The Impact of External Debt on the Nigerian Economy

Journal of Sustainable Development in Africa (Volume 10, No.3, 2008)
ISSN: 1520-5509 Clarion University of Pennsylvania, Clarion, Pennsylvania

THE IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH: A COMPARATIVE STUDY OF NIGERIA AND SOUTH AFRICA
Folorunso S. Ayadi University of Lagos Felix O. Ayadi Texas Southern University

Abstract This paper investigates the impact of the huge external debt, with its servicing requirements, on economic growth of the Nigerian and South African economies. The external debts of Nigeria and South Africa are analyzed in a new context utilizing traditional, but innovative, models and econometric techniques. The Neoclassical growth model, which incorporates external sector, debt indicators, and some macroeconomic variables, is employed in this study to explore a linear, as well as non-linear, effect of debt on growth and investment. Both ordinary least squares (OLS) and generalized least squares (GLS) are employed in the analysis. Among other test results, the negative impact of debt (and its servicing requirements) on growth is confirmed in Nigeria and South Africa. However, South Africa performs better than Nigeria in the application of external loans to promote growth. In addition, external debt contributes positively to growth up to a point after which its contribution becomes negative in Nigeria (reflecting the presence of non-linearity effects).

Introduction External debt is one of the sources of financing capital formation in any economy. Adepoju et al. (2007) note that developing countries in Africa are characterized by inadequate internal capital formation due to the vicious circle of low productivity, low income, and low savings. Therefore, this situation calls for technical, managerial, and financial support from Western countries to bridge the resource gap. On the other hand,
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external debt acts as a major constraint to capital formation in developing nations. The burden and dynamics of external debt show that they do not

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