Abstract:

Debt financing is an integral part of modern economies as developed and developing nations either borrow to drive the process of economic growth and development or to support existing level of economic activities. It is a government policy of stimulating the economy by deliberately budgeting an expenditure in excess of revenue (from taxes, royalties, and sundry sources) through injection of funds to stimulate or maintain the level of economic activities, the excess being financed by borrowing. Nwankwo (2011) posits that governments all over the world engage in borrowing but explains that while developing nations borrow to finance economic and social development projects, developed nations borrow primarily to keep the economy running and making progress.

Essentially, governments borrow from internal and external sources. However while domestic borrowing has been largely criticized for its crowding-out effect on private domestic investment, external borrowing is subject to external influences such as interest and exchange rates changes as well as inflationary trends. External borrowing leads to an injection of funds (new money) into the domestic economy. Government external borrowing was justified in Nnoli (1978) who asserts that at the time of political independence, leaders considered national resources grossly inadequate and incapable of sustaining rapid economic development. Beyond the initial period of nationhood, Onosode (2004) argues that foreign capital, technological capability and know-how are required for any serious economic development. Debt financing therefore is an integral part of national existence.  

There have been opposing arguments on whether external debt is actually a veritable instrument of promoting economic growth in debtor nations. Empirical findings in this area have been mixed. This paper therefore seeks to determine the effect of external debt on economic growth in Nigeria.