THE IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN NIGERIA

(1981-2017)

BY

BEING
A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF THE BACHELOR OF SCIENCE
(HONOURS) DEGREE IN ECONOMICS

January, 2021
 CERTIFICATION
It is hereby certified that this research project written by _________________, was
supervised and submitted to the department of Economics, federal university Lafia.
_________________________ …………………………….
(Supervisor) (Signature and Date)

______________________________ ………………………….
(Head of Department) (Signature and Date)
 DEDICATION
I dedicate this project to the Almighty and ever living God who has been my rock and
refuge all through life _________________________________________
I am forever grateful.
ACKNOWLEDGEMENTS
 TABLE OF CONTENTS
Title Page……………………..……………………………………….………......…...i
Certification……………………………………………………………….…....…...… ii
Dedication……………………………………………………………….…………..... iii
Acknowlegdgement…………………………………………………………....……... iv
Table of Contents………………………………………………………….……...…... v
List of Tables………………………………………………………….…….………. viii
List of Figures……………………………………………………..……………….…. ix
Abstract……………………………………………………………………………….. x
CHAPTER ONE: INTRODUCTION
1.1Background of the Study…………………………………………..………….............
1.2Statement of the Research Problem………………………………………….………..
1.3 Research Questions……………………………………………………………...……
1.4 Objectives of Study……………………………………………………...………....…
1.5 Research Hypotheses…………………………………………………….……...……
1.6 Scope of Study……………………………………………………………….…...…..
1.7Significance of Study……………………………………………………….…...……
1.8 Research Methodology……………………………………………………..….…..
1.9 Data Sources…………………………………………………………….….……...
1.10 Outline of Study………………………………………………………..........…...
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction…………………………………………………….……………...…..
2.2 Review of Conceptual and Definitional Issues………………………....……...…
2.3 Review of Theoretical Issues…… …………………………………………..…...
2.4 Review of Empirical and Methodological Issues…………………….........……
CHAPTER THREE: THEORETICAL FRAMEWORK & RESEARCH METHODOLOGY
3.1 Introduction……..……………………………………………………..................
3.2 Theoretical Framework..………………………………………………….………
3.3 Research Methodology……………………………………………………...…....
3.3.1Model Specification.……………………………………………….…….......
3.3.2 Techniques of Estimation………………………………………………..…..
3.4 Data Sources, Definitions and Measurements……………………………...…….
CHAPTER FOUR: DATA ANALYSIS & INTERPRETATION
4.1 Introduction……………………………………………………………..………...
4.2 Descriptive Analysis of the Data………………………………………..…….….
4.3 Trend Analysis of the Data………………………………………………...……..
4.4 Econometric Analysis of the Data…………………………..……………….…...
4.5 Conclusion………………………………………………………...…………...…
CHAPTER FIVE: SUMMARY, RECOMMENDATIONS AND CONCLUSION
5.1 Summary of Study……………………………………………..…………………
5.2 Summary of Findings……………………………………………………..…...…
5.2.1 Summary of Empirical Findings………….…………………….……..……...
5.2.2 Summary of Theoretical Findings………………………………….…..…….
5.3 Recommendations…………………………………………...…………......….....
5.4 Conclusion………………………………………………………………….…….
5.4.1 Limitations of the Study……………………….……………………….............
5.4.2 Suggestions for further Research……………………………….….………...
References………………………………………………………………....…..…....
Appendices………………………………………………………………...…......…...
Appendix 1: Table of Data………………………………………......….……...…
Appendix 2: Table of Logged Data………………….…...………………….....…
Appendix 3: Estimated Results……………………………...……………........…
LIST OF TABLES
Table 3.1 A Priori Expectation of Variables …………………………………………..
Table 3.2 Data Measurements………………………………………………………….
Table 4.1 Summary Statistics…………………………………………………………..
Table 4.2 Test for Stationarity……………………………...…………………………..
Table 4.3 Test for Johansen Co-integration Using Trace Statistic……………………..
Table 4.4 Test for Johansen Co-integration Using Max-Eigen Value………………....
Table 4.5 Long run Normalized Co-integration Estimates……………………….….
Table 4.6 Table Showing Vector Error Correction Estimates…………………….….
Table 4.7 Test for Causality………………………………………………………….
LIST OF FIGURES
Figure 4.1 Graphical Trend Analysis of Variables…………………………………….
 ABSTRACT
The study investigated the impact of external debt on economic growth in Nigeria for the period
1980-2012. Time series data on external debt stock and external debt service was used to capture
external debt burden. The study set out to test for both a long run and causal relationship between
external debt and economic growth in Nigeria. An empirical investigation was conducted using time
series data on Real Gross Domestic Product, External Debt Stock, External Debt Payments and
Exchange Rate from 1981-2017. The techniques of Estimation employed in the study include
Augmented Dickey Fuller (ADF) test, Johansen Co-integration, Vector Error Correction Mechanism
and Granger Causality Test. The results show an insignificant long run relationship and a bi-
directional relationship between external debt and economic growth in Nigeria.
 CHAPTER ONE
INTRODUCTION
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 debt (Osinubi and Olaleru, 2006).
External debt is a major source of public receipts and financing capital accumulation in any
economy (Adepoju et 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 debt 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 debt 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
indebtedness 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 debts that has led to the mounting of trade debt arrears at highly concessional
interest rates. Gohar and Butt (2012) opined that accumulated debt service payments create a lot of
problems for countries especially the developing nations reason being that a debt 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 debt service payments obligations has resulted in
debt overhang or debt service burden that has militated against her growth and development (Audu,
2004). The genesis of Nigeria’s debt service burden dates back to 1978 after a fall in world oil
prices. Prior to this occurrence Nigeria had incurred some minor debts from World Bank in 1958
with a loan of US$28million dollars for railway construction and the Paris Club debtor nations in
1964 from the Italian government with 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 debt servicing sets in and affects the growth as the focus moves from
financing private investment to repayments of debts. Pattilo, Poirson and Ricci (2002) asserted that
at low levels debt has positive effects on growth but above particular points or thresholds
accumulated debt begins to have a negative impact on growth. Furthermore Fosu (2009) observed
that high debt 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 debt service payments which eats up most of the nation’s
resources and hinders growth due to high interest payments on external debt. 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 debt service burden and by 1992 Nigeria was
classified among the heavily indebted poor countries (HIPC) by the World Bank. According to
(Omotoye, Sharma, Ngassam and Eseonu, 2006) Nigeria is the largest debtor nation in sub Saharan
Africa. When compared with other sub Saharan nations such as South Africa, Nigeria’s external debt
stock follows an upward pattern over the years while the former is relatively stabilized (Ayad and
Ayadi, 2008). Nigeria’s external debt 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 debt 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 debt 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 debt quagmire in Nigeria
could create some unfavourable circumstances such as crowding out of private investment, poor
GDP growth e.t.c (Ngonzi Okonjo Iweala, 2011).

