CHAPTER ONE
INTRODUCTION
- Background of the Study
Sustainable economic growth is a major concern for any sovereign nation most especially the Less Developed Countries (LDCs) , which are characterized by low capital formation due to low levels of domestic savings and investment (Adepoju, Salau and Obayelu, 2007). It is expected that these LDC’s when facing a scarcity of capital would resort to borrowing from external sources so as to supplement domestic saving (Aluko and Arowolo, 2010; Safdari and Mehrizi, 2011; Sulaiman and Azeez, 2011).
Soludo (2003) asserted that countries borrow for two broad reasons; macroeconomic reason that is to finance higher level of consumption and investment or to finance transitory balance of payment deficit and avoid budget constraint so as to boost economic growth and reduce poverty. The constant need for governments to borrow in order to finance budget deficit has led to the creation of external debt (Osinubi and Olaleru, 2006).
External debt is a major source of public receipts and financing capital accumulation in any economy (Adepoju et al, 2007). External debt improves total factor of productivity through an increase in output which in turn enhances gross domestic product (GDP) of a nation. The impact of external debt cannot be neglected because it boost growth and improves standard of living there by reducing poverty rate. When government invest on infrastructure such investment is
capable of raising growth and socio-economic development (Were 2001,Soludo
2003,Ogunmuyiwa 2011). Most countries are unable to collect enough revenue to finance national budgets rely on domestic and external debt to finance economy growth and expansion (Ali & Mustafa, 2009; Boboye & Ojo).
The genesis of Nigeria’s debt service burden dates back to 1978 after a fall in world oil prices. Prior to this occurrence Nigeria had incurred some minor debts from World Bank in 1958 with a loan of US$28million dollars for railway construction and the Paris Club debtor nations in 1964 from the Italian government with a loan of US$13.1 million for the construction of the Niger dam. The first major borrowing of US$1 billion known as the”Jumbo loan” was in 1978 from the International Capital Market (ICM) (Adesola, 2009).
External borrowing has a significant impact on the growth and investment of a nation up to a point where high levels of external debt servicing sets in and affects the growth as the focus moves from financing private investment to repayments of debts. However, external debt may have negative impact on investment through debt overhang and credit Rationing problem (Eduardo 2014). Debt overhang is when sustained resources are used for debt servicing which affects growth.
Nigeria as a developing nation has adopted policies to help revamp her economy and boost gross domestic product (GDP) which include structural adjustment programme (SAP). In the bid to ensure that these policies are carried out government embark on massive borrowing from multilateral sources which resulted in a high external debt service burden in 1992, when Nigeria was classified as heavily indebted poor country by the World Bank.
In 1985 Nigeria total outstanding external debt was 17290.6million progressively increased to 42,2295million in 1986 by the end of October 1987 it had hit the mark of September 1988 according to CBN, the total outstanding external debt stood at 133.95million and attained 212,750.7milloin in 1989,and rose to 3,097384million in 2000. This figure droped by about 13percent to stand at 2695072million in 2005 ,when Nigeria government reached an agreement with paris club creditor for a debt relief which led to an overall reduction in Nigeria debt stock by US30billion (3966billion).
The deal was completed in 2006 when the government of Nigeria made its final payment and was cleared of its debt with the paris club, hence at the end of 2006, Nigeria total debt has again risen by about 52.8percent to stand at 1,373,569.83million in 2013,11.24trillion and 12.6trillion in 2014 and 2015 (Arikawe, 2002;Sanusi,1987;Debt Management Office, 2006). Though the debt, if properly utilized, is expected to help the Nigeria economy, however, the management of debt by way of service payment that is the sum of principal payments and interest actually paid in foreign currency, especially if foreign currency tends to affect exchange rate. At a point in 2000,according to IMF and the world bank data, Nigeria debt service payments was estimated at approximately US1,854.82million (189,37.7million) (Saheed Zakaree s,2008;Sani Ibrahim E,1986;Idakwoji, blessing 1997). It is widely recognized in the international community that excessive foreign indebtedness in most developing countries is a major impediment to their economic growth and stability. (Audu, 2004; Mutasa, 2003; Gohar and Butt 2012) opined that accumulated debt service payments create a lot of problems for countries especially the developing nations reason being that a debt is actually serviced for more than the amount it was acquired and this slows down the growth process in such nations. The inability of the Nigerian economy to meet its debt service payments obligations has resulted in debt overhang or debt service burden that has militated against her growth and development (Audu, 2004).
