External Debt and Price Stability in Nigeria (1981-2021)

Abstract

This study investigated the effect of external debt on price stability in Nigeria between 1981 and 2021 by considering external debt from the standpoint of multilateral debt and other forms of external debt which includes Paris Club, London Club, promissory notes, bilateral, Euro bond and diaspora bond; while inflation rate was used as a surrogate for price stability. Yearly time series data on these variables were generates from Central Bank of Nigeria (CBN) statistical bulletin 2021, and International Financial Statistics and data files World Development Indicators of the IMF (International Monetary Fund). The major tool of analysis was the Vector Auto Regression (VAR) technique which covered VAR Impulse Response Functions, VAR Granger Causality Test, and Variance Decomposition. Results revealed that multilateral debt and other external debt sources effects on inflation rate are mixed; multilateral debt and other debt sources of debt are not significant in the determination of inflation; and other sources of debt influenced variations in inflation more than multilateral debt. Hence, it was concluded that external debt disaggregated into multilateral and other sources of external debt has no significant relationship with price stability (inflation) in Nigeria. On this backdrop, it was recommended that government should manage its external borrowing in such a way that its initial inflationary tendencies are minimized; and government should manage external debt’s potential to reduce inflation by reducing the length of time it takes to affect inflation negatively.

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