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Impact of external debt shocks on economic growth in Nigeria: a SVAR analysis

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Abstract

This paper uses a structural vector autoregression generalized economic growth model augmented with a debt variable to characterize the dynamic impact of innovations to external public debt-to-GDP ratio on per capita GDP growth, investment, trade openness, exchange rate and inflation in Nigeria over the period 1970–2014. Using Blanchard and Perotti (Q J Econ 177:1329–1368, 2002) identification techniques to arrive at economically interpretable variance decompositions and impulse response functions, the results show that external debt shocks have long-lived negative impacts on economic growth and investment, as consistent with the debt overhang hypothesis. Moreover, innovations to external debt were found to have short-lived positive impacts on inflation, negative impacts on trade openness, but insignificant effects on the exchange rate. The implication is that attainment of sustainable levels of economic growth and external debt is guardedly sketchy at the moment and could remain elusive if aggressive measures are not undertaken at reducing the debt burden, encouraging domestic savings vis-à-vis domestic investment, and channeling borrowed funds towards the provision of basic infrastructure and goods that would not inflate the economy or hamper external competitiveness but, rather increase the level of economic activities and improve the well-being of citizens.

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Fig. 1

Source: Computed by the authors from World Bank International Debt Statistics (2017)

Fig. 2

Source: Computed by the authors from World Development Indicators, 2015

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Notes

  1. The Nigerian economy represents about 55% of West Africa’s GDP (African Development Bank (ADB) 2013), and accounts for 64% of GDP based on purchasing power parity valuation of the fifteen member countries in the Economic Community of West African States (ECOWAS) sub-region.

  2. SVAR models are well established in applied macroeconomics. They have been used to characterize the relative importance of supply and demand shocks on business cycles (Blanchard and Quah, 1989), the effects of fiscal policy (Blanchard and Perotti, 2002), the effects of money on output (Sims and Zha, 2006), the macroeconomic linkages between countries in a monetary union (Fielding et al. 2012), among several other applications.

  3. The SVAR is appealing for many reasons including the fact that all the variables included in the SVAR system are treated as endogenous and interdependent. Further, the model is able to capture the static and dynamic interdependencies present in the data series using a minimum set of restrictions. In addition, SVBAR model explicitly account for variations in transmission of shocks among the variables. Kilian and Lutkepohl (2017) provide detailed exposition on the merits and limitations of SVAR models.

  4. In a time period spanning more than 30 years, parameter non-constancy may occur due to some financial or economic crisis, or some other kind of shock or policy regime change.

  5. We are not aware of any study that rigorously examines the public debt-economic growth dynamics using identification free structural FEVD and IRF techniques, hence, this can be considered as another contribution to the recent debate about the role that debt accumulation can have on macroeconomic dynamics.

  6. See Bua et al. (2014) for the distinction between domestic debt and external debt.

  7. The discussion in this section benefits greatly from the studies by Ekpo and Umoh (2013) and Edo and Ikelegbe (2014).

  8. Commenting on Nigeria’s crushing external debt burden, the former President Obasanjo stated “… how did we get to the point where our debt burden became a challenge to peace, stability, growth and development? Without belaboring the point, we can identify political rascality, bad governance, abuse of office and power, corruption, mismanagement and waste, misplaced priorities, fiscal indiscipline, weak control, monitoring and evaluation mechanisms, and a community that was openly tolerant of corruption and other underhand and extra-legal methods of primitive accumulation” (DMO 2005).

  9. The Akaike information criterion and the LM test suggest that the optimal lag order p is 2 shifts.

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Authors and Affiliations

  1. Department of Economics, Susquehanna University, Selinsgrove, PA, 17870, USA

    Olugbenga Onafowora

  2. Department of Economics, Western Connecticut State University, Danbury, CT, 06810, USA

    Oluwole Owoye

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  1. Olugbenga Onafowora
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  2. Oluwole Owoye
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Correspondence to Olugbenga Onafowora.

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Onafowora, O., Owoye, O. Impact of external debt shocks on economic growth in Nigeria: a SVAR analysis. Econ Change Restruct 52, 157–179 (2019). https://doi.org/10.1007/s10644-017-9222-5

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