External Debt, Domestic Debt and Economic Growth: The Case of Nigeria

The unprecedented accumulation of public debt is a source of anxiety for many Nigerians. Rather than serve as a catalyst for economic development, the debt is now a drag on economic development as Nigeria is struggling to service the interest on these loans, let alone the principal. Furthermore, the pressure to service these loans leads to a myriad of myopic policies that are totally detrimental to the interests of sustainable development. This study therefore examines the impact of public and publicly guaranteed debt on the economic growth of Nigeria. The study disaggregates total public and publicly guaranteed debt into external debt and domestic debt, and examines whether the two kinds of debt have differential impact on economic growth in Nigeria. Utilizing data from the Central Bank of Nigeria, and the World Bank, our empirical analysis using the Vector Error Correction Model (VECM) and covering 1980 – 2016, revealed that domestic debt has a statistically significant positive relationship with economic growth in the long run while external debt exhibiting a negative relationship with economic growth was not statistically significant. The lesson here is that domestic debt appears to be more beneficial in terms of economic growth in Nigeria than external debt as interest paid on domestic loans remains in the country and could be put into further productive economic use. As a policy recommendation from this study, the Federal Government of Nigeria may want to start paying more attention to the mix of domestic debt and external debt in Nigeria's loan portfolio.