1.2 Statement of the Research Problem

“Huge external debt does not necessarily imply a slow economic growth; it is a nation’s inability to
meet its debt service payments fueled by inadequate knowledge on the nature, structure and
magnitude of the debt 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 debt servicing requirements has exposed the nation to a high debt service burden. The resultant
effect of this debt service burden creates additional problems for the nation particularly the
increasing fiscal deficit which is driven by higher levels of debt 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 debt outstanding stood at US$28.35 million in 2001 which was about 59.4% of GDP from
US$8.5 million in 1980 which was about 14.6% of GDP (WDI 2013). The debt crisis reached its
maximum in 2003 when US$2.3 billion was transferred to service Nigeria’s external debt. In the
year 2005 the Paris Club group of creditor nations forgave 60% (US$18 billion) of US$30.85 billion
debt owed by Nigeria. Despite the debt 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 debt 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 debt to determine the long run relationship between external debt
and economic growth by expanding the scope of study beyond what has been done in times past.
1.3 Research Questions
This research seeks to investigate the impact of external debt on economic growth in Nigeria and
therefore tries to answer the following research questions:
1. Does a long run relationship exist between external debt and economic growth in Nigeria?
2. Is there causality between external debt and economic growth in Nigeria?
3. What are the causes of Nigeria’s external debt burden?
1.4 Objectives of Study
The broad objective of this study is to ascertain the impact external debt burden has on economic
growth in Nigeria. Other specific objectives include:
1. To determine long relationship between external debt and economic growth in Nigeria.
2. To examine causality between external debt and economic growth in Nigeria.
3. To identify the causes of external debt burden in Nigeria.
1.5 Research Hypotheses
The hypotheses to be tested in the course of this study include:
HYPOTHESIS 1
H0: There is no significant long run relationship between external debt and economic growth in
Nigeria.
H1: There is a significant long run relationship between external debt and economic growth in
Nigeria.
HYPOTHESIS 2
H0: There is no causal relationship between external debt and economic growth in Nigeria.
H1: There is a causal relationship between external debt and economic growth in Nigeria.
1.6 Scope of Study
The study seeks to analyze Nigeria’s external debt and its impact on her economic growth. In order
to fully capture its effect on the economy, a thorough empirical investigation will be conducted with
data covering a period of 37years i.e. 1981-2017. This period was chosen to cover the period after
the oil collapse and also the post debt-relief era.
1.7 Significance of Study
The burden of External debt 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 debts annually. This action has thus led to disinvestment in the
economy, and as a result a fall in the domestic savings and the overall rate of growth. This study
seeks to investigate the direct impact of external debt burden on economic growth in Nigeria by
finding a long run and causal relationship between external debt 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 debt crisis situation in Nigeria.
1.8 Research Methodology
The methodology adopted in this study is Co-integration analysis using the Augmented Dickey
Fuller (ADF) unit root test, Johansen Co-integration and Vector Error Correction techniques of
estimation which provides coefficient estimates of the time-series data used in analysis. It also
carries out a causality test using Granger Causality test to check for a causal relationship between
external debt and economic growth in Nigeria.
1.9 Data Sources
This study makes use of mainly secondary data obtained from World Bank reports, CBN statistical
bulletins and reports, journals, articles, newspapers and other statistical sources.
1.10 Outline of Study
This study is divided into five chapters.
Chapter one contains the general introduction which provides the background to the study, statement
of problem, scope of the study, significance of study, objectives of the study, research questions,
research hypotheses, research methodology as well as the data sources.
Chapter two examines the works of other economists on the subject matter of external debt and it
consists of conceptual and definitional issues, theoretical, empirical and methodological review and
a summary of literature.
Chapter three provides the theoretical framework of the study and the methodology employed. It
also contains the specification and estimation of the model.
Chapter four carries out a descriptive, trend and empirical analysis of the model estimated in chapter
three.
Chapter five contains the summary, conclusion and recommendations.
 CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
The 1950’s and 1960’s are most often described as the “golden years” for developing countries in
economic development literature because of the rate of economic growth which was not just high but
also internally generated. In the above years these LDC’s increased their investment reliance on
external resources however most of the growth in the 1970s was “debt led” and this led to persistent
current account deficits with massive borrowings from the international money and capital market
(ICM) to bridge payment gaps. External debt has increased steadily over the years in developing
countries and as such an analysis of the role external debt plays in economic growth and
development is paramount. Aside from being an ardent booster of growth external debt has also been
known to cause a number of problems for developing countries. The increases in external debt over
the years in developing countries has brought the issue of external debt out of hiding and has become
a matter of concern both to the international and local community. The need to constantly borrow as
a means of financing has brought about an increasing literature among various economists. Nigeria,
like most other Less Developed Countries (LDCs) has been classified by the World Bank among the
severely indebted low-income countries since 1992. The nation’s inability to meet all of its debt
service payment constitutes one of the serious obstacles to the inflow of external resources into the
economy. The accumulation of debt service arrears worsened by high interest payments has
catapulted the external debt stock to extremely high levels and all efforts to substantially reduce the
debt has been unsuccessful. This chapter therefore carries out an extensive literature review on the
subject matter of external debt and economic growth by looking at conceptual and definitional
issues, theoretical issues, empirical and methodological issues and summary.
2.2 Review of Conceptual and Definitional Issues
The act of borrowing creates debts and this debt may be domestic or external. The focus of this study
is on external debt which refers to that part of a nation’s debt that is owed to creditors outside the
nation. Arnone et al (2005) defines external debt as that portion of a country’s debt that is acquired
from foreign sources such as foreign corporations, government or financial institutions. Acording to
(Ogbeifin, 2007), external debt arises as a result of the gap between domestic savings and
investment. As the gap widens, debt accumulates and this makes the country to continually borrow
increasing amounts in order to stay afloat. He further defined Nigeria’s external debt as the debt
owed by the public and private sectors of the Nigerian economy to non-residents and citizens that is
payable in foreign currency, goods and services. Debt crisis occurs when a country has accumulated
a huge amount of debt such that it can no longer effectively manage the debt which leads to several
mishaps in the domestic political economy (Adejuwon et al). Mimiko (1997) defined debt crisis as a
situation whereby a nation is severely indebted to external sources and is unable to repay the
principal of the debt. Origin of Debt Crisis in LDCs When we trace back countries with debt crises
history, the origin can be attributed to the following time periods: First Period (1973-1978) The
quadrupling of crude-oil price following the Egypt –Israel war of October 1973 led to disorder in the
international market. To neutralize the effect, producers in the industrialized world increased market
price both in the domestic and international market. This created inflationary pressure around the
industrialized world and left many of the developing countries with severe balance of payment
issues. This was because the economies of these LDC’s were not well developed to withstand the
price shocks due to the increase in the price of crude oil and imported goods. The current account
deficit in LDCs increased from 8.7 billion US$ in 1973 to US$ 42.9 billion in 1974 and US$ 51.3
billion in 1975. As a result many of them resorted to borrowing from banks in the international
capital market (ICM). This also created room for major banks to re-channel the funds generated from
dollar-based oil exporting countries to budget deficit oil-importing countries and by 1978 foreign
indebtedness had risen significantly from US$130 billion in 1973 to US$336 billion. Second Period
(1979-1982) The decision taken by the Organization of Petroleum Exporting Countries (OPEC) to
increase the price of crude oil from US$ 13 per barrel to US$ 32 per barrel brought about the second
oil price shock. The response from the industrial world for the second oil price shock was similar to
that of the first period. At the end of 1979 the United States of America adopted a tight monetary
policy and was followed by other developed nations namely UK, Germany, France, Italy and Japan.
This further worsened the condition of LDC that continued on their massive borrowing from the
developed world at a higher interest rate. For instance, the London Inter Bank Offered Rate (LIBOR)
rose from 9.5 percent in mid 1978 to 16.6 percent in 1981. The corresponding increase in external
debt outstanding rose from US$336 billion in 1978 to US$662 billion in 1982. The increase in
interest rate along with other factors contributed to the severe world recession of 1981-1983. This
posed additional problems for LDCs as it led to a fall in the price and volume of their exports which
reduced their export earnings. Furthermore, the recession made the developed economies to reduce
the amount of imported goods which also reduced LDCs export earnings. Due to a USA’s high
interest Rate, bankers were willing to loan money to the US than the LDCs. The rapid appreciation
of the US Dollar also made the situation worse for LDCs as their debt service payments increased as
a result of this. The debt crisis situation is highly linked with the inability of most developing
countries to meet their debt service payment obligations.
2.2.1 Why Countries Borrow
Generally, the need for public borrowing arises from the recognized role of capital in the
developmental process of any nation as capital accumulation improves productivity which in turn
enhances economic growth. There is abundant proof in the existing body of literature to indicate that
foreign borrowing aids the growth and development of a nation. Soludo (2003) was of the opinion
that countries borrow for major reasons. The first is of macroeconomic intent that is to bring about
increased investment and human capital development while the other is to reduce budget constraint
by financing fiscal and balance of payment deficits. Furthermore (Obadan and Uga, 2007) stressed
the fact that countries especially the less developed countries borrow to raise capital formation and
investment which has been previously hampered by low level of domestic savings. Ultimately the
reasons why countries borrow boils down to two major reasons which are to bridge the “savings-
investment” gap and the “foreign exchange gap”. Chenery (1966) pointed out that the main reason
why countries borrow is to supplement the lack of savings and investment in that country. The dual-
gap analysis justifies the need for external borrowing as an attempt in trying to bridge the savings-
investment gap in a nation. For development to take place it requires a level of investment which is a
function of domestic savings and the level of domestic savings is not sufficient enough to ensure that
development take place (Oloyede, 2002). The second reason for borrowing from overseas is also to
fill the foreign exchange (imports-exports) gap. For many developing countries like Nigeria the
constant balance of payment deficit have not allowed for capital inflow which will bring about
growth and development. Since the foreign exchange earnings required to finance this investment is
insufficient external borrowing may be the only means of gaining access to the resources needed to
achieve rapid economic growth.
2.2.2 Origin of Nigeria’s External Debt Nigeria’s external indebtedness can be traced back to the
pre-independence period when in 1958 a loan of US$28 million dollars was contracted from the
World Bank for railway construction. This debt did not pose a serious burden reason being that it
was acquired on soft terms i.e. with no interest or below market rate of interest. After this period, the
need for external aid was relatively low until in 1977/1978 when there was a fall in world oil prices
which in turn reduced the nation’s oil receipts. Before this period Nigeria was experiencing
abundance in oil receipts especially with the oil boom of 1973-1976. After crude oil was first
discovered in 1956, it became a major source of foreign exchange earnings as there was a gradual
drift from agriculture which had been the dominant provider of export earnings, employment e.t.c to
near total dependence on oil as the mainstay of the economy. Following the fall in oil prices, it
became necessary for the government to correct balance of payment difficulties and finance projects.
