External Debt and Economic Growth in Nigeria: The Fiscal Transmission Mechanism

This study examines the effect of external debt on economic growth in Nigeria through the fiscal transmission mechanism of debt servicing and government capital expenditure. The study uses quarterly data covering 2010Q1 to 2024Q4 and employs a Vector Error Correction Model (VECM) as the analytical tool, while Generalised Impulse Response Functions (GIRFs) are subsequently used to trace the dynamic transmission of external debt shocks across the system. The Johansen cointegration results establish a long-run equilibrium relationship among the variables. The long-run estimates show that debt-service pressure is negatively associated with economic growth, while external debt and capital expenditure have positive long-run relationships with output. The GIRF results indicate that a positive external debt shock increases the debt-service-to-revenue ratio, reduces capital expenditure, and produces a persistent negative response in real GDP. These findings suggest that the adverse growth effect of external borrowing operates through a debt-service-induced fiscal crowding-out mechanism, whereby increasing debt-servicing obligations constrain resources available for productive public expenditure. The study therefore recommends that Nigeria strengthen debt management and domestic revenue mobilisation while directing external borrowing towards productive investments capable of generating sufficient economic returns to support debt sustainability and preserve fiscal space for growth-enhancing expenditure.