ABSTRACT
The study investigated impact of external debt on economic growth of Nigeria from 1990 to 2018. The study was analyzed using real GDP as the dependent variable and external debt, external debt servicing and exchange rate as independent variables. The tool of data analysis was the multiple regression analysis technique. Based on the results, it was found that the independent variables explained approximately 94% of the total variations in real gross domestic product. Specifically, external debt outstanding has positive and significant impact on economic growth in Nigeria while external debt servicing has negative and significant impact on economic growth in Nigeria. Based on these findings it was recommended among other things that Debt Management Office (DMO) should set mechanisms in motion to ensure that government borrowings are utilized for the purpose for which they were acquired. This could be achieved through proper monitoring of the use to which the funds are put.
TABLE OF CONTENTS
CHAPTER
ONE: INTRODUCTION
1.1
Background to the Study 1
1.2 Statement of the Problem 4
1.3 Objectives of the Study 5
1.4 Research Questions 5
1.5 Research Hypotheses 5
1.6 Scope of the Study 6
1.7 Significance of the Study 6
1.8 Limitation of the Study 7
CHAPTER
TWO: LITERATURE REVIEW 8
2.1 Conceptual Framework 8
2.1.1 Definitions of debt and external debt 8
2.1.2 Reasons for debt 9
2.1.3 Debt servicing 10
2.1.4 Origin of external debt in Nigeria 11
2.1.5 Drivers of Nigeria’s external debt 12
2.1.5.1 Inefficient
trade and exchange rate policies 13
2.1.5.2 Adverse
exchange rate movements 13
2.1.5.3 Adverse
interest rate movements 14
2.1.5.4 Poor
lending and inefficient loan utilization 14
2.1.5.5 Poor debt management practices 14
2.1.5.6 Accumulation
of arrears and penalties 14
2.1.6 Debt management in Nigeria 14
2.1.7 Mechanisms of economic growth 16
2.2 Theoretical Framework 17
2.2.1 Debt overhang theory 17
2.2.2 The Keynesian theory 17
2.2.3 The
dependency theory of underdevelopment 18
2.1.4 Ricardian equivalence
theory 19
2.3 Empirical Framework 20
2.4 Summary of
Literature Review 33
CHAPTER THREE: RESEARCH METHODOLOGY 34
3.1 Research Design 34
3.2 Nature and Sources of Data 34
3.3 Method of Data
Analysis 34
3.4 Model
Specification 34
3.5 Classifications and Explanations of
Relevant Variables Used in the Models 35
3.5.1 Dependent variable 35
3.5.2 Independent variables 36
3.6 Data Analysis Techniques 36
3.6.1 Ordinary Least Squares (OLS) Technique 36
3.6.2 Coefficient of multiple determination 37
3.6.3 t-Statistic 37
3.6.4 F-statistic
37
CHAPTER FOUR: PRESENTATION OF DATA, ANALYSIS AND
DISCUSSIONS
4.1
Presentation of Data 39
4.2
Analysis of Data, Presentation of Results and Interpretations 40
4.2.1
Descriptive Statistic 40
4.2.2
Regression Analysis 41
4.2.3
Hypothesis Testing 42
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS
5.1Summary
of Findings 44
5.2
Conclusion 44
5.3
Recommendations 44
REFERENCES
LIST
OF TABLES
Table
4.1 Aggregate Dataset used for the Analysis (2000-2018) 39
Table
4.2 Descriptive Statistic 40
Table
4.3 Regression Results 41
CHAPTER ONE
INTRODUCTION
1.1
Background
to the Study
External debt is defined
as debt owed by the government to non-residents repayable in terms of foreign
currency, food or service. It is a source of financing capital formation of an
economy. Onyele and Nwokocha (2016) opined that the amount of capital available
in most developing countries treasury is grossly inadequate to meet their
economic growth needs mainly due to their low productivity, low savings and
high consumption pattern. The reported financial inadequacies lead countries to
source for supplementary financing. Sulaiman and Azeez (2012) noted that
external debt is one major source of aid to developing nations. But the rate at
which they borrow depends on the links among foreign and domestic savings,
investment and economic growth so that the borrowing countries can increase
their capacity output with the aid of foreign savings (Ijirshar, Fefa and
Godoo, 2016). It is required that the borrowing nation should be able to invest
the borrowed fund wisely especially in financing development projects like
railway construction, electricity generation plants, road construction
and any other major capital project of the economy. However, Ijirshar et al
(2016) pointed out that external debt can only be productive if well managed by
making the rate of return higher than the cost of servicing the debt.
Generally,
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. It is
expected that these LDCs when facing a scarcity of capital would resort to
borrowing from external sources so as to supplement domestic saving. Kasidi and
Makeme (2013) 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. External debt is
a major source of public receipts and financing capital accumulation in any
economy (Ibi and Aganyi, 2014). It is a medium used by countries to bridge
their deficits and carry out economic projects that are able to increase the standard
of living of the citizenry and promote sustainable growth and development.
Utomi (2014) stated that external borrowing ought to accelerate economic growth
especially when domestic financing is inadequate. External debt also improves
total factor productivity through an increase in output which in turn enhances
gross domestic product (GDP) growth of a nation. The importance of external
debt cannot be overemphasized as it is an ardent booster of growth and thus
improves living standards thereby alleviating poverty in a nation.
Developing countries like Nigeria have often contracted
large amount of external debts that has led to the mounting of trade debt
arrears at highly concessional interest rates. Ijashir, Fefa and Godoo (2016)
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 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
(Utomi, 2014). The first major borrowing of US$1 billion known as the “Jumbo
loan” was in 1978 from the International Capital Market (ICM) (Adam, 2010).
