Financing Growth or Fueling Burden?
This study investigates the impact of external borrowing on economic growth in Nigeria over the period 1981–2018, employing the Vector Error Correction Model (VECM) to analyze the long-run and short-run dynamics among key macroeconomic variables. The research tests three hypotheses relating to the effects of external debt, external debt service payments, and domestic investment on Nigeria’s gross domestic product (GDP). Empirical results reveal that both external debt and external debt service payments exert a statistically significant negative impact on economic growth, indicating that increased borrowing and rising debt servicing obligations have constrained Nigeria's economic performance. Conversely, domestic investment exhibits a positive but statistically insignificant influence on growth. The study attributes the negative outcomes to the misallocation of borrowed funds, particularly their use in financing recurrent expenditures rather than capital investments. It concludes that while external borrowing can potentially foster economic growth, its effectiveness depends on transparent management, strategic utilization, and alignment with productive, growth-enhancing sectors. Policy recommendations include enforcing borrowing limits, improving debt monitoring, promoting economic diversification, and ensuring that loans are directed toward infrastructure and human capital development to achieve sustainable growth.