This led to the first major borrowing of US$1 billion which is referred to as the JUMBO LOAN in
1978 from the international capital market (ICM). Although this loan was used to finance various
medium and long term infrastructural projects, the returns obtained from these projects were not
enough to amortize the nation’s debts as many of the projects as included in the Fourth National
Development Plans (1981-1985) involved mainly the use of imported materials. In 1979, there was a
recovery in the oil market and oil was sold in Nigeria at US$39.00 per barrel which led to the belief
that the economy was bouncing back. But due to the fact that there was excessive importation, it
resulted in over-invoicing of imports and under-invoicing of exports and in 1982 when there was
another collapse in world oil prices it caused severe strains and stresses on the economy. Foreign
exchange was declining rapidly and there were large amount of deficits in government financing. In
the face of drastic oil downturn and dwindling oil reserves, the rate of borrowings increased from the
International Capital Market (ICM). At this point the nation’s debt profile had begun rising
astronomically due to the increasing external debt service payments. In 1980 external debt stood at
US$8.5 billion and by 1985 it nearly reached US$19 billion showing an increase of about 45.02%.
The increasing in debt service payments interests resulted in mounting of trade debts arrears. By
1997 the nation’s debt stock stood at US$27.0878 billion; US$18.9804 billion Paris Club debt;
US$4.3727 billion Multilateral debt; $1.6125 billion Promissory notes and US$0.7919 billion Non
Paris Bilateral debt (Ministry of Finance, 1997). Due to the rise in external debt there was a
corresponding increase in external debt servicing ratios; debt/GDP and debt/export earnings. As at
December 31st 2001, the external debt stock stood at US$28.35 billion which was about 59.4% of
GDP and 153.9% of export earnings.
2.2.3 Causative Factors of Nigeria’s External Debt
According to (Sogo-Temi, 1999), the explanation for the growing debt burden of developing
economies is of two-fold. Firstly, developing countries have become over-dependent on external
borrowing. Secondly, the difficulties they experience in servicing external debt due to huge debt
service payments. Ahmed (1984) asserted that the causes of debt problem relate to both the nature of
the economy and the economic policies put in place by the government. He articulated that the
developing economies are characterized by heavy dependence on one or few agricultural and
mineral commodities and export trade is highly concentrated on the other. The manufacturing sector
is mostly at the infant stage and relies heavily on imported inputs. He stated that they are dependent
on the developed countries for supply of other input and finance needed for economic development
which makes them vulnerable to external shocks. Aluko and Arowolo (2010) pointed out that the
major cause of the debt crisis situation in Nigeria is the fact that these foreign loans are not being
used for developmental purposes.Instead of being ventured into capital projects that will better the
economy, they are shrouded in secrecy. According to (Debt Management Office of Nigeria, 2012),
the factors that led to Nigeria’s external debt burden can be grouped into six areas;
 Inefficient trade and exchange rate policies
Both the trade and exchange rate (monetary) policies were not quick enough to respond to show the
external value of the naira at a time when there was a downturn in the oil market which led to a
reduction in the flow of resources into the economy. This led to embarking upon foreign borrowing
and in turn the accumulation of external debt.
 Adverse exchange rate movements
Due to the inefficient exchange rate policies, Nigeria’s exchange rate system was not flexible
enough to adjust to fluctuations (upward and downwards movements) in the foreign exchange
market which led to continuous external borrowing.
 Adverse interest rate movements.
Also, the debt quagmire in Nigeria can be attributed to external borrowing at higher interest rates.
This will in turn lead to high interest payments of external debt and as such rapid debt accumulation.
 Poor lending and inefficient loan utilization.
Also, the government of Nigeria rather than invest into capital projects that will lead to the
development of the economy and also amortize the nation’s debts poorly utilized the foreign loans
and as such led to continuous borrowing.
 Poor debt management practices.
In terms of debt sustainability and debt management Nigeria has performed poorly. The lack of
understanding of the nature, structure and magnitude of external debt has not allowed for the
Nigerian economy to effectively meet her debt service obligations and manage the debt stock
appropriately.
 Accumulation of arrears and penalties.
Also, accumulation of trade arrears and penalties with foreign nations due to high interest payments
on external debt has led to the astronomical rise in Nigeria’s external debt profile.
2.2.4 Nigeria’s External Debt Profile
Nigeria has two major categories of external creditors; official and private creditors. Her official
creditors include the International Fund for Agricultural Development (IFAD), African Development
Fund (ADF), the International Bank for reconstruction and development (IBRD), the African
Development Bank (AFDB), Economic Community of West African States (ECOWAS) fund and
the European Investment Bank. The above listed are Nigeria’s multilateral creditors which also
include the World bank and International Monetary Fund (IMF) which were very active lenders in
the 1970s/1980s. The bilateral creditors include the Paris Club and Non-Paris Club creditors. The
Paris Club is an informal group of official creditors which was created to aid debtor countries going
through payment difficulties by finding sustainable and lasting solutions. Also, part of Nigeria’s debt
profile are private creditors which are made up of promissory note holders and the London Club
group.
The total debt outstanding as at 31st December 2004 stood at US$35.94 billion with Paris Club
(85.82%), multilateral creditors (7.86%), London Club (4.01%), Non-Paris Club (0.13%) and
Promissory notes (2.18%) (DMO, 2012). This clearly shows that the largest proportion of Nigeria’s
external debt is accrued to the Paris Club group of creditors.
2.2.5 Nigeria’s External Debt Relief
M. C. Ekperiware et al (2012) defined debt relief as an agreement by a creditor or a country to
accept reduced or postponed interest and redemption payments from the debtor. Nigeria’s debt relief
deal with the Paris Club is widely recognized in external debt literature and will be discussed here in
detail. The Paris Club was formed in 1956 and its role is to provide help to the debt payment
challenges faced by debtor nations. It comprises of 14 member nations (United Kingdom, France,
Germany, Japan, Italy, United States of America, Belgium, Netherlands, Denmark, Austria, Spain,
Switzerland, Russia and Finland). Nigeria’s first loan from the Paris Club of Creditor Nations was a
US$13.1 million obtained from the Italian government in 1964 for the building of the Niger Dam.
However the oil boom of 1971-1981 introduced the era of massive borrowings in Nigeria. Loans
were acquired by various tiers of government as Nigeria embarked on major development and
reconstruction projects in the wake of the civil war. The borrowing continued wellinto the civilian
era, as the Federal Government embarked on the guaranteeing of many unviable loans taken by
private banks, state governments and government parastatals. In 1982, when oil prices crashed,
Nigeria was unable to pay off the loans it borrowed. This resulted in rising interest payments and
mounting of trade arrears and their penalties. A critical point was reached in 1986 when creditors
refused to open new credit lines for imports to Nigeria. The government therefore approached the
creditors for debt relief leading to the restructuring arrangements with the Paris Club in 1986, 1989,
1991 and 2000. However this did not stop the “leaps” and “jumps” in the external debt stock which
led to Nigeria to stop paying its debts to the Paris Club altogether, after the Paris Club refused to
substantially reduce Nigeria’s debt. With the return to civilian rule in 1999 under the President
Olusegun Obasanjo administration, Nigeria embarked on a relentless campaign for debt relief. The
major concern was that Nigeria’s spends more on debt service payments than it does on healthcare
and education and as such with the high level of debt servicing could not achieve the millennium
development goals. The campaign efforts finally paid off in 2005 when the Paris Club group of
creditors agreed to cancel 60% (US$18 billion) of the US$30.85 billion owed to it by Nigeria. This
debt relief freed the nation from the yearly US$2.3 billion (N345 billion) debt service burden.
2.3 Review of Theoretical Issues
Several theoretical contributions have been made as regards the subject matter of external debt and
economic growth. These theories are of relevance to this study as they serve as a building block to
this research work and as such the following theories will be discussed; the dual-gap theory, debt
overhang theory, crowding-out effect theory, dependency theory and the Solow-growth model
2.3.1 The Dual-gap theory
Omoruyi (2005) stated that most economies have experienced a shortfall in trying to bridge the gap
between the level of savings and investment and have resorted to external borrowing in order to fill
this gap. This gap provides the motive behind external debt as pointed out by (Chenery, 1966) which
is to fulfill the lack of savings and investment in a nation as increases in savings and investment
would vis-à-vis lead to a rise in economic growth (Hunt, 2007). The dual-gap analysis is provides a
framework that shows that the development of any nation is a function of investment and that such
investment requires domestic savings which is not sufficient to ensure that development take place
(Oloyede, 2002). The dual-gap theory is coined from a national income accounting identity which
connotes that excess investment expenditure (investment-savings gap) is equivalent to the surplus of
imports over exports (foreign exchange gap).
2.3.2 External debt and Economic growth
The matter of external debt has become a major impediment to the growth and stability of
developing countries. Economists have therefore chosen to explore the channels through which the
effects of external debt burden are realized and have come up with two competing theories namely
the debt overhang theory and the crowding-out effect theory. Debt-overhang occurs when a nation’s
debt is more than its debt repayment ability. Krugman (1982) explains debt overhang as one
whereby the expected repayment amount of debt exceeds the actual amount at which it was
contracted. Borensztein (1990) also defined debt overhang as one where the debtor nation benefits
very little from the returns on additional investment due to huge debt service obligations. The “debt
overhang effect” comes into play when accumulated debt stock discourages investors from investing
in the private sector for fear of heavy tax placed on them by government. This is known as tax
disincentive. The tax disincentive here implies that because of the high debt and as such huge debt
service payments, it is assumed that any future income accrued to potential investors would be taxed
heavily by government so as to reduce the amount of debt service and this scares off the investors
thereby leading to disinvestment in the overall economy and as such a fall in the rate of growth
(Ayadi and Ayadi, 2008). In addition, Clement et al (2003) stated that external debt accumulation
can promote investment up to a certain point where debt overhang sets it and the willingness of
investors to provide capital starts to deteriorate. Audu (2004) relates the concept of debt overhang to
Nigeria’s debt situation. He stated that the debt service burden has prevented rapid growth and
development and has worsened the social issues. Nigeria’s expected debt service is seen to be
increasing function of her output and as such resources that are to be used for developing the
economy are indirectly taxed away by foreign creditors in form of debt service payments
(Ekperiware et al, 2005). This has further increased uncertainty in the Nigerian economy which
discourages foreign investors and also reduces the level of private investment in the economy.
Cohen (1993) and Clement et al (2003) observe that aside from the effect of high debt stock on
investment, external debt can also affect growth through accumulated debt service payments which
are likely to “crowd out” investment (private or public) in the economy. The crowding-out effect
refers to a situation whereby a nation’s revenue which is obtained from foreign exchange earnings is
used to pay up debt service payments. This limits the resources available for use for the domestic
economy as most of it is soaked up by external debt service burden which reduces the level of
investment. Tayo (1993) opined that the impact of debt servicing of growth is damaging as a result
of debt-induced liquidity constraints which reduces government expenditure in the economy. These
liquidity constraints arise as a result of debt service requirements which shift the focus from
developing the domestic economy to repayments of the debt. Public expenditure on social
infrastructure is reduced substantially and this affects the level of public investment in the economy.
Furthermore, some researchers have come up with other ways through which external debt may
affect economic growth. According to (Borenstein, 1990) external debt affects growth through the
credit rationing effect which is a condition faced by countries that are unable to contract new loans
based on their previous inability to pay.
2.3.3 The Dependency Theory
The dependency theory seeks to outline the factors that have contributed to the development of the
underdeveloped countries. This theory is based on the assumption that resources flow from a
