External Debt Sustainability and Economic Growth Nexus in Nigeria

A Co-integration and Causality Analysis

Abstract

High debt burdens can stifle investment and growth, while responsible debt management can support productive spending and development. This paper examined the impact of debt sustainability on economic growth in Nigeria from 1986 to 2024 using the co-integration and Pairwise Granger causality techniques. The variables of this paper are real GDP; debt-to- GDP ratio, debt-to-service ratio, monetary policy rate, and government expenditure on the theoretical frameworks of the exogenous growth theory and the debt overhang hypothesis. The data for the variables were sourced from the Central Bank of Nigeria Statistical Bulletin and the Debt Management Office (DMO). The results show that debt-to-GDP ratio had a negative (-0.000206) and insignificant (-0.688940) relationship with economic growth; debt-to-service ratio had a negative (-0.001716) and insignificant (-0.342420) relationship while MPR had a negative (-0.005717) and insignificant (-0.96354) relationship. Government expenditure had negative but significant relationship between debt sustainability and economic growth. The debt-to-GDP ratio (P-value, 0.0005< 0.05) Granger causes real GDP and Debt-to-GDP ratio causes economic growth (0.0071< 0.05). This paper concluded that debt-to-GDP ratio, debt-to service ratio and monetary policy rate has negative impact on economic growth within the reviewing period. Furthermore, the evidence as shown in the causality results show that the relationship between debt sustainability and economic growth is symbiotically mutual, reinforcing each other both in the immediate and in the long-term. This paper recommended as follows: i) sustain the current fiscal policy regime/reforms, economy-wide and sector specific so as to promote growth. This also implies regular update using the best scenarios for the Nigeria Debt Sustainability Analysis (DSA), ii If possible by the Government, a moratorium on debt accumulation at all levels of government should be implemented. This would reduce the excessive borrowing by the Federal government and subnational governments, iii) The Central Bank of Nigeria should reconsider the hike in the rate, a downward review in order to promote growth, v) Government spending should be to promote productive/growth drivers than consumption.