ABSTRACT
This study examined the impact of External debt management on economic growth of Nigeria. Using annual time series data collected over the period of 33 years (1986 – 2018). The data for the study were collected from the CBN statistical bulletin annual report. The variables on which data were collected include: Real Gross Domestic Product (RGDP), External Debt (EXD), External Debt service (EXDS), Balance of Payment (BOP) and Exchange Rate (EXR). Data were analyzed using multiple regression analysis. It proceeded with Descriptive statistics; Augmented Dickey Fuller (ADF) unit root test, Co-integration test and Auto-Regressive Distributed Lag (ARDL) model. In the model, Real Gross Domestic Product (RGDP) was used as a proxy for economic growth and Dependent Variable. Findings from the analytical result revealed that of the four independent variables tested, External Debt (EXD) exhibited an effect that is statistically significant with (P-value = 0.0130) on economic growth of Nigeria .This implies that strategic management of the various fund obtained through external debt has promoted economic productivity. External Debt Service (EXDS) has significant effect with (p – value = 0.0424) 0n the economic growth of Nigeria. This is an evidence that the Nigeria. Economy has gained at some point in time following the debt servicing in operation by the nation. Furthermore, Balance of Payment (BOP) with (P – value = 0.0085) showed a significant effect on economic growth of Nigeria. This means that within the reference period Balance of payment have contributed meaningfully to the economic output in the country. On the other hand, Exchange Rate (EXR) with (P – value = 0.2694) showed an insignificant effect on economic growth of Nigeria .This simply implies that exchange rate has hindered economic growth of Nigeria.
TABLE OF CONTENTS
Title
Page i
Declaration
ii
Dedication iii
Certification
iv
Acknowledgements v
Table
of contents vi
List
of Tables x
Abstract xi
CHAPTER 1:
INTRODUCTION
1.1
Background
of the Study 1
1.2
Statement
of the Problem 4
1.3
Objective
of the Study
6
1.4
Research
Questions 6
1.5
Research
Hypotheses 7
1.6
Significance
of the study 7
1.7
Scope
of the study and Limitations 8
CHAPTER 2: REVIEW OF RELATED
LITERATURE
2.1 Conceptual
Framework 9
2.1.1
Concept of debt 11
2.1.1.1 External debt 12
2.1.1.2 External debt management 13
2.1.1.3 External debt service payment 13
2.1.1.4 Balance of payment 14
2.1.1.5 Exchange rate 15
2.1.1.6 Economic growth 16
2.1.2
Sources of external debt 17
2.1.3
Classification of external debt 18
2.1.4
External debt in developed countries 19
2.1.4.1
External debt in developing countries 20
2.1.4.2
External debt in Africa 21
2.1.5 External debt profile of Nigeria
23
2.1.5.1 Causes of Nigeria’s external
debt 24
2.1.5.2 External debt relief of Nigeria 26
2.1.6 External debt management
and economic growth of Nigeria 28
2.2
Theoretical Framework 30
2.2.1 The
dual-gap theory 30
2.2.2
Debt - cum - growth theory 30
2.2.3
The profligacy theory 32
2.2.4
The dependence theory 32
2.2.5 The neoclassical
theory 33
2.2.6 Growth and debt
theory 34
2.3
Empirical Review 35
2.3.1 Summary or review 45
2.4 Research Gap 46
CHAPTER 3: METHODOLOGY
3.1
Research
Design 48
3.2
Sources of Data 48
3.3 Model Specification 49
3.3.1
Description of research variables 51
3.3.1.1 Dependent variables 51
3.3.1.2
Independent variables 51
3.3.2
Unit root test analysis 53
3.3.3
A priori expectations 53
3.4
Technique for Data Estimation 54
CHAPTER 4: DATA
PRESENTATION AND ANALYSIS
4.1 Data
Presentation 55
4.2
Descriptive Statistics 58
4.3
Unit Root Test 59
4.4 Co-integration Test 60
4.5 ARDL Result of the
Impact of External Debt on Economic Growth 61
4.6
Hypotheses Testing 63
4.6.1
Test of hypothesis one 64
4.6.2
Test of hypothesis two 64
4.6.3
Test of hypothesis three 65
4.6.4 Test of hypothesis four 65
4.7
Discussion of Results 65
CHAPTER 5: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary 67
5.2 Conclusion 68
5.3 Recommendations 69
5.4 Contributions to knowledge 70
References 72
Appendices 79
LIST OF TABLES
4.1 Data
presentation 56
4.2
Descriptive statistics 58
4.3 Augmented Dickey Fuller (ADF) Test for unit