“periphery” of poor and underdeveloped states to a “core” of wealthy states thereby enriching the
latter at the expense of the former. The phenomenon associated with the dependency theory is that
poor states are impoverished while rich ones are enriched by the way poor states are integrated into
the world system (Todaro, 2003; Amin, 1976).
Dependency theory states that the poverty of the countries in the periphery is not because they are
not integrated or fully integrated into the world system as is often argued by free market economists,
but because of how they are integrated into the system. From this standpoint a common school of
thought is the bourgeoisie scholars. To them the state of underdevelopment and the constant
dependence of less developed countries on developed countries is as a result of their domestic
mishaps. They believe this issue can be explained by their lack of close integration, diffusion of
capital, low level of technology, poor institutional framework, bad leadership, corruption,
mismanagement, etc. (Momoh and Hundeyin, 1999). They see the under-development and
dependency of the third world countries as being internally inflicted rather than externally afflicted.
To this school of thought, a way out of the problem is for third world countries to seek foreign
assistance in terms of aid, loan, investment, etc, and allow undisrupted operations of the
Multinational Corporations (MNCs). Due to the underdeveloped nature of most LDC’s, they are
dependent on the developed nations for virtually everything ranging from technology, aid, technical
assistance, to culture, etc. The dependent position of most underdeveloped countries has made them
vulnerable to the products of the Western metropolitan countries and Breton Woods institutions
(Ajayi, 2000). The dependency theory gives a detailed account of the factors responsible for the
position of the developing countries and their constant and continuous reliance on external for their
economic growth and development.
2.3.3 The Solow Growth Model
The Solow-growth model was published in 1956 as a seminar paper on economic growth and
development under the title, “A contribution to the theory of economic growth”. Like \most
economic growth theories, Solow growth model is built upon some assumptions:
 Countries will produce and consume only a single homogenous good.
 Technology is exogenous in the short run.
The Solow growth model is developed based on a Cobb - Douglas production function
given by the form:
Y = F (K, L) = Kα L1-α
Where
Y = output
K = Capital input
L = Labor input
α and 1-α are output elasticities of capital and labor respectively and α is a number between 0 and 1.
The other important equation from the Solow growth model is the capital accumulation equation
expressed in the form:
Ḱ = sY – dK
Where:
Ḱ = change in capital stock
sY = gross investment
dK = depreciation during the production process
With mathematical manipulation Solow derives the capital accumulation equation in terms of per
worker i.e. ḱ = sy – (n+d)k . This implies that the change in capital per worker is a function of
investment per worker, depreciation per worker and population growth. Of these three variables
only investment per worker is positively related with change in capital per worker.
2.3.4 Solow Growth Model and External Debt
The Solow growth model is built on a closed economy which makes use of labour and capital as its
means of production. Under this scenario the implication of external debt on growth can be seen
through its effect on the domestic saving which in turn used as investment in a closed model. The
general effect of external debt on the Solow growth model can be analyzed by looking at the
individual effects of the debt overhang and debt crowding theories on the Solow growth model.
According to the debt overhang hypothesis, the government in an attempt to amortize the
accumulated debt, will increase tax rate on the private sector (as means of transferring resources to
the public sector). This will discourage private sector investment and also reduce government
expenditure on infrastructure as the resources are used to pay up huge debt service payments instead
of being put into good use. This will lead to a reduction of total (private and public) investment in
the economy and a shift downward of both the investment and production function curves in Solow
growth model. On the other hand, in the case of debt crowding out, in a bid to clear their outstanding
debts use their revenue from export earnings and in some cases transfer resources including foreign
aid and foreign exchange resources to service their forthcoming debt. Those countries which transfer
revenue from export earnings which can be used in investment in the economy to avoid huge debt
payments will discourage public investment. This in turn will decrease economic growth and will
shift both the investment and production function curves in Solow growth model downward (Dereje,
2013).
2.4 Review of Empirical and Methodological Issues
The motive behind external debt is to boost economic growth and development of any nation but as
a result of future high debt service payments, it poses a serious threat to the economy of that nation.
Economic researchers have therefore sought out to investigate the implication of external debt
burden on the economies of debtor nations and have come up with diverse views.
Suliman et al (2012) carried out a study on the effect of external debt on the economic growth of
Nigeria. Annual time series data covering the period from 1970-2010 was used. The empirical
analysis was carried out using econometric techniques of Ordinary least squares (OLS), Augmented
Dickey-Fuller unit root test, Johansen Co-integration test and error correction method. The co-
integration test shows long-run relationship amongst the variables and findings from the error
correction model revealed that external debt has contribute positively to the growth of the Nigerian
economy. In addition the study recommends that the Nigerian should ensure political and economic
stability so as to ensure effective debt management. An empirical investigation conducted by (Audu,
2004) examines the impact of external debt on the economic growth and public investment of
Nigeria. The study carried out its analysis using time series data covering the period from 1970-
2002. The Johansen Co-integration test and Vector Error correction method econometric techniques
of estimation were employed in the study. The study concluded that Nigeria’s debt service burden
has had a significant adverse effect on the growth process and also negatively affected public
investment. Another study by Ogunmuyiwa (2011) examined whether external debt promotes
economic growth in Nigeria using time-series data from 1970-2007. The regression equation was
estimated using econometric techniques such as Augmented Dickey-Fuller test, Granger causality
test, Johansen co-integration test and Vector Error Correction Method (VECM). The results revealed
that causality does not exist between external debt and economic growth in Nigeria.
Ayadi and Ayadi (2008) examined the impact of the huge external debt, with its servicing
requirements on economic growth of the Nigerian and South African economies. The Neoclassical
growth model which incorporates external debt, debt indicators, and some macroeconomic variables
was employed and analyzed using both Ordinary Least Square (OLS) and Generalized Least Square
(GLS) techniques of estimation. Their findings revealed that debt and its servicing requirement has a
negative impact on the economic growth of Nigeria and South Africa. Faraji and Makame (2013)
investigated the impact of external debt on the economic growth of Tanzania using time series data
on external debt and economic performance covering the period 1990-2010. It was observed through
the Johansen co-integration test that no long-run relationship between external debt and GDP.
However the findings show that external debt and debt service both have significant impact on GDP
growth with the total external debt stock having a positive effect of about 0.36939 and debt service
payment having a negative effect of about 28.517. The study also identified the need for further
research on the impact of external debt on foreign direct investments (FDIs) and domestic revenues.
(Safdari and Mehrizi, 2011) analyzed external debt and economic growth in Iran by observing the
balance and long term relation of five variables (GDP, private investment, public investment,
external debt and imports). Time series data covering the period 1974-2007 was used and the vector
autoregressive model (VAR) technique of estimation was employed. Their findings revealed that
external that has a negative effect on GDP and private investment and pubic investment has a
positive relationship with private investment. Ejigayehu (2013) also analyzed the effect of external
debt on the economic growth of eight selected heavily indebted African countries (Benin, Ethiopia,
Mali, Madagascar, Mozambique, Senegal, Tanzania and Uganda) through the debt overhang and
debt crowding out effect with ratio of external debt to gross national income as a proxy for debt
overhang and debt service export ratio as a proxy for debt crowding out. Panel data covering the
period 1991-2010 was used. The empirical investigation was carried out on a cross-sectional
regression model with tests for stationarity using Augmented Dickey Fuller tests, heteroskedasticity
and ordinary regression. The concluding result from estimation showed that external debt affects
economic growth through debt crowding out rather than debt overhang. In their study on external
debt relief and economic growth in Nigeria, (Ekperiware and Oladeji, 2012) examined the structural
break relationship between external debt and economic growth in Nigeria. The study employed the
se o quarterly time series data of external debt, external debt service and real GDP from 1980-2009.
An empirical investigation was conducted using the chow test technique of estimation to determine
the structural break effect of external debt on economic growth in Nigeria as a result of the 2005
Paris Club debt relief. The result of their findings revealed that the 2005 external debt relief caused a
structural break effect in the relationship between external debt and economic growth. Based on
these findings they concluded that the external debt relief made available resources for growth-
enhancing projects.
 CHAPTER THREE
THEORETICAL FRAMEWORK & RESEARCH METHODOLOGY
3.1 Introduction
The aim of this research study is to examine the impact of external debt on the growth of the
Nigerian economy. This chapter consists of the theoretical framework which provides the theoretical
basis of this study and the research methodology which throws more light into the empirical
investigation conducted. Also in order to fully assess the impact of the external debt burden, a model
with dependent and explanatory variables to be estimated is specified, a priori expectations of these
variables, techniques of estimation and method of data analysis are all treated in this chapter.
3.2 Theoretical Framework
Overhang Debt Theory: Myers (1977) presents debt overhang as excessive debt that inhibits
investment, arising from the fact that the benefits derived by the firm using high risky financing
accrue largely to existing debt holders instead of shareholders. In other words, high level of public
debt is crowding out private investment. Again debt overhang is presented when a country’s debt
accumulation is greater than its strength and capacity of repayment in the future. According to
Krugman (1988), the debt overhang theory shows that if there is some likelihood that in the future
debt will be larger than the country's repayment ability; expected debt-service costs will discourage
further domestic and foreign investment because the expected rate of return from the productive
investment projects will be very low to support the economy as the significant portion of any
subsequent economic progress will accrue to the creditor country. Monogbe, (2016) maintains that
the inability of the present generation to service the borrowed fund may be transfer to the future
generation as a debt burden.
Though the constant need to borrow from foreign sources arises from the recognized role of capital
in developmental process of any nation. Sustainable economic growth requires a given level of
savings and investment and in a case where it is not sufficient, it results in external borrowing.
Herein lays the basis for the dual-gap analysis. The dual-gap theory postulates that for development
to occur it requires investment and this investment is a function of savings and investment which
requires domestic savings is not sufficient enough to ensure that development takes place. The dual-
gap framework is coined from a national income accounting identity which states that excess
investment expenditure over domestic savings is equivalent to the surplus of imports over exports.
Thus at equilibrium the following identities hold;
I - S = m – X …………………………. (1)
S – M = x – m ………………………… (2)
Where: I = Investment
S = Savings
M = Import
X = Export
The above equations show that the domestic resource gap (S – I) is equal to foreign exchange gap (x
– m). An excess of import over export implies an excess of resources used by an economy over
resources generated by it. This further implies that the need for foreign borrowing is determined
overtime by the rate of investment in relation to domestic savings.
3.3 Research Methodology
The time series data for the period of thirty-seven years (37) from 1981 to 2017 was generated from
Central Bank of Nigeria Statistical Bulletin2016, Debt Management Office, World Bank and
National Bureau of Statistics (2017). The study used the descriptive statistics to explore the nature of
the data collected for the study. Granger causality was used to test the causal effect relationship that
existed between the data, the unit root test was used to test for the stationarity of the data while error
correction model (ECM) was used to capture the short and long run behaviour of the variables.

