External Debt, Foreign Direct Investment, and Economic Growth in Nigeria

This study examines how external debt and foreign direct investment (FDI) affect economic growth in Nigeria, using annual data for 1995–2024 from the World Bank’s World Development Indicators and the Central Bank of Nigeria. Autoregressive distributed lag (ARDL) Bound testing suggests is relevant due to augmented Dickey-Fuller tests showing that the variables are a mix of I(0) and I(1) processes. Results from the bounds test suggest the existence of a long run relationship between real output, external debt, FDI, inflation, and exchange rate. The FDI coefficient is positive and statistically significant as is the coefficient on inflation in the long run, while the coefficient on external debt is negative and statistically insignificant and the coefficient on the exchange rate is insignificant. In the short run, growth in external debt is significantly and negatively associated with output growth, while exchange rate depreciation and inflation are positively associated with it. The error-correction term (−0.81, p <.001), suggests rapid error correction: deviations from the long run equilibrium are corrected by 81% within one year. The reliability of the estimates is backed by both residual diagnostics and CUSUM-based tests of the stability of the parameters. The results indicate that external borrowing has not been able to produce any real growth dividend yet FDI is the more reliable source of external capital. The study suggests lowering of the reliance on external borrowing, dedicated borrowing of resources for productive infrastructure, improvement of investment climate, diversification of exports and the maintenance of price stability.