root 60
4.4b Co-integration
test 60
4.5 ARDL regression
result 61
CHAPTER 1
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
It is in the habit of developing countries to
borrow fund for developments needs. Nigeria as a developing country source for
external fund since domestic fund is insufficient to meets the needs for
economic growth. External debt is simply a part of a county’s debt that was
loaded from overseas lenders together with commercial banks, Government and
international financial institutions. The inability to utilize the debt on
productive projects that will yield positive output and to efficiently meet the
requirements of servicing the debt is some of the major problems faced by
Nigeria. External debt appears to be a general occurrence in recent time due to
its accumulation, especially for the emerging
nations which are at the stage of economic recovery and development where the
supply of internal savings are not enough with high current account payment
deficit and in-depth need of import of capital to increase domestic resources.
The essence of external debt is to enable countries without sufficient internal
financial resources source for foreign aid (Noko, 2016).
Nigeria’s external debt management
is one major macroeconomic problem both to the economic agent particularly at
the beginning of the years of her independent (Ogege and Ekpudu, 2010). In spite of many efforts made to control and reduce debt
on Nigeria’s economy by the Government over the years. Such include the
deliberate application of essential resources towards debt servicing, the
renewal of the terms of loans and the alteration of structure to debt conversion
programme. The focus of many researcher and public debate is on the issue of sustainability
of the debt profile of Nigeria. While foreign borrowing can be beneficial in
providing the resources necessary to prop up economic increase and development,
it has its salient detrimental costs (Uma et al; 2013).
These costs gradually outweigh the benefits for many developing nations. The
major cost connected with the accumulation of a huge external debt is ‘’debt
servicing’’. Debt servicing is the payment of cash of the principal and piled
up interest. Balance due servicing is a contractually stable exchange on
domestic real income and savings as the debt becomes bigger or as interest rate
increase. With the purpose of saying, debt servicing requirement can be carried
out through export earnings (Kehinde,
2012). However if import and export changes
or interest rate increases and causing a rapid growth of debt servicing payment
or if export earning becomes smaller, the difficulties of debt serving will
eventually increase. This have been the experience of a good number of the
heavily indebted third World nations (Lora and Olivera, 2016).
The genesis of external debt of
Nigeria was in 1958 as 28 million US dollars was borrowed from the World Bank
intended for railway building. Within the interval of 1958 as well as 1977, the
call for external debt was not a lot. The decrease in oil prices in 1978 caused
a negative influence on the finances of the government. The government had to
borrow to be free from the difficulties of balance of payment and to finance
some projects. 1 million U.S dollars which was said to be a jumbo loan was the
first money borrowed by the government from the global capital market (GCM) but
in 1978 it increased to 2.2 million U.S dollars.
From then on the rate of lending
increased which leads to external debt contractual requirement by the state
government. As stated by Debt Management Office (DMO), Nigeria sustained external
debt of N17.3 million in 1980. In order
to resolve the problem, various external debt-financing options were taken to
consideration in the Structural Adjustment Programme (SAP) in 1986. Since the
introduction of this programme, Nigerians have been falling into one difficulty
after another starting from the devaluation of the country’s currency (naira)
through Second Tie Foreign Exchange Market (SFEM) now Foreign Exchange Market
(FEM) to the increasing prices of inflation goods such as raw materials and
agricultural products etc.