3.3.1 Model Specification

The functional model of the study is stated as;
GDP = f(EXTDEBT, DEBTSER, CAPEX)
Transformed to econometric terms as;
GDPt= βo + β1EXTDEBT + β 2DEBTSER + β 3CAPEX + Ɛ0-------------------------(1)
Where;
GDP = Gross Domestic Product
EXTDEBT= External Debt Stock
DEBTSER= Debt Service Cost
CAPEX= Government Capital Expenditure

3.3.2 Techniques of Estimation

Time series data covering a period of 37 years will be estimated using Co-integration technique of
analysis which is an improvement on the classical ordinary least square technique (OLS). This
technique was chosen as it depicts long-run economic growth. The following techniques of
estimation are employed in carrying out the co-integration analysis:
 Unit Root Test This is the pre Co-integration test. It is used to determine the order of integration
of a variable that is how many times it has to be differenced or not to become stationary. It is to
check for the presence of a unit root in the variable i.e whether the variable is stationary or not. The
null hypothesis is that there is no unit root. This test is carried out using the Augmented Dickey
Fuller (ADF) technique of estimation. The rule is that if the ADF test statistic is greater than the 5
percent critical value we accept the null hypothesis i.e the variable is stationary but if the ADF test
statistic is less than the 5 percent critical value i.e the variable is non-stationary we reject the null
hypothesis and go ahead to difference once. If the variable does not become stationary at first
difference we difference twice. However, it is expected that the variable becomes stationary at first
difference.
 Co-integration
After the test for the order of integration, the next step is to test for co-integration. This test is used to
check if long run relationship exists among the variables in the model (Ogundipe and Alege, 2013).
This will be carried out using the Johansen technique.
 Vector Error Correction Model
The Vector Error Correction Model (VECM) shows the speed of adjustment from short-run to long
run equilibrium. The a priori expectation is that the VECM coefficient must be negative and
significant for errors to be corrected in the long run. The higher the VECM, the more the speed of
adjustment.
 Causality Test
This is used to check for causality between two variables. In this case our aim is to test for a causal
relationship between external debt and economic growth. The rule states that if the probability value
is between 0 and 0.05 there is a causal relationship.
3.4 Data Sources, Definitions and Measurements
3.4.1 Data Sources
This study makes use of secondary data covering a period of 33years i.e. 1981– 2017 gotten from
World Bank Statistical Database (WDI, 2018).
3.4.3 Data Measurements

CHAPTER FOUR
DATA ANALYSIS & INTERPRETATION
4.1 Introduction
This research seeks to examine the impact of external debt on economic growth in Nigeria. This
chapter therefore comprises of the data presentation, estimation and results of the empirical
investigation carried out. It also addresses the relationship between external debt and economic
growth in Nigeria in the long run. This chapter is further divided into trend analysis which shows the
trend of the time series data used from 1981-2017, descriptive analysis which contains the measures
of central tendency which include mean, mode, median as well as measures of variation and other
statistical characteristics of the variables and econometric analysis which focuses on test for unit
root, Johansen test for Co-integration and error correction mechanism.
4.2 Descriptive Analysis
Table 4.1 Descriptive Statistics
GDP EXTDEBT DEBTSER CAPEX
Mean 25425.34 1365.506 93.67730 390.6249
Maximum 135459.7 6862.360 393.9600 1200.000
Std. Dev. 36032.02 1655.663 117.0149 391.7613
Skewness 1.457466 1.574639 1.614483 0.640510
Kurtosis 4.097295 4.876428 4.384450 2.042843
Jarque-Bera 14.95553 20.71835 19.02868 3.942296
Probability 0.000566 0.000032 0.000074 0.139297
Source: researcher’s summary of descriptive statistics (2018).
Table 4.1 provides some insight into the nature of the time series data used for the study. From the
table above, we observed that within the period under study, external debt value (mean) is about four
times higher than the capital expenditure, this relationship shows that only about the quarter of the
external debt that are used for capital project, the balance was used to meet recurrent expenditure
need. The Jarque-Bera (JB) which test for normality or existence of outlier shows that all the
variables are normally distributed at 1% level of significance accept capital expenditure.

Unit Root Test

The study used the Augmented Dickey Fuller (ADF) to test for the stationarity of the data. The
summary of the result is presented below.
Table 4.2: Stationarity Test
Variables Order of ADF @ level 1% (CV) 5% (CV) 10% (CV)
integration
GDP 1 (1) -6.89770 -4.81720 -3.73042 -3.37799
EXTDEBT 1 (0) -5.67859 -4.65255 -3.67081 -3.86909
DEBTSER 1 (0) -6.82186 -4.68355 -3.56081 -3.86909
CAPEX 1 (1) -5.66387 -4.52620 -3.53048 -3.39799
The stationarity result shows that external debt and debt servicing were stationary at first order.
While capital expenditure and economic growth were stationary at after first differential was taken.
These results imply that the regression results that would be obtained from the models specified in
(Equation 2) would have been spurious if there is no long-run relationship among the variables in the
model. As such, cointegration properties (long run and short run relationship) were investigated.
Co-integration tests
Co-integration tests: The hypothesis of co-integration is accepted if the number of co- integrating
relationships is greater than or equal to one. The Johansen co-integration test result between GDP,
EXTDEBT, CAPEX, and DEBTSER is supported at lag 2 in the Final prediction error (FPE),
Akaike information criterion (AIC) and HQ: Hannan-Quinn information criterion (HQ).

Table 4.3: Unrestricted Cointegration Rank Test

 Co-integration Rank Test for GDP and EXDEBT
Eigenvalue Trace Statistic 5% Critical Value Probability
None* 0.57883 70.3133 47.8561 0.0001
At most 1* 0.53204 40.0477 29.7970 0.0024
At most 2 0.31839 13.46974 15.4947 0.0987
Co-integration Rank Test for GDP and DEBTSER
None * 0.47733 30.26562 27.5843 0.0021
At most 1* 0.56214 26.57800 21.1316 0.0077
At most 2 0.54832 13.41579 14.2646 0.0678
Co-integration Rank Test for GDP and CAPEX
None * 0.59301 37.9301 55.3557 0.0030
At most 1* 0.68481 33.8481 33.8481 0.0145
At most 2 0.45384 15.7384 9.56776 0.0441
S
ource: researcher (2018) summary from e-view software 9.

From the Johansen co-integration test results presented in Table 4 below, the Trace statistic indicates
two co-integrating equations judging from the P-values at None* and 1* which are both significant
at 1% and 5% level. The Max-Eigen statistic also indicates two co-integrating equations judging
from the P-values at none* and 1* which both showed a significant level of 1% and 5%. The result
reveals that the co-integrating relationships is greater than one, and the null hypothesis of no co-
integration was rejected in favour of the alternative hypothesis that the variables used in the model
are co-integrated, this reveals that a long run relationship exist between, external debt, capital
expenditure, debt servicing and economic growth in Nigeria (GDP).
4.4 Econometric Analysis
4.4.1 Unit Root Test
This test tries to examine the property of the variables. It is used to check for the presence of a unit
root i.e. no stationarity of the variables. This test is carried out using the Augmented Dickey Fuller
(ADF) test. This is the first test carried out in the Co-integration analysis and is known as the pre Co-
integration test. The ADF is carried out using Eviews software package and the results from the test
are tabulated below:
Table 4.2 Test for Stationarity
AT LEVELS At 1st DIFFERENCE

