The necessity for governments to borrow in order to finance a deficit budget has led to the development of external debt. This study examined the impact of external borrowing on Nigeria’s economy between 1980 and 2015. By synthesizing a relationship between external borrowing and the economy the study shows that an increase in external borrowing results to an increase in the economy. The results of the econometric analysis confirm the existence of a positive relationship between external borrowing and economic in Nigeria. The hypothesis further confirms that there is a causal relationship between external borrowing and economic development in Nigeria. The study concludes that external borrowing has positive impact on the economy of Nigeria between the years under review. Based on the findings of the study, it is recommended that government should endeavour to reduce its external borrowing so as to reduce the burden that might be unleashed on tax- payers in terms of higher taxes in the future, and also on future generation, though it was observed from the study that external borrowing impacts positively on economic growth in the country.

























1.1 Background of the Study

Sustainable economic growth is a major concern for any sovereign nation most especially the Less Developed Countries (LDCs) which are characterized by low capital formation due to low levels of domestic savings and investment (Adepoju, Salau and Obayelu, 2007). It is expected that these LDC’s when facing a scarcity of capital would resort to borrowing from external sources so as to supplement domestic saving (Aluko and Arowolo, 2010; Safdari and Mehrizi, 2011; Sulaiman and Azeez, 2011). Soludo (2003) asserted that countries borrow for two broad reasons; macroeconomic reason that is to finance higher level of consumption and investment or to finance transitory balance of payment deficit and avoid budget constraint so as to boost economic growth and reduce poverty. The constant need for governments to borrow in order to finance budget deficit has led to the creation of external borrowing (Osinubi and Olaleru, 2006).

External borrowing is a major source of public receipts and financing capital accumulation in any economy (Adepojuet al, 2007). It is a medium used by countries to bridge their deficits and carry out economic projects that are able to increase the standard of living of the citizenry and promote sustainable growth and development. Hameed, Ashraf and Chaudary (2008) stated that external borrowing ought to accelerate economic growth especially when domestic financing is inadequate. External borrowing also improves total factor productivity through an increase in output which in turn enhances Gross Domestic product (GDP) growth of a nation. The importance of external borrowing cannot be overemphasized as it is an ardent booster of growth and thus improves living standards thereby alleviating poverty. It is widely recognized in the international community that excessive foreign borrowing in most developing countries is a major impediment to their economic growth and stability (Audu, 2004; Mutasa, 2003). Developing countries like Nigeria have often contracted large amount of external borrowings that has led to the mounting of trade borrowing arrears at highly concessional interest rates. Gohar and Butt (2012) opined that accumulated borrowing service payments create a lot of problems for countries especially the developing nations reason being that a borrowing is actually serviced for more than the amount it was acquired and this slows down the growth process in such nations. The inability of the Nigerian economy to meet its borrowing service payments obligations has resulted in borrowing overhang or borrowing service burden that has militated against her growth and development (Audu, 2004). The genesis of Nigeria’s borrowing service burden dates back to 1978 after a fall in world oil prices. Prior to this occurrence, Nigeria had incurred some minor borrowings from World Bank in 1958, with a loan of


US$28million dollars for railway construction with the Paris Club borrowing and in 1964 with the Italian government lends a loan of US$13.1 million for the construction of the Niger dam. The first major borrowing of US$1 billion known as the ”Jumbo loan” was in 1978 from the International Capital Market (ICM) (Adesola, 2009).

External borrowing has a significant impact on the growth and investment of a nation up to a point where high levels of external borrowing servicing sets in and affects the growth as the focus moves from financing private investment to repayments of borrowings. Pattilo,Poirson and Ricci (2002) asserted that at low levels borrowing has positive effects on growth but above particular points or thresholds accumulated borrowing begins to have a negative impact on growth. Furthermore Fosu (2009) observed that high borrowing service payments shifts spending away from health, educational and social sectors. This obscures the motive behind external borrowing which is to boost growth and development rather than get drowned in a pool of borrowing service payments which eats up most of the nation’s resources and hinders growth due to high interest payments on external borrowing.

Nigeria as a developing nation has adopted a number of policies such as the Structural Adjustment Programme (SAP) of 1986 to liberalize her economy and boost Gross Domestic product (GDP) growth. In a bid to ensure the implementation of these policies the government embarked upon massive borrowings from multilateral sources which resulted in a high external borrowing service burden and by 1992 Nigeria was classified among the heavily inborrowinged poor countries (HIPC) by the World Bank. According to (Omotoye, Sharma, Ngassam and Eseonu, 2006) Nigeria is the largest borrowingor nation in sub Saharan Africa. When compared with other sub Saharan nations such as South Africa, Nigeria’s external borrowing stock follows an upward pattern over the years while the former is relatively stabilized (Ayad and Ayadi, 2008). Nigeria’s external borrowing stock rose from US$28454.8 million in 1997 to US$31041.6 and US$37883.1 million in 2001 and 2004 with 80.3, 64.67 and 52.58 percentages of GDP respectively. On the other hand South Africa’s external borrowing stock stood at US$25272.4 million, US$24050 million and US$27112.4 million in 1997, 2001 and 2004 with 16.98, 20.34 and 12.52 percentages of GDP respectively.

