Determinants of External Debt and Its Impact on Socio-Economic Life in Nigeria

Abstract

The research focused on analyzing the factors influencing external debt and its effects on the socio-economic conditions of Nigeria from 1986 to 2021. Data from annual time series were collected from the World Bank Development Indicator (WDI, 2022) and Central Bank of Nigeria Statistical Bulletin (CBN). Variables studied included real gross domestic product, debt service payments, exchange rate, gross domestic savings, trade openness, and misery index used as a proxy for socio-economic status. Stationarity of the variables was tested using the Augmented Deckey Fuller Unit Root Test, showing mixed order of integration me (0) at levels and me (1) at first differences. The Breusch-Godfrey Serial Correlation LM test indicated no serial correlation in the model, while the Breusch-Pagan-Godfrey Heteroskedasticity test revealed no heteroskedasticity in the residual series. The Autoregressive Distributive Lag (ARDL) Bound test confirmed a long-term relationship between external debt determinants and their impact on Nigeria’s socio-economic conditions. The study found that real gross domestic product, exchange rate, and gross domestic savings had a negative impact on the misery index, implying that an increase in these variables would reduce the misery index in Nigeria in the long run. The Error Correction test suggested that 87% of equilibrium errors were corrected annually, pointing to a steady adjustment towards the long-term equilibrium. It was recommended that efforts should be made to stabilize the exchange rate to mitigate inflation and enhance the purchasing power of the naira, ultimately reducing Nigeria’s external debt burden and improving the misery index.