An Estimation of the Critical Levels of External Debt Accumulation: The Nigerian Experience

There are inexhaustible literatures on the dichotomy between the support for and against borrowing as a means of driving the economy. While some were of the opinion that debt acquisition is good for growth others are of the opinion that debt retards growth. The implication of this is that there is no clear policy understanding on the impact of debt on growth. Consequently, the current study attempts to unify this dichotomy on debt and growth by empirically examining the critical levels of external debt accumulation for Nigeria’s sustainable economic growth, that is, at what point will debt accumulation become growth augmenting or growth backtracking, and at what point will debt accumulation ensures a stable and sustainable growth that will help Nigeria to achieve its growth objective. The study used a quadratic hill-climbing technique, which allows us to obtain analytically, the critical levels of external borrowing that will either augment or retard economic growth in Nigeria. The study used two variant optimization algorithms namely Gauss-Newton/BHHH, and Marquardt algorithms, respectively, estimated with three variant estimators- Generalized Linear Method (GLM), Least Square (LS) and Maximum Linear-Autoregressive Conditional Heteroscadaticity (ML-ARCH). The Gauss, Berndt, Hall, Hall and Hausman commonly referred to as the Gauss-Newton/BHHH is specifically designed for maximum likelihood problems, while Marquardt algorithm modifies the Gauss-Newton algorithm by adding a correction matrix (or ridge factor) to the Hessian approximation. The ridge correction handles numerical problems when the outer product is near singular and may improve the convergence rate. Data ranges from 1965 to 2013 (48 years). The research findings showed that the maximum critical level of Nigeria’s external debt threshold that ensures a steady state growth converges around 14% to 15%. The estimated growth-augmenting threshold showed that at the early stage of debt acquisition, its contribution to output growth is rising, but at a decreasing rate, hence the alternating signs between the linear (positive) and non-linear (negative) debt coefficients. That is, as time progresses a negative non-linear impact of debt stock on growth is experienced showing that there is a poor application of loan such that the earlier benefit derived is gradually eroded. At that point, the maximum attainable growth rate stagnated at 6.3% after which the attainable growth is not Pareto optimal because additional or reduction in debt becomes growth-backtracking – it is also observable that at debt-driven steady state, growth deficit is zero. Based on these findings the study therefore, concluded that both debt accumulation and non-debt acquisition are detrimental to the economy, hence debt is a necessary evil that should be guided. Therefore, the following policy recommendations were made: the country’s external borrowing space is capable of generating higher output growth. Consequent upon this, the external loan contracted by Nigerian government can be increased to reduce or fill the growth gap, if the government will continue to channel the contracted loan into infrastructural development or/and productive activities which is strictly the purpose of venturing into external debt obligations. In order to achieve its growth objectives and at the same time service its debt obligations, the government should diversify its economy; create an enabling environment for domestic and foreign private investors so that income generated can be channeled into achieving the country’s objectives. Efforts should be made by Nigerian Government in ensuring a reliable and vibrant capital market as income generated from the capital market can be used to augment funds from external borrowing to achieve its growth objectives.