The unabated increase in the level of external borrowing service payments has led to huge imbalances in fiscal deficits and budgetary constraints that have militated against the growth of the Nigerian economy. The resultant effect of the borrowing quagmire in Nigeria could create some unfavourable circumstances such as crowding out of private investment, poor GDP growth e.t.c (Iweala, 2011).

1.2 Statement of the Problem

“Huge external borrowing does not necessarily imply a slow economic growth; it is a nation’s inability to meet its borrowing service payments fuelled by inadequate knowledge on the nature, structure and magnitude of the borrowing in question” (Were, 2011).

It is no exaggeration that this is the major challenge faced by the Nigerian economy. The inability of the Nigerian economy to effectively meet its borrowing servicing requirements has exposed the nation to a high borrowing service burden. The resultant effect of this borrowing service burden creates additional problems for the nation particularly the increasing fiscal deficit which is driven by higher levels of borrowing servicing. This poses a grave threat to the economy as a large chunk of the nation’s hard earned revenue is being eaten up. Nigeria’s external borrowing outstanding stood at US$28.35 million in 2001 which was about

59.4 percent of GDP from US$8.5 million in 1980 which was about 14.6 percent of GDP (World Development Indicator, 2013). The borrowing crisis reached its maximum in 2003 when US$2.3 billion was transferred to service Nigeria’s external borrowing. In the year 2005 the Paris Club group of creditor nations forgave 60 percent (US$18 billion) of US$30.85 billion borrowing owed by Nigeria. Despite the borrowing relief of US$18 billion received by Nigeria from the Paris club in 2005 the situation remains the same (Bakare, 2010). The question then becomes why has external borrowing not accelerated the pace of growth of the Nigerian economy?

There are various empirical studies that have been conducted to investigate the impact of external borrowing burden on economic growth in Nigeria and have arrived at different results using the same scope of study (see Bhattarchanya& Nguyen, 2003; Fosu, 2007; Hunt, 2007; Ayadi, 2008). My research study will focus on these issues in external borrowing to determine the long run relationship between external borrowing and economic growth by expanding the scope of study beyond what has been done in times past.

1.3 Objectives of Study

The broad objective of this study is to ascertain the impact external borrowing burden has on Nigerian economy in Low Developed Countries. Other specific objectives include:

  1. To find out the effect of external borrowing on economic growth in Nigeria
  2. To determine if there is a long run relationship between external borrowing and economy in Nigeria.
  3. To examine the causality between external borrowing and economic growth in Nigeria.


1.4 Research Questions

This research seeks to investigate the impact of external borrowing on Nigerian economy and therefore tries to answer the following research questions:

  1. Does external borrowing have any effect on Nigeria’s Economic growth?
  2. Does a long run relationship exist between external borrowing and economic growth in Nigeria?
  3. Is there causality between external borrowing and economic growth in Nigeria?


1.5 Research Hypotheses

The hypotheses to be tested in the course of this study include:

Hypothesis One

H0:    There is no significant on the effect of external borrowing on Nigeria’s economic growth

H1:There is significant on the effect of external borrowing on Nigeria’s Economic Growth

Hypothesis Two

H0:    There is no significant long run relationship between external borrowing and economic growth in Nigeria.

H1:     There is a significant long run relationship between external borrowing and economic growth in Nigeria.


Hypothesis Three

H0:  There is no causal relationship between external borrowing and economic growth in Nigeria.

H1:  There is a causal relationship between external borrowing and economic growth in Nigeria.

1.6 Scope of Study

The study seeks to analyze Nigeria’s external borrowing and its impact on her economy. In order to fully capture its effect on the economy, a thorough empirical investigation will be conducted with data covering a period of 35 years i.e. 1980-2015. This period was chosen to cover the period after the oil collapse and also the post borrowing relief era.


1.7 Significance of Study

The burden of External borrowing has been a matter of great concern to the government of Nigeria and the nation as a whole which has resulted in embarking upon drastic actions like dividing the nation’s scarce resources in servicing of borrowing annually. This action has thus led to disinvestment in the economy, and as a result of a fall in the domestic savings and the overall rate of growth.

This study seeks to investigate the direct impact of external borrowing on Nigeria economy on by finding a long run and causal relationship between external borrowing and economic growth. This study is significant as its findings will provide a basis which will aid policy makers in proffering polices aimed at managing the borrowing crisis situation in Nigeria.