One major risk to a nation’s growth
is an increase in the nation’s fiscal deficits caused by high level of external
debt servicing. The ensuing effect of huge increase of debt introduced the
country to an elevated debt load (Kehinde, 2012).
Nigeria is among the wealthiest nation on the continent of African, but due to several
macro-economic problems which include; dishonesty, joblessness, wholly reliance
on crude oil as a main basis of income, inflation, and increasing external debt
and debt service payment, greater part of her citizens fell under the poverty
line (Oyejide
et al; 2011).
Nigeria was to disburse a huge sum
of $4.9 million each year lying on debt service prior to the debt termination
deal (Aluko and Arowolo, 2010). Such indebtedness would have made it impossible
to attain exchange rate stability or a few significant growths in the country.
The consequence of the Paris Club debt termination was instantaneously observed
in the chronological decrease of the Nigeria’s exchange rate in comparison with
the US Dollar from 130.6 Naira within 2005 up to 128.2 Naira in 2006, and
decreased down to 120.9 in 2007 (CBN, 2009). Even as at that, the economic
increase by Nigeria has been contradictory in the period of post-debt relief as
it plunged from 6.5% in 2005 to 6% in 2006 and subsequently increased to 6.5%
in 2007 (CBN, 2008). It was expected that as the year goes by, the benefits for
the termination of debt will manifest. Instead it was cleared up in 2009 via
the international financial and economic disaster, which was impulsive in
August 2007 by the disintegration of the major lending market in the United
States. The consequence of the catastrophe on swap over rate of Nigeria was
unusual as the Naira exchange rate in comparison with the US Dollar rise
astronomically from about N120/$ in the last quarter of 2007 to more than
N150/$ (about 25% increase) in the third quarter of 2009 (CBN, 2009). This is
attributed to the sudden drop in foreign earnings of Nigeria as a consequence
of the constant fall of crude oil price, which plunged from US$147 per barrel
in July 2007 and by December 2008 the price for a barrel was as low as US$45
(CBN, 2008).
Nigeria’s external debt stock was
increasing subsequent to the debt termination in 2005; available statistics is
an evidence of this. Nigeria’s external debt outstanding rose in the year 2006
to the year 2009 with the following figures $3,545 million, $3,654 million,
$3,720 million $3,947 million respectively and so it continues to increase to
date (CBN, 2018). The study therefore empirically ascertained the impact of external debt management on economic growth of
Nigeria within the period of 33 years (1986 – 2018).
1.2 STATEMENT OF THE PROBLEM
The issue of external debt management
of Nigeria remains in the mind of researchers and policy makers. Strategies on
how it could be managed properly and the impact it will create on the economy
is something of great concern. Many emphasis on the significant and
insignificant of external debt and it management has been accounted for through
prior studies on the subject matter. In order to digest this study, the
research problems include:
a.
The inability to utilize the debt for economic growth: One of the problems faced by Nigeria in her external debt
management is the inability to utilize the debt properly for economic growth.
Due to corruption the debt is been converted to unnecessary projects that its
output will not be enough to cover the principal payment and the interest. The
consequence of this is that Nigeria economy could not get to the height it
ought to reach. This plainly explains that the utilization of loan is what
matters. Borrowing to fund government expenses is not bad but what the debt is
spent on and the mode of debt serving is the issue of concern.
Also
when external debt is used to finance a country’s current account deficit and
not used for productive projects, it will be repaid with interest. And if it
continues, it will be an issue of concern among investors and those in the
financial country. The ability of the debtor county in repaying all its debt
will be doubted. Investors will stop investment for fear of financial
instability; also bank may withdraw their short – term loans which will cause a
downward pressure on the country’s exchange rates. This implies that
depreciation has taken place and servicing of debts becomes more expensive and
difficult.
b.
