ABSTRACT
The study investigated on the effect of external debt on Nigerian economic growth. The objectives of the study are; to assess the impact of external debt on public and private investment within the Nigerian economy, to evaluate the effect of foreign debt on domestic economic growth in Nigerian, to investigate the impact of external debt servicing on investment development in Nigeria and to investigate the impact of foreign debt on exchange rate within the Nigeria economy. To achieve the objectives of the study, expost facto research design was adopted. The researcher adopted secondary data in getting the required information. Data were collected from CBN statistical bulletin. Conclusively, in as much as external debt burden is a reality in Nigeria, it is also true that the country cannot achieve its goal of becoming an industrialized nation by the year 2020 without external financial assistance. However, over reliance on external finance should be discouraged since this aggravates the problem of lean external sources of funds. The study therefore, recommends that external finance should be used only for projects of highest priority. This is so because it is huge external debt that threw us into the series of economic problem in the first instance. The implementation must stipulate period long enough (10 years or more) before dividends can be repatriated for investment to mature. To achieve a long term solution to external debt problem there must be vigorous promotion of the nations export trade and drastic reduction in her merchandise imports. The principal vulnerability of Nigeria is to have an open-ended burden of higher interest payment in the event of an increase in international interest rate. Nigeria should therefore seek fixed interest rate. Nigeria should devote a tangible proportion of her annual foreign exchange earnings for debt servicing. This would enable the country to accommodate the creditors’ requirements.
TABLE OF CONTENTS
Page
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgments v
Table of Contents vi
List of Table v
CHAPTER ONE:
INTRODUCTION
1.1 Background to the study. 1
1.2
Statement of the problem 3
1.3 Objectives of the study 5
1.4 Research questions 6
1.5
Research hypotheses 6
1.6
Significance of the study 7
1.7 Scope of the study 8
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework 9
2.1.1 Evolution and origin of the Nigerian external
debt 10
2.1.2 The management of Nigeria external debt 14
2.1.3 Nigerian external debt
management under structural
adjustment
programme and other strategies 15
2.1.4 External debt and economic growth in Nigeria 16
2.1.5 The burden of Nigeria
external debt on economic growth 17
2.1.6 Macro-economic implementation of external debt
burden 19
2.1.7 Government response to external debt burden 20
2.1.8 Nigeria external debt relief 21
2.1.9 The paris club, London club,
multilateral debt and promissory notes
21
2.2 Theoretical framework
25
2.2.1 System stability theory
25
2.2.2 System correction theory
29
2.2.3 System instability theory
31
2.2.4 Applications of debt theories to the
Nigeria situation
35
2.2.5 Debt rescheduling initiatives
37
CHAPTER THREE:
3.1 Research design
39
3.2 Sources of data
40
3.3 Methods of data collection
40
3.4 Limitation of the study
40
3.5 Model specification 41
3.5.1 Estimation technique Cointegration
and error correction model 45
3.5.2 Co_integration test 46
3.5.3 Granger causality test
47
CHAPTER FOUR: DATA PRESENTATION AND
ANALYSIS
4.1 Data presentation
48
4.2 Data Analysis
50
4.2.1 Unit root test 50
4.2.2 Granger causality 51
4.2.3 Result of the error correction
model 52
4.2.4 Result of the external debt economic
growth model 52
4.2.5 Result of the investment external
debt model
55
4.3 Test of hypotheses 57
4.3.2 Test of hypothesis two 58
4.3.3 Test of hypothesis three 58
4.3.4 Test of hypothesis four 58
4.4
Discussion of findings 59
CHAPTER FIVE: SUMMARY OF CONCLUSION AND
RECOMMENDATIONS
5.1 Summary of findings 61
5.2 Conclusion 64
5.3 Recommendations 65
References 67
Appendices 72
CHAPTER ONE
INTRODUCTION
1.1 Background to
the study.
Like many other countries of the world, Nigeria has accumulated a large amount
of external debt. Ordinarily, external borrowing ought to accelerate economic
growth especially when domestic financial resources are inadequate and need to
be supplemented with funds from foreign countries. Economists also believe that
reasonable levels of borrowing promote economic growth through factor accumulation
and productivity growth. This is because the countries at the initial stages of
their development usually tend to have smaller capital stocks and their investment
opportunities are limited. External debt therefore provides opportunities for
economic growths and developments. It is often argued that if the borrowing
countries channel the borrowed funds into productive investments and they enjoy
macroeconomic stability, they will be able not only to accelerate their
economic growth but also to settle their debt obligations comfortably.
Nigerian’s external debt
crisis was one of the critical factors which brought about the Structural Adjustment
Programme (SAP) introduced in 1986 to revamp the Nigerian economy and put it on
a sustainable path of recovery. The meaning of this statement is that if only
the high level of external debt service payments could be reduced, Nigeria
would be in a position to finance a larger volume of domestic investment which is
critical for the promotion of growth and development. But more often than not,
a debtor has limited opportunities to advantageously manage debt crisis. Yet
Nigeria’s outstanding external debt was less than $1.0 billion in 1977. But by
1988 total external debt stock exploded to about $26.0 billion at a time when
the total value of exports from which the debt could be serviced had declined
by more than half in real terms. Such large external stock with the related
debt service commitments has hampered economic growth and development by
putting a ceiling on imports which are critical for domestic production
activities.
