It is generally expected that developing
countries, facing a scarcity of capital, will acquire external debt to
supplement domestic saving (Pattillo, Poirson,
and Ricci , 2002; Safdari and Mehrizi, 2011). The rate at which they borrow
abroad - the “sustainable” level of foreign borrowing - depends on the links
among foreign and domestic saving, investment, and economic growth. The main
lesson of the standard “growth with debt” literature is that a country should
borrow abroad as long as the capital thus acquired produces a rate of return
that is higher than the cost of the foreign borrowing. In that event, the
borrowing country is increasing capacity and expanding output with the aid of
foreign savings.
In theory, it is possible to calculate the
sustainable level of foreign borrowing, based, on maturity and availability of
foreign capital. In practice, however, the task is nearly impossible, since
such information is not readily available. Thus, various ratios, such as that
of debt to exports, debt service to exports, and debt to GDP (or GNP), have
become standard measures of sustainability. Even though it is difficult to
determine the sustainable level of such ratios, their chief practical value is
to warn of potentially explosive growth in the stock of foreign debt. If additional
foreign borrowing increases the debt-service burden more than it increases the
country’s capacity to carry that burden, the situation must be reversed by
expanding exports. If it is not, and conditions do not change, more borrowing
will be needed to make payments, and external debt will grow faster than the
country’s capacity to service it.
Countries in sub-Saharan Africa
have generally adopted a development strategy that relies heavily on foreign
financing from both official and private sources. Unfortunately, this has meant
that for many countries in the region the stock of external debt has built up
over recent decades to a level that is widely viewed as unsustainable. From a
trivial debt stock of $1billion in 1971, Nigeria had towards the end of 2005
incurred close to $40 billion debt with over $30 billion of the amount owed to
the Paris Club alone. Although Nigeria’s
debt was more than the total of those of the 18 other poor countries (14 of
them African Countries) classified as Heavily Indebted Poor Countries (HIPCs),
it had been a herculean task convincing the creditors that debt cancellation
was the most desirable option. Prior to Nigeria’s $18 billion debt cancellation
deal, these 18 other poor countries i.e. Benin Republic, Bolivia, Burkina- Faso,
Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique,
Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia had secured a
100 percent debt cancellation totalling $40 billion (Semenitari, 2005).
The debt burden on less developed countries can
be traced to the early 1980’s after the oil price increase of the 1970’s. It
was the product of reactions by the international community to “oil price
shocks”. One of the legacies of African Countries from the crisis has been an
increasing debt burden, which constituted a major constraint to growth and
development.
External debt became a burden to African Countries
because contracted loans were not optimally deployed, therefore returns on
investments were not adequate to meet maturing obligations and also hindering
economic growth. African economies have not performed well, partly because of
the increased outflow of resources to service debt obligations and partly
because the necessary macro-economic adjustment has remained elusive for most
of the countries in the continent.
The main objective of
this research is to determine the effect of an increasing external debt
liability on the Nigerian economy. Other specific objectives are as follows;
(i) to examine the external debt trend of Nigeria
(ii) To explore the impact of the debt cancellation on the Nigerian
economic growth
(iii) Proffering appropriate framework based on the policy recommendations
made.
The finding of this study will provide an
econometric basis upon which to examine the effect of external debt on Nigeria’s
economic growth. Hence, policy makers will be able to formulate an articulate
and comprehensive policy with respect to debt management in Nigeria. This research will also
provide an objective view to the relevance of the debt cancellation to Nigerian
economy. The findings of this research will also serve as a good resource
materials for those that in tend to carry out further research on the effect of
debt liability on the Nigerian economy.
The following
hypotheses will be tested at the course of this study:
i.
Ho: the external debt stock
did not affect the economic growth of Nigeria.
H1: the external debt stock affects the economic
growth of Nigeria.
ii. Ho: the external debt cancellation has no
significant
effect on the Nigerian
economy
H1: the external debt cancellation has a
significant
effect on the Nigerian
economy
iii. Ho: the external service payment did not impact on
the economic growth of Nigeria.
H1: the external service payment impacted on the
economic growth of Nigeria.
The scope of this study shall cover the external
debt trend in Nigeria
and the effect external debt has on the growth of the Nigerian economy. This
research will also focus on the effect of external debt cancellation and debt service
payment on the economic growth in Nigeria. Recent literatures will be reviewed with
respect to the rationality behind the increasing debt liability in Nigeria.
However, the empirical investigation of the effect of external debt on the
economic growth of Nigeria
shall be restricted to 1981 and 2010. This restriction is unavoidable because
of the non-availability of some data.
Secondary data shall be the basis for this
study. The relevant data to be used would be sourced from the Central Bank of Nigeria’s
statistical reports, annual reports and statement of accounts for the years
under review.
The Ordinary Least Square Regression Technique
will be employed in the analysis of the data. This econometric method would be
used because it is very reliable and widely used in researches. Two simple
regression models shall be adopted to capture the effect of external debt and
the debt service payment on Nigerian economic growth. The effect of other
macro-economic factors such as: exchange rate, inflation rate, interest rate
and government expenditure would also be considered. This would enable us to
judge the relevance of the debt cancellation. If the external debt stock and
the debt servicing payment had adverse effect on the economy, then the debt
cancellation would contribute the growth of the economy.
The
following words are operationally defined as they would be used in this
research study.
i.
External Debt: The acquisition of foreign loan. That is the amount of money owing by
country to another.
ii.
Economic Growth: The rate of expansion in the volume of production of goods and services of
a country. That is the rate at which the Gross National Product (GNP) increases
annually.
iii.
Inflation: A steady and progressive fall in the value of money, shown by the
proportionate rate of increase in the general price level per unit of time.
iv.
Debt Conversion: This involves the practice of issuing new stocks and shares exchange for
others. The transformation of repudiated loan stock into a new loan issue.
v.
Foreign Exchange: currency or interest bearing bonds
of another country. For example, holding by Nigerians of US Dollars. Euro -
Dollars, Deutsche - Marks, Swiss - Francs or US Government bonds.
vi.
Fiscal Deficit: A situation where Government expenditure exceed income or where Government
liabilities exceed assets at a specific point in time.
vii.
Economic Recession: A falling off in the progress of a country, which if it persists will lead
to depression and to a slump.
viii.
Devaluation: A reduction in the official per-value of the legal unit of currency in
terms of the currencies of other countries. Devaluation is used to correct a
balance of payment deficits but only as a last resorts as it has major
repercussions on the domestic economy.
Login To Comment