Effect of Foreign Commercial Debt Financing on Debt Servicing in Nigeria

Abstract

This study examines the short-run and long-run effect of foreign commercial debt financing on debt servicing in Nigeria within the framework of the Debt Sustainability Theory. Using quarterly data spanning 2007Q1 to 2024Q2, the study employs descriptive statistics, unit root tests, and the Autoregressive Distributed Lag (ARDL) bounds testing approach to assess both short-run and long-run dynamics. Unit root results confirm a mixed order of integration, justifying the ARDL technique. The bounds test indicates the existence of a long run co-integration relationship among debt servicing, foreign commercial debt, exchange rate, inflation, fiscal deficit, foreign reserves, crude oil prices, and monetary policy rate. Long-run estimates reveal that foreign commercial debt, exchange rate, and fiscal deficit significantly increase Nigeria’s debt servicing burden, while foreign reserves exert mitigating effects. Short-run dynamics showed similar patterns, with the error correction mechanism confirming rapid adjustment to equilibrium. Diagnostic tests validate the robustness and stability of the model. The study concludes that Nigeria’s increased dependence on foreign commercial debt financing heightens debt servicing pressure, raising concerns for fiscal sustainability. Based on the findings and to ensure that commercial debt financing remains sustainable in the long-run, the policy makers should make efforts to strengthen external debt management frameworks through prudent borrowing as well as improve management of external reserves, leverage on declining severe market conditions and maintain healthy debt service coverage ratio.