-Fuller (ADF) test, Co-integration Vector Error Correction Method (VECM). The research also employed Threshold Autoregressive Model (TAR) to ascertain the sustainability of debt in Nigeria within the period under review.

Model Specification

Model One

The dependency theory and the Harrod-Domar Growth theory were adopted in this research work as they emphasize the role savings accumulation play in economic growth. Thus using the theoretical underpinning of the theories as expatiated in the work of Ayadi and Ayadi, (2008).

FOREIGN ECON & SYSTEM

Fig 1: The Schema (Visual Depiction of the Relationships)

 

CONSUMPTIONN

                                                                                                  (+, -)?

 

The basic model proxied Real Gross Domestic Product (RGDP) as the endogenous variable to measure economic growth while External Debt (EXD), External Debt Servicing (EDS), and Exchange Rate (EXR) represent independent variables.  

The implicit form of the model is specified as follows:

RGDP = f (EXD,EDS , EXR) …………………….. ………… (1)

The model in its explicit form is as stated below:

RGDP = β_o + β₁EXD+ β₂EDS + β₃EXR + U …………..….… (2)

Where

RGDP = Real Gross Domestic Product

EXD    =          External Debt

EDS   =           External Debt Servicing

EXR    =          Exchange Rate.

Model Two (Threshold Autoregressive (TAR) Model)

The Threshold Autoregressive (TAR) model developed by Howell Tong has been enormously influential in economics. One statistical issue of primary importance is testing for linearity against the TAR alternative. Such tests are of particular importance in economics as there is a presumption among most economists that applications should use linear models unless there is convincing evidence to support a specific nonlinear specification. Test for threshold effects provides such evidence.

TAR models have been used to model aggregate output as measured by GNP growth rates. The model makes use of Multivariate models, in particular the threshold Vector Correction Model (VECM) and Vector Threshold Autoregressive (VTAR) models, to jointly model aggregate output and other variables. According to Bruce, (2011) TAR model in econometrics theory analyses output growth, forecasting, interest rate, prices, stock returns, exchange rate and other time series data measurable. 

Following the Framework of Li (2005), we specify the TAR for external debt sustainability for Nigeria as follow

RGDP = β_o + β₁ RGDP_t-1 + β₂ EXD + β₃EDS + β₄ EXD [DM (EXD <K*)] + β₅EXD [DM (EXD >K*)] + β₆EXR U …… (2)

Where

DM = sustainability measure (dummy variable with values 1 if EXD < K* or 0 if otherwise

K* = the threshold level of external debt which is to be calculated

RGDP =          Real Gross Domestic Product

EXD    =          External Debt

EDS   =           External Debt Servicing

EXR    =          Exchange Rate.

Apriori Expectation

This refers to the expected behaviour of the independent variables on the dependent variable. Thus, we have: β₁>0; β₂ <0; β₃ <0;

ANALYSIS OF RESULT

Unit Root Test

The result of the Augmented Dickey-Fuller (ADF) unit root test is presented in Table 1

Table 1: Unit Root Test Result

Variable	ADF Statistics (1st Difference	1% Critical Value	5% Critical Value	10% Critical Value	P-value	Order of Integration
EDS	-6.746192	-3.699871	-2.976263	-2.627420	0.0000	I(1)
EXD	-3.672627	-3.699871	-2.976263	-2.627420	0.0107	I(1)
EXR	-4.563161	-3.699871	-2.976263	-2.627420	0.0012	I(1)
RGDP	-34.99682	-3.699871	-2.976263	-2.627420	0.0001	I(1)

Source: Extract from E-views 9.5 output

From Table 1, the test result shows that, after all the variables were transformed to their first difference, they became stationary. Therefore, they are said to be maintain stationarity at order one [that is, I(1)].

Johansen Co-Integration Test

Having established that the variables are integrated of the same order, the study proceeded to establish whether or not there is a long-run cointegrating relationship among the variables by using the Johansen cointegration. In testing for the long run relationship, the trace statistic and the maximum Eigen statistics are used. The results are show in Table 2

Table 4.2     Johansen Cointegration Test

Unrestricted Cointegration Rank Test (Trace)
Hypothesized				Trace		0.05
No. of CE(s)		Eigenvalue		Statistic		Critical Value		Prob.**
None*		0.702266		78.84686		73.34145		0.0344
At most 1*		0.545402		46.13488		35.24578		0.0425
At most 2		0.413262		24.84966		35.01090		0.3926
At most 3		0.258150		10.45388		18.39771		0.4377
Trace test indicates 2 cointegration at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized			Max-Eigen		0.05
No. of CE(s)	Eigenvalue		Statistic		Critical Value		Prob.**
None*	0.702266		32.71198		27.16359		0.0410
At most 1*	0.545402		31.28521		30.81507		0.0443
At most 2	0.413262		14.39578		24.25202		0.5516
At most 3	0.258150		8.062420		17.14769		0.5960
Max-eigenvalue test indicates 2 cointegration at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Source: Extract from E-views 9.5 output

