IMPACT OF EXTERNAL DEBT ON THE ECONOMIC GROWTH OF NIGERIA (2001-2016)

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IMPACT OF EXTERNAL DEBT ON THE ECONOMIC GROWTH OF NIGERIA (2001-2016)

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

According to Wikipedia (2018) External debt is the total debt a country owes to foreign creditors. The debtors can be the government, corporations or citizens of another country. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank.

Most developing countries of the world are regarded as being poor not because they don’t have the resources but because bulk of their resources (income) are being channeled to meeting the consumption needs of their people with little or nothing left for savings. Hence low savings rate brings about low investments rate and low investments rate results to low growth rate. Therefore, poverty at the beginning through low savings, low investments and low growth leads to poverty again (poverty trap). For this reason, developing countries are left with no option than to result to external borrowings and foreign assistance (foreign aid) to bridge the saving- investment gap with the intention to achieving economic growth and poverty reduction.

Official development assistance (ODA), more commonly known as foreign aid, consists of resource transfers from the public sector, in the form of grants and loans at concessional financial terms, to developing countries. Many studies in the empirical literature on the effectiveness of foreign aid have tried to assess if aid reaches its main objective, defined as the promotion of economic development and welfare of developing countries (Sandrina, 2005). On the other hand, the act of borrowing creates debt. Debt therefore, refers to the resources of money in use in an organization which is not contributed by its owners and does not in any other way belong to them, it is a liability represented by a financial instrument of other formal equivalent (Udoka and Ogege, 2012).

Recent years have seen a surge in calls for more ODA to developing countries in order to eliminate poverty. Developed countries, international organizations and other Philanthropists have all made renewed pleas for a massive infusion of development aid to developing countries including Nigeria. Experts who argued in favour of more aid are of the view that injecting more foreign aid would materially benefit the people of the recipient country (Okon, 2012). Developing countries like Nigeria are indeed characterized by low level of income, high level of unemployment, very low industrial capacity utilization, and high poverty level just to mention a few of the various economic problems these countries are often faced with. In addressing these problems, foreign aid has been suggested as a veritable option for augmenting the saving-investment gap. While some countries that have benefited from foreign assistance at one time or the other have grown such that they have become aid donors (South Korea, North Korea, China etc.), majority of countries in Africa like Nigeria have remained backward. Nigeria has continued to benefit from all sorts of foreign assistance and in fact still collect at least as much as the amount collected in the early 1980s, yet socio-economic development has remained dismal (Fasanya and Onakoya, 2012).

Aside foreign aid, external borrowing has also over the years attracted much concern as an important aspect of any country’s macroeconomic policy framework. A developing country wishing to mobilize capital resources to foster economic development may at one time or the other resort to borrowing (internally or externally) to supplement domestic savings. Soludo (2003), reacting to this, opined that countries borrow for two broad reasons: macroeconomic reasons higher investment, higher consumption (education and health) or to finance transitory balance of payments deficits to lower nominal interest rates abroad, lack of domestic long-term credit, or to circumvent hard budget constraints. This implies that economy indulges in debt to boost economic growth and reduce poverty. He is also of the opinion that once an initial stock of debt grows to a certain threshold, servicing them becomes a burden, and countries find themselves on the wrong side of the debt-laffer curve, with debt crowding out investment and growth. This seems to be the position of Nigeria today because investment, which will accordingly result to high-speed growth with a positive effect on poverty, is moving sporadically in both positive and negative directions.

Sanusi (2003) opined that an escalating debt profile presents serious obstacles to a nation’s path to economic growth and development. The cost of servicing public debt (domestic and external) may expand beyond the capacity of the economy to cope, thereby impacting negatively on the ability to achieve the desired fiscal and monetary policy objectives.

However, whether or not external debt would be beneficial to the borrowing nation depends on whether the borrowed money is used in the productive segments of the economy or for consumption (Ezenwa, 2012).

Governments are not island on its own; it would require aid so as to perform efficiently and effectively. One major source of aid is foreign borrowing or external debt. The motive behind external debt is due to the fact that countries especially the developing ones lack sufficient internal financial resources and this calls for the need for foreign aid

The dual-gap analysis provides the framework which shows that the development of a nation is a function of investment and that such investment which require domestic savings is not sufficient to ensure that development take place (Oloyede, 2002). Hence, the importance of external debt on the growth process of a nation cannot be overemphasized. Hameed, Ashraf, and Chaudhary (2008) stated that external borrowing ought to accelerate economic growth especially when domestic financial resources are inadequate and need to be supplemented with funds abroad.