Variables ADF Test statistic

Critical Value at 5%
La g
Rem arks
ADF Test Statistic
Critical Value at 5%
Lag Rem arks
Order of Integratio n LRGDP 1.972910 -2.957110 0 NS -4.544087 -2.960411 0 S I(1) LEDS -
1.950507 -2.960411 1 NS -3.890507 -2.960411 0 S I(1) LDSP -1.642663 -2.957110 0 NS -4.851131
-2.963972 1 S I(1) EXR -5304134 -2960411 0 I(0) Source: Author’s Compilation from Eviews 7
The a priori expectation when using the ADF test is that a variable is stationary when the
value of the ADF test statistic is greater than the critical value at 5%. None of the
variables used met this a priori expectation at levels except exchange rate (EXR) as they
were non-stationary (NS) and as such were differenced once to become stationary (S).
Thus LRGDP, LEDS and LDSP integrated of order one while EXR is integrated of
order zero.
4.4.2 Johansen Co-integration test
The co-integration test is used to check for long run relationship between the dependent
and independent variables (Ogundipe and Amaghionyeodiwe, 2013). The co-integration
test was carried out using the Johansen technique also using Eviews software package
and it produced the following results:
Table 4.3 Test for Johansen Co-integration Using Trace Statistic Hypothesized No. of CE(s) Eigen
Value Trace Statistic 0.05 Critical Value
Prob.**
None* 0.808381 86.82273 63.87610 0.0002 At most 1 0.466610 35.60317 42.91525 0.2211 At
most 2 0.306475 16.11962 25.87211 0.4830 At most 3 0.142745 4.774616 12.51798 0.6290 Source:
Author’s Compilation from Eviews 7
From the above table the trace indicates one co-integrating equation at 5 percent level.
Table 4.4 Test for Johansen Co-integration Using Max-Eigen Value Hypothesized No. of CE(s)
Eigen Value Max-Eigen Statistic 0.05 Critical Value
Prob.**
None* 0.808381 51.21956 32.11832 0.001 At most 1 0.466610 19.48355 25.82321 0.2740 At most
2 0.306475 11.34501 19.38704 0.4784 At most 3 0.142745 4.774616 12.51798 0.6290 Source:
Author’s Compilation from Eviews 7
52
From the above table the Max-Eigen value indicates one co-integrating equation at 5
percent level. Based on the above tables we reject the null hypothesis of no co-
integrating equations.
Table 4.5 Long run Normalized Co-integration Estimates LRGDP LEDS LDSP EXR 1.000000
0.060263 0.723011 -0.006284 (0.05932) (0.08449) (0.00146) [1.01589] [8.55736] [4.30411)
Source: Author’s Compilation from Eviews 7
The above table shows the normalized co-integration co-efficients with the standard
error and t-statistic in parentheses ( ) and [ ].
There is an inelastic relationship between LRGDP and LEDS. A unit change in LEDS
will bring about a less than proportionate change in LRGDP. The t-statistic shows the
significance of the independent variable with respect to the dependent variable in the
long run. The rule of thumb for t-statistics states that t ≥ 2 is significant. Therefore
LEDS is statistically insignificant at 1.01589.
There is an inelastic relationship between LRGDP and LDSP. A unit change in LDSP
will bring about a less than proportionate change in LRGDP. The rule of thumb states
that t ≥ 2 is significant. Therefore LDS is statistically significant at 8.55736.
There is positive relationship between LRGDP and EXR. A unit increase in EXR will
bring about a 0.006284 increase in LRGDP. This meets a priori expectation of a positive
relationship between exchange rate and economic growth. The rule of thumb states that t
≥ i2. Therefore EXR is statistically significant at 4.30411.
4.4.3 Error Correction Estimates Using Vector Error Correction Model
Table 4.6 Table Showing Vector Error Correction Estimates Error Correction D(RGDP) D(LEDS)
D(LDSP) D(EXR) CointEq1 -0.292245 -0.221313 0.999894 -16.97928 (0.10918) (0.37499)
(0.80216) (25.6926) [-2.67664] [-0.59018] [1.24649] [-0.66086] Source: Author’s Compilation
from Eviews 7
The above table contains the vector error coefficient estimates and standard and t-
statistic are in parentheses. The a priori for the vector error correction coefficient (alpha)
is that it must be negative. The alpha meets this expectation and this implies that
29.2245 percent of the errors are corrected in the long run.
4.4.4 Granger Causality Test
Table 4.7 Test for Causality Null Hypothesis Observations F-Statistic Prob LEDS does not Granger
cause LRGDP LRGDP does not Granger cause LEDS 32 5.65990 6.91967 0.0242 0.0135 LDSP
does not Granger cause LRGDP LRGDP does not Granger cause LDSP 32 0.04306 5.75002 0.8371
0.0231 EXR does not Granger cause LRGDP LRGDP does not Granger cause EXR 32 0.07278
13.5768 0.0009 0.7892 LDSP does not Granger cause LEDS LEDS does not Granger cause LDSP
32 7.11542 13.9911 0.0124 0.0008 EXR does not Granger cause LEDS LEDS does not Granger
cause EXR 32 4.93139 0.22009 0.0343 0.6425 EXR does not Granger cause LDSP LDSP does not
Granger cause EXR 32 1.89008 1.68736 0.1797 0.2042 Source: Author’s Compilation from
Eviews 7
Our focus is on the causal relationship between external debt and economic growth
(LRGDP). The null hypothesis states that LEDS does not Granger cause LRGDP and
LRGDP does not Granger cause LEDS. The rule of thumb states that the probability of
F-statistic must be less than 0.5 to show causal relationship. The probabilities for our
causal variables Real Gross Domestic Product and External Debt Stock are 0.0242 and
0.0135. Therefore we reject the null hypothesis and conclude that a bi-directional causal
relationship exists between external debt and economic growth in Nigeria.
4.5 Conclusion
This chapter focused on the data analysis and interpretation. It began with a graphical trend analysis
of all the variables used in the study from 1980-2012. It then moved on to the descriptive analysis
which contained a summary of data statistics. Next was the empirical analysis where unit root, co-
integration and vector error correction tests were carried out. The Augmented Dickey Fuller (ADF)
test was used to check for stationarity (presence of a unit root) and to what degree. The test revealed
that all the variables were stationary at first difference except exchange rate which was stationary at
levels. The Johansen Co-integration test showed long run relationship among the variables and as
such the normalized coefficients were interpreted. There is an inelastic relationship between External
Debt Stock and Real Gross Domestic Product, External Debt Services Payments and Real Gross
Domestic Product and a positive relationship between Exchange Rate and Real Gross Domestic
Product which met the a priori expectation. The t-statistic revealed a significant relationship between
Real Gross Domestic Product and Debt Service Payments, Exchange Rate and an insignificant
relationship between External Debt and Real Gross Domestic Product. The Vector Error Coefficient
of concern showed that about 29.2245 percent of the errors will be corrected in the long run and as
such there is a convergence. Also the Granger Causality test revealed that there External Debt Stock
causes Economic Growth and vice versa thus a bi-directional relationship exists between them.

CHAPTER FIVE
SUMMARY, RECOMMENDATIONS & CONCLUSION
5.1 Summary of Study
The aim of this study is to examine the impact of external debt on economic growth in Nigeria. This
is done by examining the long-run and causal relationship between external debt and economic
growth. The study carries out an empirical analysis to determine the relationship between the
variables. This brought about a number of findings and these findings will provide recommendations
for managing the debt situation in Nigeria all of which are outlined in this chapter.
5.2 Summary of Findings
5.2.1 Summary of Empirical Findings
The empirical analysis carried out revealed a significant long run relationship between real gross
domestic product (LRGDP) and external debt service payments (LDSP) and Real Gross Domestic
Product exchange rate (EXR) and an insignificant long run relationship between LRGDP and
external debt stock (LEDS). Also the Granger causality test showed that external debt (LEDS)
Granger causes economic growth (LRGDP) and economic growth (LRGDP) Granger causes
external debt (LEDS).
5.2.2 Theoretical Findings
The result shows an inelastic relationship between Real Gross Domestic Product and External Debt
Stock. A unit change in external debt will bring about a less than proportionate change in real gross
domestic product.
There is an inelastic relationship between Real Gross Domestic Product and External debt service
Payments. A unit change in external debt service payments will bring about a less than proportionate
change in real gross domestic product. There is a positive relationship between Real Gross Domestic
Product and Exchange rate. A unit crease in exchange rate will bring about a 0.006284 increase in
real gross domestic product.
5.3 Recommendations
Based on the above findings, the following recommendations are given: Firstly, external debts
should be contracted solely for economic reasons and not for social or political reasons. This is to
avoid accumulation of external debt stock overtime and prevent an obscuring of the motive behind
external debt. Secondly, the authorities responsible for managing Nigeria’s external debt should
adequately keep track of the debt payment obligations and the debt should not be allowed to pass a
maximum limit so as to avoid debt overhang. Lastly the Nigerian government should promote
exportation of domestic products as a high exchange rate will make our goods more attractive in the
foreign market and will increase foreign exchange earnings.
5.4 Conclusion
This study examined the impact of external debt on economic growth in Nigeria. The study sought
out to find a significant long run and causal relationship between external debt and economic
growth. Real gross domestic product was used as a proxy for economic growth which is the
dependent variable while external debt stock, external debt service payments and exchange rate were
the independent variables. External debt stock and external debt service payments were used to
capture the external debt burden in Nigeria. The Johansen co-integration test was used to test the
first hypothesis of no long run relationship between external debt and economic growth. The null
hypothesis was accepted as the results showed no long run relationship between external debt and
economic growth. The Granger causality test was used to test the second null hypothesis of no causal
relationship between external debt and economic growth in Nigeria. The null hypothesis is rejected
as the results show that there exist bi-directional causal relationship between external debt and
economic growth. Based on these findings recommendations were given.
5.4.1 Limitations of Study
The researcher faced challenges in acquiring secondary data on some variables for Nigeria and as
such these variables were exempted from the model.
5.4.2 Suggestions for further research
Further research should be done on the channels through which external debt may affect economic
growth in Nigeria.

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APPENDICES
Appendix 1: Table of Data
YEAR RGDP EDS DSP EXR 1980 61946106738 8938206000 1150772000 0.546781 1981
53813895881 11445508000 1790651000 0.617708 1982 53247135431 11992472000 2090346000
0.673461 1983 50557914889 17576994000 2565377000 0.72441 1984 49535867646 17783310000
4067500000 0.766527 1985 53658653550 18655380000 4428669000 0.893774 1986 48961280054
22215776000 2050757000 1.754523 1987 43697110037 29024888000 1106408000 4.016037 1988
46992974187 29624122000 2210434000 4.536967 1989 50032099652 30121999000 2117490000
7.364735 1990 56419202083 33438924000 3335543000 8.038285 1991 56070615711 33527205000
2944753000 9.909492 1992 56313808189 29018714000 2414572000 17.29843 1993 57490979534
30735623000 1490998000 22.0654 1994 58014011386 33092286000 1871671000 21.996 1995
57835636304 34094442000 1832904000 21.89526 1996 60723777676 31414751000 2228630000
21.88443 1997 62425413646 28467541000 1415896000 21.88605 1998 64120663260 30313711000
1331989000 21.886 1999 64424747539 29368025000 1072055000 92.3381 2000 67850915773
31581804000 1854816000 101.6973 2001 70843863904 30031742000 2524307000 111.2313 2002
73525054912 29918232000 1476880000 120.5782 2003 81137974799 34136659000 1631344000
129.2224 2004 1.09E+11 36689358000 1710307000 132.888 2005 1.12E+11 20475927000
8807116000 131.2743 2006 1.21E+11 4065417000 6710138000 128.6517 2007 1.30E+11
3862818000 1010498000 125.8081 2008 1.38E+11 4143915000 429497000 118.546 2009
1.47E+11 6847795000 432345000 148.9017 2010 1.59E+11 7271144000 315097000 150.298 2011
1.70E+11 9008773000 373161000 154.7403 2012 1.81E+11 10076546000 302664000 156.8097