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. Utomi (2014) asserted that at low
levels, debt has positive effects on growth
but above particular
points or thresholds accumulated debt begins to have a negative impact on
growth. Furthermore Fosu (2009) observed that high debt service payments shifts
spending away from health, educational and social sectors. This obscures the
motive behind external borrowing which is to boost growth and development
rather than get drowned in a pool of debt service payments which eats up most
of the nation’s resources and hinders growth due to high interest payments on
external debt.
Nigeria as a developing nation has adopted a number of
policies such as the Structural Adjustment Programme (SAP) of 1986 to
liberalize her economy and boost Gross Domestic product (GDP) growth. In a bid
to ensure the implementation of these policies the government embarked upon
massive borrowings from multilateral sources which resulted in a high external
debt service burden and by 1992 Nigeria was classified among the heavily
indebted poor countries (HIPC) by the World Bank. According to (Sulaiman and
Azeez, 2012) Nigeria is the largest debtor nation in sub Saharan Africa. When
compared with other sub Saharan nations such as South Africa, Nigeria’s
external debt stock follows an upward pattern over the years while the former
is relatively stabilized. Nigeria’s external debt stock rose from ₦716.87
billion in 1995 to ₦2,577.37 billion and ₦4,478.33 billion in 1999 and 2003.
The external debt profile of Nigeria stood at ₦3,478.92 billion in 2016.
However, the Nigerian GDP growth rate was 1.84% in 1995, 0.52% in 1999, 8.68%
in 2003 and -1.61% in 2016.
The unabated increase in the level of external debt
which has led to increased external debt service payment has resulted to huge
imbalances in fiscal deficits and budgetary constraint that have militated
against the growth of the Nigerian economy. Hence, the resultant effect of
increased external debt and repayment in Nigeria could create some unfavourable
economic circumstances such as capital flight, low investments and GDP growth
rate (Onyele, Okpara and Nwokocha, 2017; Sulaiman and Azeez, 2012; Iweala,
2011). It is based on this premise that this study aimed to ascertain the
impact of external debt on the Nigerian economy.
1.2 Statement of the Problem
Huge external debt does not necessarily imply a slow
economic growth; it is a nation’s inability to meet its debt service payments
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 Nigerian economy. The inability of the Nigerian economy
to effectively meet its debt servicing requirements 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 ₦3,176.29 billion
in 2001 which was about 80.56% increase from the 1995 figure of ₦716.87
billion (CBN, 2016). The debt crisis
continued in 2003 as about ₦363.51 billion was transferred to service Nigeria’s
external debt. In the year 2005 the Paris Club group of creditor nations
forgave 60% (US$18 billion) of US$30.85 billion debt owed by Nigeria. Despite
the debt relief of US$18 billion received by Nigeria from the Paris club in
2005 the situation remains the same as total debt outstanding for Nigeria
reached ₦3,478.92 billion in 2016 and ₦5,787.51 billion in 2017 (CBN, 2017).
Unfortunately, even with the increasing external debt, Nigeria’s economic
growth has been slow.
There are various empirical studies that have been
conducted to investigate the impact of external debt on economic growth in
Nigeria and this have arrived at different results with their scope limited to
2015 (see, Utomi, 2014; Adam, 2010; Fosu, 2009; Hunt, 2007; Ayadi, 2008). This
research study will focus on these issues in external debt to determine the
possible impact of external debt on economic growth by expanding the scope of
study beyond what has been done in times past to 2018.
1.3 Objectives of the Study
The
broad objective of this study is to ascertain the impact external debt has on
the economic growth in Nigeria. The specific objectives include:
1.
To investigate the impact of
outstanding external debt on real gross domestic product in Nigeria.
2.
To analyze the impact of
external debt servicing on real gross domestic product in Nigeria.
3.
To ascertain the impact of
exchange rate on real gross domestic product in Nigeria.
1.4 Research Questions
This
research investigated the impact of external debt on economic growth in Nigeria
and therefore tries to answer the following research questions:
1.
In what ways does outstanding
external debt impact on real gross domestic product in Nigeria?
2.
To what extent does external
debt servicing impact on real gross domestic product in Nigeria?
3.
How does exchange rate impact
on real gross domestic product in Nigeria?
1.5 Research Hypotheses
The hypotheses
tested in the course of this study are:
Ho1: The impact of outstanding external debt on real gross
domestic product in Nigeria is not significant.
Ho2: External debt servicing does not have a significant
impact on real gross domestic product in Nigeria.
Ho3: Exchange rate does not have a significant
impact on real gross domestic product in Nigeria.
1.6 Scope of the Study
The study covered the period from
1990 to 2018 which spans across 29 years. In order to fully capture its effect
on the economy, a thorough empirical investigation was conducted with data
covering a period of 29 years i.e. 1990-2018. This period was chosen to cover
the period after the oil collapse and also the post debt-relief era.
1.7 Significance of the Study
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.
Consequently, this study is significant in the following ways:
1.
Policy makers: It will provide a basis
which will aid policy makers (such as government) in proffering polices aimed
at managing the debt situation in Nigeria.
2. Researchers: This study will contribute to existing studies on debt servicing
payment such that subsequent researchers could make reference to for further
studies. Also, it adds to the existing literature on the topic under discussion
and also serves as a reference for researchers working on similar studies.
1.8 Limitation of the Study
There are
some factors or constraints which hindered achieving the whole intension of
this work, these constraints are; variations in the data reported by different
bulletins of statistics and lack of finance for producing the hard copy.
However, the research relied on secondary data from Central Bank of Nigeria
(CBN) statistical bulletin volume 27.
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