External debt is a major source of public receipts. The accumulation of external debt should not signify slow economic growth. It is a country’s inability to meet its debt obligation compounded by the lack of information on the nature, structure and magnitude of external debt (Were, 2001). Soludo (2003) opined that countries borrow for two broad categories; macroeconomic reasons to either finance higher investment or higher consumption and to circumvent hard budget constraint. This implies that an economy borrow to boost economic growth and alleviate poverty. He argued that when debt reaches a certain level, it becomes to have adverse effect, debt servicing becomes a huge burden and countries find themselves on the wrong side of the debt-laffer curve, with debt crowding out investment and growth. The debt service burden has militated against Nigeria’s rapid economic development and worsened the social problems (Audu, 2004).

According to Omoleye, Sharma, Ngussam, and Ezeonu (2006), Nigeria is the largest debtor nation in the Sub-Saharan Africa. The genesis of Nigeria’s external debt can be traced to 1958 when 28 million US dollars was contracted from the World Bank for railway construction. Between 1958 and 1977, the need for external debt was on the low side. However, due to the fall in oil prices in 1978 which exerted a negative influence on government finances, it became necessary to borrow to correct balance of payment difficulties and finance projects. The first major borrowing of 1billion US dollars referred to as Jumbo loan was contracted from the international capital market (ICM) in 1978 increasing the total to 2.2 billion U.S dollars (Adesola, 2009). The spate of borrowing increased thereafter with the entry of the state government into external loan contractual obligation. According to the Debt Management Office (DMO), Nigeria’s external debt outstanding stood at N17.3 billion. In 1986, Nigeria had to adopt a World Bank/International Monetary Fund (IMF) sponsored Structural Adjustment Programme (SAP), with a view to revamping the economy making the country better-able to service her debt (Ayadi and Ayadi, 2008).

The increasing fiscal deficits driven by the higher level of external debt servicing is a major threat to growth of the nation. The resultant effect of large accumulation of debt exposes the nation to high debt burden.

1.2 Statement of the Problem

“Huge external debt does not necessarily imply slow economic growth; it is a nation’s inability its debt service payments fueled by inadequate knowledge on the nature, structure and magnitude of the debt in question” (Were, 2001).

This can be said to be a problem being faced by Nigeria. Nigerian exports were primarily commodities with export earnings too small to finance imports which are mostly capital intensive goods which are comparably more expensive. Compounding the problem is Nigeria’s drift to mono economy with the discovery of oil which is today the major challenge the country is facing. The oil sector generates about 95% of foreign exchange earnings and about 80 percent of budgetary revenue. The inability to diversify her revenue sources coupled with corruption and mismanagement compels Nigeria to have inadequate fund for growth and developmental projects such as roads, electricity pipe borne water and so on.

1.3 Objectives of the Study

The main objective of the study is to determine the impact of external debt on the economic growth of Nigeria.

However, the specific objectives are:

To ascertain the impact of external debt on Gross Domestic Product in Nigeria.

To determine the effect of external debt servicing on Gross Domestic Product in Nigeria.

1.4 Research Questions

What is the impact of external debt on Gross Domestic Product in Nigeria?

What is the effect of external debt servicing on Gross Domestic Product in Nigeria?

1.5 Research Hypotheses

The study was guided by the following null hypotheses:

Ho1 External debt has no significant impact on Gross Domestic Product in Nigeria.

Ho2External debt servicing has no significant effect on Gross Domestic Product in Nigeria.

1.6 Scope of 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 will be conducted.

1.7 Significance of Study

Nigerian Government: The burden of External debt has been a matter of great concern to the Government of Nigeria and the nation as a whole which has resulted in embarking upon drastic actions like dividing the nation’s scarce resources in servicing of debts annually. This action has thus led to disinvestment in the economy, and as a result a fall in the domestic savings and the overall rate of growth.

Findings of this study will aid the Nigerian government in her quest to reduce the burden of external debt.

Policy makers: This study is significant as its findings will provide a basis which will ai policy makers in proffering polices aimed at managing the external debt issues in Nigeria.

Researchers:Academicians of all level will find this study useful tool of reference when conducting any similar research.

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