Appendix 2: Table of Logged Data

YEAR LNRGDP LNEDS LNDSP 1980 24.84953 22.9136 20.8637 1981 24.7088 23.16086
21.30585 1982 24.69821 23.20754 21.4606 1983 24.64639 23.58986 21.66537 1984 24.62596
23.60153 22.12629 1985 24.70591 23.6494 22.21136 1986 24.6143 23.82407 21.44147 1987
24.50055 24.09142 20.82438 1988 24.57326 24.11185 21.51645 1989 24.63593 24.12852 21.4735
1990 24.75608 24.23299 21.9279 1991 24.74988 24.23562 21.80329 1992 24.75421 24.09121
21.60479 1993 24.77489 24.14869 21.12271 1994 24.78395 24.22257 21.3501 1995 24.78087
24.2524 21.32917 1996 24.8296 24.17054 21.52465 1997 24.85724 24.07203 21.07103 1998
24.88403 24.13487 21.00994 1999 24.88876 24.10317 20.79284 2000 24.94058 24.17585 21.34105
2001 24.98374 24.12552 21.64923 2002 25.02089 24.12173 21.1132 2003 25.11942 24.25364
21.21267 2004 25.41011 24.32575 21.25994 2005 25.44398 23.74252 22.89883 2006 25.52289
22.12578 22.62689 2007 25.58894 22.07466 20.73371 2008 25.64976 22.14491 19.87813 2009
25.71681 22.64719 19.88473 2010 25.79228 22.70718 19.56839 2011 25.85799 22.92146 19.73752
2012 25.92126 23.03348 19.52813

Appendix 3: Estimated Results

Augmented Dickey Fuller Test for Stationarity
Null Hypothesis: LOGDSP has a unit root Exogenous: Constant Lag Length: 0 (Automatic - based
on SIC, maxlag=2) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -
1.642663 0.4498 Test critical values: 1% level -3.653730 5% level -2.957110 10% level -
2.617434 *MacKinnon (1996) one-sided p-values. Augmented Dickey-Fuller Test
Equation Dependent Variable: D(LOGDSP) Method: Least Squares Date: 03/28/14 Time: 00:17
Sample (adjusted): 1981 2012 Included observations: 32 after adjustments Variable
Coefficient Std. Error t-Statistic Prob. LOGDSP( -1) -0.223450 0.136029 -1.642663 0.1109
C 4.708881 2.893783 1.627241 0.1141 R -squared 0.082522 Mean dependent var -
0.041736 Adjusted R- squared 0.051940 S.D. dependent var 0.586516 S.E. of regression 0.571081
Akaike info criterion 1.777892 Sum squared resid 9.784019 Schwarz criterion 1.869500 Log
likelihood -26.44626 Hannan-Quinn criter. 1.808257 F-statistic 2.698343 Durbin-Watson stat
1.484370 Prob(F- 0.110895

statistic) Null Hypothesis: D(LOGDSP) has a unit root Exogenous: Constant Lag Length: 1
(Automatic - based on SIC, maxlag=2) t-Statistic Prob.* Augmented Dickey-Fuller
test statistic -4.851131 0.0005 Test critical values: 1% level -3.670170 5% level -2.963972 10%
level -2.621007 *MacKinnon (1996) one-sided p-values. Augmented Dickey-Fuller
Test Equation Dependent Variable: D(LOGDSP,2) Method: Least Squares Date: 03/28/14 Time:
00:17 Sample (adjusted): 1983 2012 Included observations: 30 after adjustments Variable
Coefficient Std. Error t-Statistic Prob. D(LOGDSP (-1)) -1.145888 0.236210 -4.851131
0.0000 D(LOGDSP (-1),2) 0.329338 0.179967 1.829989 0.0783 C -0.069045 0.106385 -0.649009
0.5218 R -squared 0.495724 Mean dependent var -0.012138 Adjusted R- squared 0.458370
S.D. dependent var 0.787232 S.E. of regression 0.579367 Akaike info criterion 1.840880 Sum
squared resid 9.062997 Schwarz criterion 1.980999 Log likelihood -24.61319 Hannan-Quinn
criter. 1.885705 F-statistic 13.27103 Durbin-Watson stat 2.127873 Prob(F- statistic) 0.000097
Null Hypothesis: LOGEDS has a unit root Exogenous: Constant Lag Length: 1 (Automatic - based
on SIC, maxlag=2) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -
1.950507 0.3060 Test critical values: 1% level -3.661661 5% level -2.960411 10% level -
2.619160 *MacKinnon (1996) one-sided p-values. Augmented Dickey-Fuller Test
Equation Dependent Variable: D(LOGEDS) Method: Least Squares Date: 03/28/14 Time: 00:18
Sample (adjusted): 1982 2012 Included observations: 31 after adjustments Variable
Coefficient Std. Error t-Statistic Prob. LOGEDS( -1) -0.167066 0.085652 -1.950507 0.0612
D(LOGEDS( -1)) 0.404131 0.172064 2.348718 0.0261 C 3.953600 2.029919 1.947664 0.0615
R -squared 0.211494 Mean dependent var -0.004109 Adjusted R- squared 0.155172 S.D.
dependent var 0.347469 S.E. of regression 0.319374 Akaike info criterion 0.646859 Sum squared
resid 2.855996 Schwarz criterion 0.785632 Log likelihood -7.026313 Hannan-Quinn criter.
0.692095 F-statistic 3.755099 Durbin-Watson stat 1.971696 Prob(F- statistic) 0.035914
Null Hypothesis: D(LOGEDS) has a unit root
Exogenous: Constant Lag Length: 0 (Automatic - based on SIC, maxlag=2) t-Statistic
Prob.* Augmented Dickey-Fuller test statistic -3.890507 0.0057 Test critical values: 1% level
-3.661661 5% level -2.960411 10% level -2.619160 *MacKinnon (1996) one-sided p-
values. Augmented Dickey-Fuller Test Equation Dependent Variable: D(LOGEDS,2)
Method: Least Squares Date: 03/28/14 Time: 00:18 Sample (adjusted): 1982 2012 Included
observations: 31 after adjustments Variable Coefficient Std. Error t-Statistic Prob.
D(LOGEDS( -1)) -0.679126 0.174560 -3.890507 0.0005 C -0.004191 0.060071 -0.069762 0.9449
R -squared 0.342941 Mean dependent var -0.004363 Adjusted R- squared 0.320283 S.D.
dependent var 0.405678 S.E. of regression 0.334461 Akaike info criterion 0.709745 Sum squared
resid 3.244052 Schwarz criterion 0.802261 Log likelihood -9.001054 Hannan-Quinn criter.
0.739903 F-statistic 15.13604 Durbin-Watson stat 1.905025 Prob(F- statistic) 0.000538
Null Hypothesis: EXR has a unit root Exogenous: Constant Lag Length: 0 (Automatic - based on
SIC, maxlag=2) t-Statistic Prob.*
Augmented Dickey-Fuller test statistic 0.025970 0.9542 Test critical values: 1% level -
3.653730 5% level -2.957110 10% level -2.617434 *MacKinnon (1996) one-sided p-
values. Augmented Dickey-Fuller Test Equation Dependent Variable: D(EXR) Method:
Least Squares Date: 03/28/14 Time: 00:19 Sample (adjusted): 1981 2012 Included
observations: 32 after adjustments Variable Coefficient Std. Error t-Statistic Prob.
EXR( -1) 0.001073 0.041304 0.025970 0.9795 C 4.821708 3.393089 1.421038 0.1656 R-
squared 0.000022 Mean dependent var 4.883216 Adjusted R- squared -0.033310 S.D.
dependent var 13.52135 S.E. of regression 13.74470 Akaike info criterion 8.139645 Sum squared
resid 5667.504 Schwarz criterion 8.231254 Log likelihood -128.2343 Hannan-Quinn criter.
8.170011 F-statistic 0.000674 Durbin-Watson stat 1.963455 Prob(F- statistic) 0.979453
Null Hypothesis: D(EXR) has a unit root Exogenous: Constant Lag Length: 0 (Automatic - based
on SIC, maxlag=2) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -
5.304134 0.0001 Test critical values: 1% level -3.661661
5% level -2.960411 10% level -2.619160 *MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation Dependent Variable: D(EXR,2) Method: Least Squares
Date: 03/28/14 Time: 00:19 Sample (adjusted): 1982 2012 Included observations: 31 after
adjustments Variable Coefficient Std. Error t-Statistic Prob. D(EXR( -1)) -0.983448
0.185412 -5.304134 0.0000 C 4.956121 2.669564 1.856528 0.0736 R -squared 0.492420
Mean dependent var 0.064466 Adjusted R- squared 0.474917 S.D. dependent var 19.24910 S.E.
of regression 13.94840 Akaike info criterion 8.170947 Sum squared resid 5642.176 Schwarz
criterion 8.263463 Log likelihood -124.6497 Hannan-Quinn criter. 8.201105 F-statistic 28.13384
Durbin-Watson stat 2.003771 Prob(F- statistic) 0.000011
Augmented Dickey-Fuller Test Equation Dependent Variable: D(LOGRGDP) Method: Least
Squares Date: 03/28/14 Time: 00:21 Sample (adjusted): 1981 2012 Included observations: 32
after adjustments Variable Coefficient Std. Error t-Statistic Prob. LOGRGDP( - 1)
0.063984 0.032431 1.972910 0.0578 C -1.565448 0.810548 -1.931345 0.0629 R -squared
0.114845 Mean dependent var 0.033492
Adjusted R- squared 0.085340 S.D. dependent var 0.075571 S.E. of regression 0.072274
Akaike info criterion -2.356232 Sum squared resid 0.156708 Schwarz criterion -2.264624 Log
likelihood 39.69972 Hannan-Quinn criter. -2.325867 F-statistic 3.892373 Durbin-Watson stat
1.569777 Prob(F- statistic) 0.057782
Null Hypothesis: D(LOGRGDP) has a unit root Exogenous: Constant Lag Length: 0 (Automatic -
based on SIC, maxlag=2) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -
4.544087 0.0011 Test critical values: 1% level -3.661661 5% level -2.960411 10% level -
2.619160 *MacKinnon (1996) one-sided p-values. Augmented Dickey-Fuller Test
Equation Dependent Variable: D(LOGRGDP,2) Method: Least Squares Date: 03/28/14 Time:
00:21 Sample (adjusted): 1982 2012 Included observations: 31 after adjustments Variable
Coefficient Std. Error t-Statistic Prob. D(LOGRGD P(-1)) -0.733924 0.161512 -4.544087
0.0001 C 0.030456 0.013259 2.296936 0.0290 R -squared 0.415896 Mean dependent var
0.006581 Adjusted R- squared 0.395755 S.D. dependent var 0.087198 S.E. of regression 0.067782
Akaike info criterion -2.482700
Sum squared resid 0.133237 Schwarz criterion -2.390185 Log likelihood 40.48185 Hannan-
Quinn criter. -2.452543 F-statistic 20.64873 Durbin-Watson stat 2.056804 Prob(F- statistic)
0.000090
Johansen Test for Co-integration
Date: 03/28/14 Time: 00:53 Sample (adjusted): 1982 2012 Included observations: 31 after
adjustments Trend assumption: Linear deterministic trend (restricted) Series: LOGRGDP
LOGEDS LOGDSP EXR Lags interval (in first differences): 1 to 1 Unrestricted
Cointegration Rank Test (Trace) Hypot hesize d Trace 0.05 No. of CE(s) Eigenvalue
Statistic Critical Value Prob.** None * 0.808381 86.82273 63.87610 0.0002 At most 1
0.466610 35.60317 42.91525 0.2211 At most 2 0.306475 16.11962 25.87211 0.4830 At most 3
0.142745 4.774616 12.51798 0.6290 Trace test indicates 1 cointegratingeqn(s) at the 0.05
level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999)
p-values Unrestricted Cointegration Rank Test (Maximum Eigenvalue) Hypot hesize d
Max-Eigen 0.05 No. of CE(s) Eigenvalue Statistic Critical Value Prob.** None *
0.808381 51.21956 32.11832 0.0001 At most 1 0.466610 19.48355 25.82321 0.2740 At most 2
0.306475 11.34501 19.38704 0.4784 At most 3 0.142745 4.774616 12.51798 0.6290
Max-eigenvalue test indicates 1 cointegratingeqn(s) at the 0.05 level * denotes rejection of
the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Unrestricted
Cointegrating Coefficients (normalized by b'*S11*b=I): LOGR GDP LOGEDS LOGDSP
EXR @TREND(81 ) 3.798 522 0.228911 2.746372 -0.023870 0.221044 11.47 492 2.558987
0.747160 -0.009929 -0.376778 3.719 173 2.928376 -0.874929 0.035181 -0.269757 - 3.1729 45 -
1.436166 0.660012 0.039337 -0.116559 Unrestricted Adjustment Coefficients (alpha):
D(LO GRGD P) 0.002064 -0.032177 0.020711 0.008819 D(LO GEDS ) -0.174005 -0.057019 -
0.081168 0.012947 D(LO GDSP) -0.169844 0.082272 0.196667 -0.046573 D(EX R) 0.519343 -
4.717055 -1.251551 -4.247989 1 Cointegrating Equation(s): Log likelihood -76.63286
Normalized cointegrating coefficients (standard error in parentheses) LOGR GDP LOGEDS
LOGDSP EXR @TREND(81 ) 1.000 000 0.060263 0.723011 -0.006284 0.058192 (0.05932)
(0.08449) (0.00146) (0.01081) Adjustment coefficients (standard error in
parentheses) D(LO GRGD P) 0.007839 (0.04902) D(LO GEDS ) -0.660962 (0.14577)
D(LO GDSP) -0.645157 (0.30647) D(EX R) 1.972735 (10.1720) 2
Cointegrating Equation(s): Log likelihood -66.89109 Normalized cointegrating coefficients
(standard error in parentheses) LOGR GDP LOGEDS LOGDSP EXR @TREND(81 ) 1.000 000
0.000000 0.966626 -0.008290 0.091899 (0.10387) (0.00173) (0.01364) 0.000 000 1.000000 -
4.042540 0.033296 -0.559328 (0.56504) (0.00939) (0.07421) Adjustment coefficients
(standard error in parentheses) D(LO GRGD P) -0.361384 -0.081867 (0.13523) (0.02874)
D(LO GEDS ) -1.315251 -0.185743 (0.44290) (0.09414) D(LO GDSP) 0.298908 0.171654
(0.95474) (0.20293) D(EX R) -52.15512 -11.95200 (30.2933) (6.43896)
3 Cointegrating Equation(s): Log likelihood -61.21858 Normalized
cointegrating coefficients (standard error in parentheses) LOGR GDP LOGEDS LOGDSP EXR
@TREND(81 ) 1.000 000 0.000000 0.000000 -0.004159 -0.042752 (0.00252) (0.01723)
0.000 000 1.000000 0.000000 0.016020 0.003798 (0.00843) (0.05760) 0.000 000 0.000000
1.000000 -0.004274 0.139300 (0.00354) (0.02419) Adjustment coefficients (standard error
in parentheses) D(LO GRGD P) -0.284358 -0.021218 -0.036494 (0.13143) (0.04049) (0.03094)
D(LO GEDS ) -1.617129 -0.423433 -0.449468 (0.41543) (0.12797) (0.09781) D(LO GDSP)
1.030347 0.747569 -0.577055 (0.86625) (0.26684) (0.20396) D(EX R) -56.80985 -15.61701 -
1.003067 (31.5364) (9.71453) (7.42526)