The question that needs to be answered is whether the large debt burden
in Africa is one of the factors contributing to the weak economic performance
and the uneven pace of economic reform in these countries, particularly in
Nigeria. In attempt to answer this question two competing hypotheses: the ‘debt
overhang hypothesis’ and the ‘liquidity constraint hypothesis have been
proposed. The debt overhang theory however assumes that the debtor country
shares only partially in any increase in output and exports because a fraction
of that increase will be used to service the external debt. The theory implies
that debt reduction will lead to increased investment and repayment capacity
and, as a result, the portion of the debt outstanding becomes more likely to be
repaid. When this effect is strong, the debtor is said to be on the ‘wrong
side’ of the debt Laffer curve (Were, 2001). The debt Laffer curve refers to
the relationship between the amount of debt repayment and the size of debt.
However, the idea of debt Laffer curve also implies that there is a limit at
which debt accumulation stimulates growth (Elbadawi 1996). In reference to an
aid Laffer curve, Lensink and White (1999) argue that there is a threshold at
which more aid is detrimental to growth.
The liquidity constraint is captured as a ‘crowding out’ effect, by which
the requirement to service debt reduces funds available for investment and
growth. A reduction in the current debt service should, therefore, lead to an
increase in current investment for any given level of future indebtedness
(Cohen 1993). Other channels through which the need to service a large amount
of external obligations can affect economic performance include lack of access to
international financial markets and the effects of the stock of debt on the
general level of uncertainty in the economy (Claessens, 1996).
However, Nigeria has made significant efforts at reducing her debt
overhang as part of effort at restoring internal and external balance to the
economy. While management efforts have provided some relief, the debt burden is
still unbearable and unacceptable.
1.3
Statement of the problem
Developing countries in Africa like Nigerian are characterized by
inadequate internal capital formation arising from the vicious circles of low
productivity, low income, and low savings. This scenario calls for technical,
managerial and financial supports from abroad to bridge the resources gap. The
accesses to external finance strongly influence the economic development
process of nations. It is an important resource needed to support sustainable
economic growth. Ordinarily, economic growth should depend largely on domestic
capital formation and accumulation, but due to severe limitations it requires
imports of capital goods and complementary raw materials that are not
domestically available. These foreign imports are necessary for various
reasons. Balanced growth calls for substantial investment in infrastructures
such as roads, ports, dams, transportations etc. According to Telegram (1992)
foreign debt is needed to cover two types of gaps in the developing process.
They include
(a) The foreign exchange gap
which is the payment of deficit a country faces when it has reduced its
external reserves to a minimum compared with projected import requirements.
(b) The investment – saving
gap which is the foreign capital needed to supplement domestic savings for
financing real investment levels.
External financial supports, when used productively accelerate the pace
of economic development. It will not only provide foreign capital but will also
give managerial know-how, technology, technical expertise as well as access to
foreign markets for the mobilization of a nation’s human and material resources
for development purposes. Specifically, loans can be used in areas such as
increasing agricultural production of goods for export, mineral exploration and
exploration, industrialization, transport and communication, rural and urban
development, healthcare services balance of payments, tourism, infrastructural
development etc (Anyanwu, 1997).
A borrowing country visions its borrowing need for foreign capital from
the standpoint of its development programmes and projects. Foreign lenders on
the other hand will normally take account of the borrower’s ability to service
its loan, taking into consideration the programme and projects of the borrower.
Where views are reconcilable, both the borrower and lenders work out a variety
of policy guidelines that influence the magnitude and use of borrowed funds.
However, it is unpleasant to note that some of the external loans
obtained by various administrations in Nigerian have not been used for the
purpose for which they were meant for or better still used for ventures which
do not yield returns that would be used in the repayment of the loans at
maturity.
1.3 Objectives of
the study
The main objective of this
study was to examine the impact of external debt on Nigerian economic growth.
The specific objectives were
as follows;
i.
To assess the impact of external debt on public and private
investment within the Nigerian economy.
ii.
To evaluate the effect of foreign debt on domestic economic
growth in Nigerian.
iii.
To investigate the impact of external debt servicing on
investment development in Nigeria
iv.
To investigate the impact of foreign debt on exchange rate
within the Nigeria economy
1.4 Research questions
The research
questions that guided this study were as follows;
i.
What is the impact of external debt on both public and
private investments in Nigeria?
ii.
What is the impact of external debt on domestic economic
growth in Nigeria?
iii.
What is the effect of External Debt Servicing on economic
development in Nigeria?
iv.
What is the effect of exchange rate on external debt in
Nigeria?
1.5 Research hypotheses
In order to have a
framework for the study and also to answer the research questions above, the
following hypotheses were formulated:
H01: External debt has no significant effect on Private
and public investment in Nigeria.
H02: External debt has no significant effect on domestic economic
growth of Nigeria.
H03: External debt Servicing has no significant impact
on Exchange rate in Nigeria
H04: External debt Servicing has no significant impact on
Inflation in Nigeria
1.6 Significance of the study
The study was considered
significant in respect of the fact that it considers financial deepening as a
variable in external debt model in Nigeria.
It will also provide a
clue to optimal allocation of foreign funds borrowed within the sector of the Nigerian
economy and prevent mismanagement of it alternatively how to spend the borrowed
funds on productive investment.
To serve as a guide to
students and researchers having dealings with financial institution and
international finance organization.
Finally, the study
recommended policies measures to the DMO’s office that will lead to a more
efficient management of Nigerian external debts.
1.7 Scope of the
study
This research work
comprises of Nigeria’s external debts which include the origin, the reasons for
such loans, the impact on economic development, the management of her external
debt and recommendations for managing it properly. To do this the researcher studied
the debt stock for only 19 years (1990 – 2009) respectively.
This period was long
enough for reliable result to be obtained. The review period covered period of
oil boom and increase in government revenue and period of oil glut and increase
in deficit. Period of growth in petroleum and decline in agricultural sector,
period of expansionary and contradictory restrictive monetary and fiscal
policies, period of structural reforms and period of guided deregulation with
abandonment of liberalization policies.
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