The result from both trace and the maximum Eigenvalue tests show that there were 2 cointegrating equations in the system. This means that the null hypothesis that there is none (r=o) cointegrating equation was rejected. This implied the existence of a long run equilibrium relationship between real output measured by real GDP and the fundamentals used in the model.

The parameters of the cointegrating vector for the long-run RGDP are presented in the equation below.

Table 4.3 Long-run Results

Dependent Variable: RGDP

Variable	EXR	EXD	EDS
Coefficient	-0.336141	0.048613	-0.294745
Standard Error	(0.06589)	(0.013078)	(0.06321)

The above normalized cointegrating equation shows that there is a long-run negative and significant relationship between the exchange rate and economic growth proxied with RGDP in the long run. However, there is a positive but insignificant relationship between external debt (EXD) and economic growth in the long run. Furthermore, the results in the table show that while external debt service (EDS) has negative and significant relationship with economic growth in the long run.

Error Correction Model

When co-integration has been employed it is also expected to complete the estimation process with the short run equation models. The short run model in this study assumed a one-year lag in the variables. The short run model process helps to observe the convergence in the long –run as earlier revealed by the co-integration test. The result of the short-run dynamics is presented in Table 4

Table 4: ECM Results

Dependent Variable: RGDP

Variable	Coefficient	Std. Error	t-Statistic
EXR(-1)	- 0.862518	0.08258	-10.4445
EXD(-1)	-0.498302	0.06051	-8.23564
EDS(-1)	-0.873171	0.08488	-10.2868
C	-2.572438

R-Square=  0.589295, CoinEqi = -0.072406

The result of ECM regression is presented in Table 4. From the table, it can be observed that the lag of exchange rate has a negative and significant effect on RGDP at 5% level of Significance. The positive sign is in line with the theoretical expectation. It implies that a unit increase in exchange rate will reduce economic growth by 86%. Similarly, the coefficient of external debt is negative. This is correctly signed and statistically significant at 5% level of significance. On the average, it means that an increase external debt to the turn of 100% will reduce economic growth by 49.8%. Finally, external debt service has negative and statistically significant relationship with economic growth in the short. The negative sign is in line with the a priori expectation. On the average, it means increase in external debt services to the turn of 100% is accompanied by 87.3% decrease in GDP in the short run.

The coefficient of determination (R²) which tests the total variation in the dependent variable explained by the independent variables is 0.589. This indicates that the model’s predictive power is moderately high. It implies that about 58.9% of the total variation in the output in Nigeria is collectively explained by the explanatory variables. The one-period lagged    value     of    the    error    from    the cointegrating   regression has the negative expected sign (-0.072406).  This shows that when economic growth is above its equilibrium value, it will start falling in the next period to correct the equilibrium error and vice versa with the speed of adjustment of 7.24%.

Table 5 Threshold Regression Results

Variables	Coefficient	Standard Error	t-statistics	Probability
EXD EDS EXD EDS EXD EDS	RGDP<433203.5…..13 obs -0.0000268 -22.24421 433203.5<RGDP527576.039…6obs -0.000384 -0.844055 527576.039<RGDP…10obs -0.000451 -21.15782	0.00000892 2.828118 0.000121 29.29422 0.0000123 7.282252	-3.003989 -7.865375 -0.318144 -0.028813 -3.667474 -2.905395	0.0070 0.0000 0.7537 0.9773 0.0015 0.0087

R-squared                    0.970695                                 Mean Deviation          409671.4

Adjusted R-Squared   0.958974                                 S.D Dependent Var    200946.9

S.E of Regression       40701.76                                 Akaike criterion          24.31506

Sum of Square Resi.   3.31E+10                                Schwarz Criterion       24.73039

Log likelihood             -343.5683                                Hannan-Quinn Criter  24.44795

F-statistic                    82.81086                                 Durbin-Watson Stat    1.951000

Prob(F-statistic)          0.000000

Source: Extracted from E-views 9.5 output.

