International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 Volume 2, No. 2, February 2013 i-Xplore International Research Journal Consortium www.irjcjournals.org 73 An Econometric Study of the Impact of External Debt, Public DEBT and Debt Servicing on National Savings in Nigeria: A Cointegration Approach Rahmat Magajiya Aliyu, Department of Establishment, Office of Head of Service, Minna, Niger State Usman A. Usman, Department of Economics, Usmanu Danfodiyo University Sokoto ABSTRACT This paper seeks to investigate the impact of external debt, public debt and debt service on the gross national savings in Nigeria spanning the period 1970 to 2010. This study applied the ADFGLS test for stationarity and the result indicates that series are stationary at first difference and integrated of order one 1(1). The Johansen Cointegration test also depicts a long run relationship between series, while the Vector Error Correction Model shows that External Debt has a negative and statistically significance effect on National Savings in Nigeria. However, Public debt and Debt service have a positive and statistical significant effect on National Savings in Nigeria. Debt overhang economies scares off investors due to high expected future tax by implication reduces national savings. Deliberate polices aimed at diversifying the economy will give the nation affluent sources not necessary relying on external borrowing. 1. INTRODUCTION Like other African nations, Sub-Saharan Africa continued to be constraints with low profile savings to boost capital formation. This influence has plagued growth possibilities and prospects making nations to remain perpetually poor and reliant on aids, borrowing heavily from external and public debt which stem from multilateral and bilateral sources respectively. Like Latin America in 1980-1984, Sub-Saharan Africa recorded a high level of debt owing to excessive and indiscriminate borrowing to augment national savings to finance investment, social services and infrastructural development. Iyoha (1999) argued using the two staged least square in 1971 to 1994 that Sub-Saharan Africa is faced with large stock of external debt and debt service payment which attributes to negative effect on investment. This stems from inefficient allocation of resource and political corruption which dwindles most economies of Sub-Saharan Africa. Correspondingly, Nigeria witnessed an increase in external debt profile from US$9 billion to US$19 billion in 1980 to 1985 respectively. This further rose from US$27.5 billion in 1991 to US$32.6 billion in 1995. Between 1985 and 2001, debt service payment pegged at US$32 billion. Total public debt stock rose from US$35.09 billion in 2010 to US$41.55 billion in 2011. Relatively, domestic debts pegged at US$35.88 billion, showing 86.36% of the total debts, while external debts stood at US$5.67 billion in 2011. Relatively, national savings rose from N6, 562.60 Million in 1981 to N12, 521.80 Million in 1985 and N23, 801.30 Million in 1989 respectively. Savings rate stood at 23.77% and 16.95% respectively in 2008 and 2009. Similarly, the savings-investment gap registered N 5, 821.74 billion and N 4, 157.4 billion respectively in 2008 and 2009 CBN (2010). Regardless of gross increase in national savings and external debt in Nigeria, the poverty head count ratio at national poverty line percent of population rose from 43% to 64% from 1985 to 1996 respectively and the ratio of population lived at $2 per day rose from 77% to 84.5% in 1986 to 2010. More so, the population lived at $1.25 per day stood at 53.9% and rose to 68% in 2010. However, despite the gross increase in external debt to fill the savings gap, the implication continued to be servicing sizeable volume of debt at non concessional interest rate and future tax increase which eventually tax away not only investors but also present and future savings to pay the debt off. Nigeria initiated various policy programs such as SAP 1986, NEEDS 2003: 2007 and the new perspective plan Vision 20: 2020 targeted at reducing debt profile, encouraging private sector participation and control over national resources, this was to reduce complete government control over the management of Nigeria economy. Thus, was designed to conserve export earnings for social services to improve the standard living of the population and infrastructural development. Since sustainable development has become the major focus of policy, savings is a function of external debt, private sector domestic investment and gross capital formation and other key growth variables. This study seeks to investigate the effect of external debt, public debt and debt service on national savings in Nigeria and it is divided into six sections including the introduction. Section two discuses on theoretical framework, section three explores the relevant related literature on the area, section four explains the methodology, section five shows the result and discussions, and section six draws the conclusion and section seven implication for policy. 2. THEORETICAL FRAMEWORK The dual gap theory describe an economy with growth dependent on investment and investment a function of