Vector Error Correction Model

Vector Error Correction Estimates Date: 03/28/14 Time: 00:54 Sample (adjusted): 1983 2012
Included observations: 30 after adjustments Standard errors in ( ) & t-statistics in [ ]
CointegratingE q: CointEq1 LOGRGDP( -1) 1.000000 LOGEDS(-1) 0.197084
(0.07846) [ 2.51198] LOGDSP(-1) -0.135526 (0.16222) [-0.83545] EXR(-1) -
0.001197 (0.00193) [-0.61973] @TREND(80) -0.054900 (0.01970) [-2.78657]
C -25.75918 Error Correction: D(LOGRGD P) D(LOGEDS) D(LOGDSP) D(EXR)
CointEq1 -0.292245 -0.221313 0.999894 -16.97928 (0.10918) (0.37499) (0.80216) (25.6926) [-
2.67664] [-0.59018] [ 1.24649] [-0.66086] D(LOGRGDP( -1)) 0.101752 0.157345 2.577302 -
12.75172 (0.18878) (0.64838) (1.38698) (44.4238) [ 0.53899] [ 0.24268] [ 1.85821] [-0.28705]
D(LOGRGDP( -2)) -0.205454 -2.415750 0.867593 -7.408905 (0.19452) (0.66807) (1.42910)
(45.7728)
[-1.05623] [-3.61604] [ 0.60709] [-0.16186] D(LOGEDS(- 1)) 0.075571 0.191064 0.337744
0.056062 (0.06806) (0.23375) (0.50003) (16.0153) [ 1.11038] [ 0.81739] [ 0.67545] [ 0.00350]
D(LOGEDS(- 2)) 0.046275 0.300252 0.489148 9.508239 (0.05375) (0.18461) (0.39491)
(12.6485) [ 0.86092] [ 1.62643] [ 1.23865] [ 0.75173] D(LOGDSP(- 1)) 0.011219 -0.405215 -
0.137209 -2.309847 (0.02863) (0.09833) (0.21035) (6.73728) [ 0.39183] [-4.12087] [-0.65229]
[-0.34285] D(LOGDSP(- 2)) -0.002612 0.048344 -0.130452 -7.413376 (0.02898) (0.09953)
(0.21292) (6.81955) [-0.09011] [ 0.48570] [-0.61269] [-1.08708] D(EXR(-1)) -0.000480 -
0.000552 0.008921 -0.079262 (0.00101) (0.00348) (0.00745) (0.23870) [-0.47357] [-0.15838]
[ 1.19705] [-0.33206] D(EXR(-2)) -0.000886 0.000300 0.009716 -0.031874 (0.00101)
(0.00348) (0.00745) (0.23873) [-0.87377] [ 0.08596] [ 1.30351] [-0.13351] C 0.051615
0.049920 -0.291481 6.117177 (0.01887) (0.06482) (0.13866) (4.44112) [ 2.73486] [ 0.77013] [-
2.10214] [ 1.37740] R-squared 0.404515 0.722176 0.556529 0.159784 Adj. R-squared
0.136546 0.597156 0.356967 -0.218313 Sum sq. resids 0.085246 1.005546 4.601391 4720.394
S.E. equation 0.065286 0.224226 0.479656 15.36293 F-statistic 1.509561 5.776460 2.788756
0.422600 Log likelihood 45.38299 8.366844 -14.44558 -118.4449 Akaike AIC -2.358866
0.108877 1.629705 8.562994 Schwarz SC -1.891800 0.575943 2.096771 9.030060 Mean
dependent 0.040768 -0.005802 -0.064415 5.204541 S.D. dependent 0.070259 0.353279
0.598154 13.91857 Determinant resid 0.004820
covariance (dof adj.) Determinant resid covariance 0.000952 Log likelihood -65.91975 Akaike
information criterion 7.394650 Schwarz criterion 9.496446

Granger Causality Test

Pairwise Granger Causality Tests Date: 03/28/14 Time: 01:03 Sample: 1980 2012 Lags: 1
Null Hypothesis: Obs F-Statistic Prob. LOGEDS does not Granger Cause LOGRGDP 32
5.65990 0.0242 LOGRGDP does not Granger Cause LOGEDS 6.91967 0.0135 LOGDSP
does not Granger Cause LOGRGDP 32 0.04306 0.8371 LOGRGDP does not Granger Cause
LOGDSP 5.75002 0.0231 EXR does not Granger Cause LOGRGDP 32 13.5768 0.0009
LOGRGDP does not Granger Cause EXR 0.07278 0.7892 LOGDSP does not Granger Cause
LOGEDS 32 7.11542 0.0124 LOGEDS does not Granger Cause LOGDSP 13.9911 0.0008
EXR does not Granger Cause LOGEDS 32 4.93139 0.0343 LOGEDS does not Granger Cause
EXR 0.22009 0.6425 EXR does not Granger Cause LOGDSP 32 1.89008 0.1797 LOGDSP
does not Granger Cause EXR 1.68736 0.2042