ABSTRACT
This research work was aimed at ascertaining the impact of external debt on economic growth in Nigeria. Ex-Post factor research design was adopted for the study. While data on Gross Domestic Product (GDP). External debt stock and external debt service payment were obtained from World Bank international debt statistics, exchange rate data were collected from central bank of Nigeria statistical Bulletin. 2020. The period of study was 1981-2020 model was formulated and data were analysed using ordinary least square. Diagnostics test were conduct using augmented dickey-fuller unit root test, co-integration and error correction model. The independent variable was GDP, while the explanatory variables were external debt stock, external debt services payment and exchange rate. We discovered that external debt had a positive relationship with gross domestic product at short run, but a negative relationship at long run. Also while external debt service payment had negative relationship with gross domestic product, exchange rate had a positive relationship with the paper concluded that exchange rate fluctuation had positive impact on the Nigeria economy while external debt stock and debt service payment had negative impact on the same economy. The study recommended amongst others, that debt management office should set mechanism in motion to ensure that loans were utilized for purposes for which they were acquired as well as set a ceiling for borrowing for sates and Federal Government based on well-defined criteria.
TABLE CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of Contents vi
List of Tables ix
Abstract x
CHAPTER
ONE: INTRODUCTION
1.1 Background
to the Study 1
1.2 Statement
of the Problem 4
1.3 Objectives
of the Study 7
1.4 Research
Questions 7
1.5 1.5
Research Hypotheses 7
1.6
Significance of the Study 8
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Conceptual
Framework 9
2.1.1
Overview of External debt 9
2.1.2.1
Source of Loans 14
2.1.2.2
First-External loans guaranteed by Government 14
2.1.2.3
Official bilateral Loans: 14
2.1.2.4 Official Loans contracted with multilateral
international organizations: 15
2.1.3
The History of Nigeria External Debt 16
2.1.4 Causative Factors of Nigeria’s External Debt 17
2.1.5 External Debt Burden and Debt service
Capacity. 19
2.1.6 Debt
Burden and its Sustainability 21
2.1.7 Nigeria’s External Debt Profile 23
2.1.8 Nigeria’s External Debt Relief 24
2.1.9 External
Debt 25
2.1.9.1 The Early Stages 26
2.1.9.2 The Debt Crisis 27
2.1.9.3 Debt
Overhang 29
2.1.9.4 Highly
Indebted Countries 30
2.1.10
External debt and Economic growth 32
2.2
Theoretical
Framework 34
2.2.1
The
Dual-gap Theory 34
2.2.2
The
Dependency Theory 34
2.2.3
Solow
Growth Model and External Debt 36
2.3
Empirical
Review 37
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research
Design 40
3.3 Area
of the Study 40
3.4 Sources
of Data 41
3.5 Method
of Data Collection 41
3.5.1 Model
Specification 42
3.5 Description of Model Variables 43
3.6 Data
Analysis Technique 43
CHAPTER 4: DATA PRESENTATION AND ANALYSES
4.1 Data Presentation and Descriptive
Analysis 44
4.2 Stationarity Test 45
4.4 Co-integration Test 46
4.4 Test of Hypotheses 46
4.4.1 Hypothesis I 47
4.4.2 Hypothesis II 48
4.2.3 Hypothesis III 48
CHAPTER 5: SUMMARY
OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1 Summary of Findings 50
5.2 Conclusion 50
5.3 Recommendations 51
References 56
LIST OF TABLES
Table 1: Descriptive Analysis of
Selected Variables 44
Table 2: Results of Unit Root Analyses at Level and
First Differencing 45
Table 3: Error
correction model of Nigeria's External Debt on the Gross Domestic
Product growth
rate 47
CHAPTER ONE
INTRODUCTION
1.1 Background
to the Study
No government is an island on its own; it
would require aid so as to perform efficiently and effectively (Omoleye Sharma,
Ngussam, and Ezeonu, 2006). One major source of aid is foreign borrowing or
external debt. The motive behind external debt 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 frame
work 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 nation cannot be overemphasized, Hameed,
Ashraf, and Chaudhary (2008) stated that external borrowing is ought to
accelerate economic growth especially when domestic financial resources are
inadequate and need to be supplemented with funds abroad.
