EXTERNAL FINANCING, FLYPAPER EFFECT AND OUTPUT IN NIGERIA

Abstract

This study examined the flypaper effect of on the nexus between external financing and output in Nigeria over the period 1970-2022. The Augmented Dickey-Fuller, Philips-Perron unit root tests as well as the Bayer-Hanck Co-integration tests and the Dynamic Simulated Autoregressive Distributed Lags (DARDL) model were used for analysis in this study to examine flypaper effect of on the nexus between both foreign aid (grant) and external debt on income per capita. The finding shows that the variables exhibit mixed order of integration and there is a long-run equilibrium relationship between external financing (debt and aid) and real GDP per capita in Nigeria. Furthermore, the result indicates that a 1% change increase in personal income will result in about 11% increase in real GDP, while 1% decline in ED will lead to 0.3% increase in real GDP in Nigeria.  This indicates that there is a flypaper effect on the nexus between external financing (both debt and aids) and real output in Nigeria in the long run. This implied that the impact of personal income on real income per capita is more than the effect of external debt and foreign aid on per capita income. It means, external debt and foreign aid are not spent on the areas or purposes for which they are needed or meant for in Nigeria. Thus, the external financing should be directed to projects and programmes that have direct impact on the well-being of the people rather than sponsoring the budget. That is, foreign aid and external debt should be spent directly on people-oriented programmes and projects.