ANALYSIS OF FOREIGN DEBT ON CAPITAL FORMATION IN NIGERIA: 1981-2019

Abstract

Over the years the rate at which Nigeria is borrowing has gone in the rise and the cost of living in the country as well as the infrastructural deficit continue to be more worrisome and alarming, this necessitated the study to investigate the impact of foreign debt on capital formation in Nigeria, covering the period of 1981 - 2019. The data of the variables used in the study are sourced from World Bank data base (WDI). ARDL bounds test for cointegration was applied after confirming the existence of mix order of integration of variables for the models of the study via ADF and PP unit root tests. Capital formation was found to be statistically positive and has significant impact on foreign debt in both long and the short run. Moreover, the study revealed that capital formation was negative and statistically significant in effecting exchange rate in the long run and also had significant negative impact on economic growth in the long run. While, gross domestic product was also found to be negative and has significant impact in influencing both capital formation and foreign debt in the long run. Furthermore, the study revealed that gross domestic product has positive and significant impact on debt servicing and exchange rate at five percent and ten percent level of significance respectively. Therefore, it is recommended that causation should be an important tool for government in formulating effective and functional policies in the Nigerian financial sector. It is important for the policy makers in the country to be cautious on the implementations of projects that raise the foreign debt. It is evidential that such costs lead to borrowing from foreign sources that may take the country towards high debt ratio regime associated with lower economic growth.