External debt may be defined as debt owed
to non-residents repayable in terms of foreign currency, food or service (World
Bank, 2004). Human wants are insatiable and the means or resources available
for the satisfaction of wants are limited in their supply (Olukunmi, 2007). In
individual and national lives, the above assertion is true. To meet national
wants amidst limited resources, nations might resort to borrowing. Borrowing
creates debt. Debt is the aggregate of all claims against the government held
by the private sector of the economy or by foreigners, whether interest bearing
or not less, any claim held by the government against private sectors and
foreigners (Oyejide, Soyede and Kayode, 1985). Shortfall in domestic savings to
finance productive activities compels nations to borrow (Ezeabasili, 2006 and
Momodu, 2012). Debt could be from within a nation’s boarder (Internal) or from
outside (External). External debt may be defined as debt owed to non-residents
repayable in terms of foreign currency, food or service (World Bank, 2004). The
effect of external debt on investment and economic growth of a country has
remained questionable for policy makers and academics alike. There has not been
consensus on the impact of external debt on economic growth. External debt may
be used to stimulate the economy but whenever a nation accumulates substantial
debt, a reasonable proportion of public expenditure and foreign exchange
earnings will be absorbed by debt servicing and repayment with heavy
opportunity cost (Albert, Brain and Palitha, 2005). Excessive external debt
constitutes obstacle to sustainable economic growth and poverty reduction
(Maghyere and Hashemite , 2003; Sanusi, 2003 and Berensmanna,2004). Those who
argue that external debt has positive effect on the economy do that from the stand point that external debt will
increase capital inflow and when used for productive ventures, accelerates the
peace of economic growth. The capital inflow may be associated with managerial
know-how, technology, technical expertise as well as access to foreign market.
The above is in agreement with the view of the Keynesian Theory of capital
accumulated as a catalyst for economic growth. However, external debt may have
negative impact on investment through debt overhang and credit-rationing
problem (Eduardo, 1989).
Debt
overhang phenomenon is where substantial resources are used for debt servicing
such that it stifles economic growth. It becomes a tax on domestic production
such that the amount spent hampers meaningful economic growth activities as
will it reduces resources available to government to implement growth oriented
economic policies. Credit rational effect results when a country is unable to
pay her debt. The authorities increase interest rates to narrow savings
investment gap, thus affecting new investment
generating greater surplus for debt servicing and
repayment. However, this may subsequently depress future growth prospects.
External debt is an important source
of finance mainly used to supplement
the domestic source of fund for supporting development and other needs of a
country. Usually external debt is incurred by a country which suffers from
shortages of domestic savings and foreign exchange needed to achieve its
development and others national objective. However, if the external debt is not
used in income generating and productive activities, the ability of a debtor
nation to repay the debt is significantly reduce. It is often argue that the
excessive debt constitutes an obstacle to sustainable economic growth and
poverty reduction (Berensmann, 2004; Maghyereh and Hashiemite, 2003).
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 on 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 reason to either finance higher investment or
consumption and to circumvent hard budget constraint. This implies that an
economy borrow to boost economic growth and alleviate poverty. He argue that
when debt reaches a certain level, it becomes to have adverse effect, 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 technical aspect is concerned with the
determination of the amount (level) of debt the economy can sustain and that
the conditions of borrowing are on favourable terms and are consistent with the
future debt servicing capacity. While, the institutional aspect includes the
administrative, organizational, legislative, accounting and monitoring aspect
of managing both the new borrowings and old stock of debt. In both aspects,
more attention is given to reducing the debt service burden or keeping it
stable (Hamid, Ashraf and Claudary, 2008).
The huge debt was too much burden on the
country, in terms of its servicing, leaving it with little to perform her constitutional
obligations to the citizenry thereby affecting the growth of the economy
(Semenitari, 2005). It is against this background that the study tends to
examine the effect of external debt on economic growth in Nigeria.
1.2 Statement
of the Problem
Nigeria like most highly indebted poor
countries has low economic growth and low per capita income, with domestic
savings insufficient to meet developmental and other national goals. Nigeria
exports were primarily primary commodities with export earnings too small to
finance imports which are mostly capital intensive (Manufactured) goods which
are comparably more expensive (Siddique, Selvanathan and Selvanathan, 2015).
