Long-Run Impact of Foreign Aid and External Debt on Economic Growth in Nigeria: Evidence from the ARDL Approach (1980–2024)

Feb 7
1 min read

Authors: Francis, A. Akawu Ph.D., Mikailu, Ahmed Aminu, Ajidani, Moses Sabo Ph.D.

Abstract

This study examines the impact of foreign aid and external debt on economic growth in Nigeria over the period 1980-2024. Against the backdrop of persistent domestic savings constraints and rising dependence on external financing, the study investigates whether foreign aid and external debt exert significant short-run and long-run effects on economic growth. The Autoregressive Distributed Lag (ARDL) bounds testing approach is adopted to examine the existence of a long-run relationship among the variables and to estimate both short-run dynamics and long-run coefficients. Empirical findings reveal that official development assistance exerts a positive and statistically significant effect on economic growth in the long run, underscoring its role in supporting infrastructure development, human capital formation, and institutional capacity building. In contrast, external debt exhibits a negative and significant impact on economic growth, lending strong support to the debt overhang hypothesis, which posits that excessive debt servicing crowds out productive investment and undermines growth. Short-run estimates indicate that foreign aid contributes modestly to growth, while external debt has no significant immediate effect. Stability diagnostics confirm the robustness of the estimated model. The study concludes that while foreign aid can serve as a catalyst for economic growth, unsustainable external debt accumulation constrains Nigeria’s long-term growth prospects. Consequently, the study recommends effective allocation and monitoring of foreign aid alongside prudent external debt management strategies to ensure sustainable economic growth in Nigeria.

Keywords: Foreign Aid; External Debt; Economic Growth; ARDL; Nigeria