The result in table 5 revealed two threshold values of N433, 203.50 million and optimal value of N527, 576.039 million for RGDP in Nigeria. The optimal RGDP is put at a threshold value of N527, 576.039 million given that the country borrows externally to finance the economy. The result indicates that in the low RGDP regime (that is RGDP <N433, 203.5 million) one unit increase in external debt significantly leads to a decrease in RGDP by 0.0000268 while increase in external debt servicing significantly leads to a decrease in RGDP by 22.24421. In the second regime (N433, 203.5 million<  RGDP <N527,576.039 million), the results show that one unit increase in external debt leads to 0.0000384 decrease in RGDP while one unit change in external debt service leads to 0.844055 decrease in RGDP  in Nigeria. However, the negative influence at this level is not significant at 5% critical level. In the third regime which is also the optimal RGDP (<N527, 576.039 million), one unit increase in the amount of external debt is associated significantly with 0.000451 decrease in RGDP while the amount of external debt service is associated significantly with 21.15782 decrease in RGDP in Nigeria. This means that the RGDP along the optimal path in the long run is affected negatively and significantly by increase in both external debt and external debt service at 5% level of significance. This result is likely to be associated to the misuse of the external debt, the failure of investing the external debt fund in productive sectors that would yield returns, weak institutional framework, and non-adherence to borrowing guidelines. This explains that Nigeria has exceeded a healthy threshold as revealed in all the regimes of RGDP, the study therefore concludes that the debt holding of Nigeria have led to increased debt servicing hence, a negative impact on economic growth. This is because it has exceeded the healthy threshold of significant positive impact.

External Debt Sustainability: The Threshold.

The results in table 3 above shows that the optimal growth rate of RGDP in Nigeria is put at a threshold value of N433, 203.5 million given the nature of the countries external borrowing. The results show that in a low growth regime (i.e RGDP< N433203.5 million) a hundred percent increase in external debt will significantly lead to a decrease in the growth of RGDP by 26.8%. This means the growth of RGDP along the optimal path in the long-run is affected negatively and significantly by increase in external debt. Again, the result is likely to be associated with low productivity, and corruption in Nigeria.

On the other hand, the second regime, the optimal rate of RGDP in Nigeria is put at a threshold value of N527, 576.039 million given the nature of the countries external borrowing. The results shows that at RGDP <N527, 576.039 a hundred percent increase in external debt will significantly lead to a decrease in the growth of RGDP by 45.1%. This means the growth of RGDP along the optimal path in the long-run is affected negatively and significantly by increase in external debt.  These results show that economic growth path in Nigeria is highly significantly and influenced by external debt.

Again from the results in table 4.5 above, the coefficients of external debt service indicates that external debt is sustainable in Nigeria in the long-run. This evidenced from the estimates of TAR. The second regime bench mark of  N527,576.039 < RGDP  shows that with external debt RGDP will increase but it external debt service will pull down RGDP growth by 45.1% as compared to the First regime of 26.8%. The first regime is a healthier one as compared to the second. This is because, at RGDP <N433, 203.50 resources channeled for servicing external debt are minimal as compared to the second regime. Hence, a productive economy that will stimulate economic growth.

CONCLUSION AND RECOMMENDATIONS

The study clearly showed that, external debts and economic growth are positively related in the long run. This is an indication that external debts has the potential of accelerating economic growth of the country in the long run. The study shows clearly that Nigeria is not in a debt trap. The country can still borrow for growth purposes. Nigeria is not yet at the level of reaping gains of external debt because of various constraints. Some of these constraints include; the size of the debt relative to the size of the economy is enormous and can lead to not only the capital flight but also discourages private investment. Debt servicing payment forms a significant proportion of the annual export earnings. Meeting debt servicing obligations eats significantly into whatever facility can be provided to improve the welfare of the citizens and therefore has macroeconomic implication. Nigeria will benefit from external debt only if it maintains a strong and stable macroeconomic framework as well as adhere to DMO guidelines, eliminate corruption, utilize debt in productive sectors of the economy etc.

Based on the findings and conclusion drawn from the study, the following recommendations are made.

i.                    Utilization of external debt in to productive sectors of the economy rather than recurrent expenditure. 

ii.                  Currently Nigeria is not in a debt trap, therefore can still borrow for growth purposes.

iii.                The current trend in external debt is still viable. The country can borrow within the stipulated threshold. This will affect economic growth positively.

iv.                Efforts should be made to enhance and strengthen existing guidelines on public borrowing in line with relevant provisions of the DMO Act.

v.                  Debt Management Office (DMO) in collaboration with monetary authorities should borrow within the sustainability benchmark.

vi.                 Execution of borrowed funds should provide for debt servicing and sustenance on debt.

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