Determinants and Sustainability of External Debt in a Deregulated Economy: A Cointegration Analysis from Nigeria (1986-2010)
Imimole, Benedict PhD; Imoughele Lawrence Ehikioya; Okhuese, Matthew Asin

Abstract
The relatively high level of Nigeria’s external indebtedness, and rising debt burden which has serious implications on the country’s development and debt sustainability in terms of ability to pay has led to continued deterioration in Nigeria’s economic performance. This study examines the extent to which Nigeria’s external debt relates to indices of ability to pay in order to ascertain the sustainability of it and to identify the main determinants of her external indebtedness for the period 1986 to 2010. Based on available data and the use of statistical methods, we observed that Nigeria’s external debt is not sustainable in terms of willingness and ability to pay, and that the country’s external debt is characterised by capital flight as a results of external debt accumulation which is evident in the ratio of the country’s reserves to external debt. Using theoretical framework that justifies the demand for external borrowing by developing countries and relying on error correction mechanism and the Johansen cointegration test, we estimated our model after conducting stationarity test, using the Augmented Dickey-Fuller test. The result from cointegration test showed presence of long run relationship between external debt and the explanatory variables. The study also found that the main determinants of Nigeria’s external debt are gross domestic product, debt service and exchange rate. To reduce the adverse effects of external debt on the Nigerian economy and make it sustainable the study recommends that an analysis of the economic and social profitability of all external debt financial projects be carried out to ensure that the returns would be in excess of the interest and principal repayment. The aim is to prevent the deadweight effect of external debt on the economy and make it sustainable. The study also recommends that Government should ensure that external finance be used only for projects of highest priority and productivity and adequate machinery should be put in place by all sectors of government to arrest corruption and penalize those who divert and embezzle public funds. This will help to reduce the rising profile of Nigeria’s external debt.

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