The inability to meet to debt servicing requirement: According to Noko, (2016) debt does not essentially mean a
slow growth of an economy; it is a nation’s incapability to comply with debt
service requirements coupled by insufficient awareness on the whatness and
structure of the debt as well as the money the nation is required to pay raise hardship
in the economy and woes in the nation.
This
is another important call out developing nations are facing, including Nigeria.
The incapability of Nigeria as a country to successfully meet up with its debt
servicing necessities/payments has exposed the country to a huge responsibility
of debt service. The consequences of this debt service responsibility causes
further problems for the country, in addition to a rise in the fiscal short
fall also which is caused by debt servicing level. This causes a severe risk to
the economy as a huge sum of the nation’s income has gone to waste.
c.
Instability in exchange rate:
The instability in the county’s currency poses a threat to the economic growth.
When a country’s currency is not stable, a strong/higher exchange rate can
depress economic growth because export will be more expensive and import will
be less expensive. The most important determinant of economic growth is the
currency exchange rate. Instability in exchange rate could lead to economic
slowness of growth which is a big problem to developing nation. This implies
that if a country’s currency is devalued, to service external debt will be
expensive and this is a problem that will hinder economic growth of a nation.
It is on this premise that this study is set to evaluate the
impact of external debt management on economic growth of Nigeria within the
past 33 years.
1.3 OBJECTIVE OF THE STUDY
The broad objective of the study is
to evaluate the impact of external debt management on economic growth of
Nigeria from 1986 – 2018. The following specific objectives of the study were
to:
- examine the effect of external
debt on economic growth of Nigeria.
- determine the effect of
external debt service payments on economic growth of Nigeria.
- examine the effect of balance
of payments on economic growth of Nigeria.
- determine the effect of
exchange rate on economic growth of Nigeria,
1.4 RESEARCH QUESTIONS
The following research questions
were to guide the study:
- to what extent does external
debt affect the growth of Nigeria economy?
- what is the effect of external debt service payments
on Nigeria’s economic growth?
- what is the effect of balance
of payments on the growth of Nigeria economy?
- what is the effect of exchange
rate on the growth of Nigeria economy?
1.5
RESEARCH HYPOTHESES
The following hypotheses were tested
to aid the attainment of research work:
H01:
External debts do not have significant effect on economic growth of Nigeria
H02:
External debt service payments do not have significant effect on economic
growth of
Nigeria.
H03: There is no
significant effect of balance of payments on economic growth of Nigeria within the study period.
HO4; Exchange rate do not
have significant effect on economic growth of Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
This study is of enormous benefit to
various government agencies and organizations. The benefactors of this study
will include;
1.
Central Bank: This institution is
responsible for debt management; this will serve as advisory tool for their
choice of debt servicing.
2.
Scholars: Scholars will find the
study relevant as it will form basis for further research and also a reference
tool for academic works.
3.
Government: Through this study the
government officials will come to the knowledge of choosing the right policy as
regards to external debt when policies are recommended to them.
Lastly, this study will reveal the
relationships and significant of external debt in Nigeria; a knowledge that
will be beneficial to many stakeholders who will find relevance in it. It will also
in a way guide the official’s formulating and implementing policies on
Nigeria’s external debt management for a better Nigeria.
1.7
SCOPE AND LIMITATION OF THE STUDY
The thesis covered the period of
thirty-three years (1986-2018). This time frame was chosen due to the fact that
it allowed an adequate survey of various periods of policy changes. In this
time frame, debt crisis was partly solved and also economic growth
sustainability was fostered. This study is basically restricted to the impact of
external debt management on economic growth of Nigeria. The researcher was not
able to collect all the necessary materials from all the secondary sources
needed for the study due to poor network service and denial of access to some
research materials, as expected to pay subscription fee before access can be
granted. Also as a student still dependent, is limited by finance that would
have ensured consistency. Irrespective of these constraints the researcher made
use of the accessible materials and with help was able to overcome these
limitations for the success of the study.
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