The situation of debt-servicing worsened in a country like Nigeria that depends on one product which is crude oil which does not have feasible price. In 1985 for example there were world crises that affected mono-economy which re-occurred in 2015 result to borrow in order to service embargoes and /or limits on new loans, rescheduling, restricting and debt-servicing and plea for debt forgiveness.
Given the pervasive nature of underutilized capacity in the economy, the country cannot afford to spend more than 20 percent of her budget to service debt. Alternatively, debt Service export ratio must not exceed 30 percent. If the domestic economy is not expected to suffer, this should be respected in debt service payment. In addition, foreign borrowing should be a last resort, as government should rely mostly on internal resources (savings) for financing growth.
Borrowing per say is not inherently bad. The problem arises when borrowed funds are
Not properly deployed, are mismanaged, diverted or stolen. While most foreign borrowing has imposed heavy debt service burden on the economy, the project on which the loans were supposedly spend are yielding no revenue with which repayments can be made; instead, they become competing expenditure sources for funds that should be directed at welfare programmers.
Thus, borrowing for development should be devoid of these inherent features. Rather, it should target projects with high social rates of return, social and infrastructural projects and export increasing import-decreasing projects for meaningful economic growth and development to be achieved.
1.2 Statement of the Problem
Huge external debt does not necessarily imply a slow economic growth; it is a nations inability to meet its debt service payment fueled by inadequate knowledge on the nature, structure and magnitude of debt in question “(Were, 2011).The resultant effect of huge debt service pose a grave threat to the economy as the hard earned revenue is being eaten up. though the debt stock in Nigeria increase every year and despite the debt relief the US18billion dollar received by Nigeria from Paris club in 2005 the situation remains the same (Bakare,2010).
The question then becomes why has external borrowing not accelerated the pace of growth of the Nigerian economy?
This study will focus on the long run relationship between external debt and economic growth in Nigeria, the causality relationship between external debt and economic growth in Nigeria and the causes of Nigeria external debt burden by expanding the scope of study beyond what has been done in time past.
1.3 Research Questions
This research seeks to investigate the impact of external debt on economic growth in Nigeria and therefore tries to answer the following research questions:
- What is the long run relationship between external debt and economic growth in Nigeria?
- What is the causality relationship that exists between external debt and economic growth in Nigeria?
1.4 Objectives of the Study
The broad objective of this study is to ascertain the impact external debt burden has on economic growth in Nigeria. Other specific objectives include:
- To determine long relationship between external debt and economic growth in Nigeria.
- To examine causality relationship that exists between external debt and economic growth in Nigeria.
1.5 Hypotheses of the Study
The hypotheses to be tested in the course of this study include:
Ho: There is no significant long run relationship between external debt and economic growth in Nigeria.
Ho: There is no causality relationship that exists between external debt and economic growth in Nigeria
1.6 Significance of the Study
This study has much significance on household, stakeholders and on government because economic growth is an engine of the economy.
- This research will serve as a reference for other researchers who may carryout research work in this field of study.
- This research would help Nigerian government and her policy makers to restore fiscal discipline in Nigeria.
iii. This study would help in the debt management in Nigeria.
1.7 Scope and Limitation of the Study
The study seeks to analyze Nigeria’s external debt and its impact on her economic growth. In order to fully capture its effect on the economy, a thorough empirical investigation was conducted with data covering the period between of 30 years (1985-2015). This period covered the period after the oil collapse and also the post debt-relief era. This study would be based largely on secondary data. The reliability of the findings of this study largely depended on the liability of the data.
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