Compounding the problem is Nigeria’s drift to mono economy with the discovery
of oil. 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. The quest for economic growth and
development compelled Nigeria to acquire external debt. The first major
external loan of US$28 million by Nigeria was acquired from World Bank in 1958 to
finance railway construction. Ever since then, there has been accumulation of
loans aimed at various development projects without obvious results as expected
in October, 2000. Prior to the establishment of DMO, Central Bank of Nigeria
(CBN) was saddled with the responsibility of management of national debts. At
moment, DMO in collaboration with CBN and Federal Ministry of Finance manage
Nigeria’s debt.
The problem associated with debt and debt
servicing prompted Sanusi (2003) to warn that rising Nigeria’s debt is an
impediment to economic growth and development. Similar view was expressed by
Campbell (2009) when he said that government debt can easily become a burden on
the economy weakening its foundation, warning that the authorities should
recognize that accumulating debt also means accumulating risks by increasing on
unrealized future income.
A prior expectation was that external debt
would bring about economic growth. Over emphasis on negative impact of debt
will cause morbid fear of debt, resulting in debt avoidance when it would have
stimulated the economy by bringing in the much needed capital for
infrastructural development and investment.
“Huge external debt does not necessarily
imply a slow economic growth; it is a nation’s inability to meet its debt
service payment fueled by inadequate knowledge on the nature, structure and
magnitude of the debt in question” (Were, 2011). It is no exaggeration that
this is the major challenge faced by the Nigeria economy. The inability of
Nigeria economy to effectively meet its debt servicing requirement has exposed
the nation to a high debt service burden. The resultant effect of this debt
service burden creates additional problems for the nation particularly the
increasing fiscal deficit which is driven by higher levels of debt servicing.
This poses a grave threat to the economy as a large chunk of the nation’s hard
earned revenue is being eaten up. Nigeria’s external debt outstanding stood at
US$28.35 million in 2001 which was about 59.4% of GDP from US$8.5 million in
1980 which was about 14.6% of GPD (WDI 2013). The debt crisis reached its
maximum in 2003 when US$2.3 billion was transferred to service Nigeria’s
external debt. In the year 2005 the Paris Club group of creditor nation forgave
60% (US$18 billion) of US$30.85 billion debt owed by Nigeria. Recently External
Debt in Nigeria increased to 15352.13 USD Million in the third quarter of 2017
from 15050 USD Million in the second quarter of 2017. External Debt in Nigeria
averaged 7521.67 USD Million from 2018 until 2017, reaching an all-time high of
15352.13 USD Million in the third quarter of 2017 and a recond low of 3627.50
USD Million in the first quarter of 2009. Despite the debt relief of US$18
billion received by Nigeria from the Paris Club in 2005 the situation remains
the same (Bakare, 2010). These huge debt has affected the growth of the
economy.
1.3 Objectives
of the Study
The general objective of the study is to
examine the effect of external debt on economic growth of Nigeria. However, the
specific objectives of the study are:
(i)
To examine the effect of
external debt on change in GDP of Nigeria.
(ii)
To ascertain the effect
of debt servicing on change in GDP of Nigeria.
(iii)
To examine the effect of
foreign exchange rate on change in GDP of Nigeria.
1.4 Research Questions
i.
What is the effect of
external debt on change in GDP of Nigeria?
ii.
What is the effect of
debt servicing on change in GDP of Nigeria?
iii.
What is the effect of
foreign exchange rate on change in GDP of Nigeria?
1.5
Research Hypotheses
For the purpose of the study, the
following hypotheses will be tested in null from
H01:
External debt has no significant effect on change in
GDP
H02:
Debt servicing has no significant effect on change in
GDP of Nigeria
H03:
Foreign exchange rate has no significant effect on
change in GDP of Nigeria.
1.6 Significance
of the Study
The study will be of a great important to
the following group of people;
Government: the study will enable the
government in understanding the impact of external debt on economic growth of
Nigeria. The study will help government to understand the need for external
debt as well as settling the debt as at when due to avoid the economic problem.
Students: the study will be an insight to
student, it will help student to understand the meaning external debt and the
role it plays on economic growth of Nigeria. The study will also serve as a
reference material to students for their future studies.
Researcher: additionally, this paper is justified
on the grounds that it will provide recommendation for further studies on the
impact of tax revenue on economic recovery during recession.
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