ABSTRACT
The study aims to ascertain the impact of external
debt on the economic growth of Nigeria. The specific objectives are to
ascertain the impact of external debt and external debt servicing on gross
domestic product with equivalent research questions and research hypotheses.
The research design used is the ex-post-facto research design, secondary data
were collected from the CBN statistical bulletin. The method of data analysis
is ordinary least squares statistical technique with the aid of the SPSS
software. The findings show that external debt has no significant impact on
economic growth. The findings also show the external debt servicing has a
significant impact on economic growth. Recommendations that were made from the
findings include that government should reduce the level of debt accumulated
overtime and government should not hesitate to clear external debt through
external debt servicing.
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
According to Wikipedia (2018) External debt
is the total debt
a country owes to foreign creditors.
The debtors can be the government, corporations or citizens of another country.
The debt includes money owed to private commercial banks,
other governments,
or international financial institutions
such as the International Monetary Fund
(IMF) and World
Bank.
Most developing countries of the
world are regarded as being poor not because they don’t have the resources but
because bulk of their resources (income) are being channeled to meeting the
consumption needs of their people with little or nothing left for savings.
Hence low savings rate brings about low investments rate and low investments
rate results to low growth rate. Therefore, poverty at the beginning through
low savings, low investments and low growth leads to poverty again (poverty
trap). For this reason, developing countries are left with no option than to
result to external borrowings and foreign assistance (foreign aid) to bridge
the saving- investment gap with the intention to achieving economic growth and
poverty reduction.
Official development assistance
(ODA), more commonly known as foreign aid, consists of resource transfers from
the public sector, in the form of grants and loans at concessional financial
terms, to developing countries. Many studies in the empirical literature on the
effectiveness of foreign aid have tried to assess if aid reaches its main
objective, defined as the promotion of economic development and welfare of
developing countries (Sandrina, 2005). On the other hand, the act of borrowing
creates debt. Debt therefore, refers to the resources of money in use in an
organization which is not contributed by its owners and does not in any other
way belong to them, it is a liability represented by a financial instrument of
other formal equivalent (Udoka and Ogege, 2012).
Recent years have seen a surge in
calls for more ODA to developing countries in order to eliminate poverty.
Developed countries, international organizations and other Philanthropists have
all made renewed pleas for a massive infusion of development aid to developing
countries including Nigeria. Experts who argued in favour of more aid are of
the view that injecting more foreign aid would materially benefit the people of
the recipient country (Okon, 2012). Developing countries like Nigeria are
indeed characterized by low level of income, high level of unemployment, very
low industrial capacity utilization, and high poverty level just to mention a
few of the various economic problems these countries are often faced with. In
addressing these problems, foreign aid has been suggested as a veritable option
for augmenting the saving-investment gap. While some countries that have
benefited from foreign assistance at one time or the other have grown such that
they have become aid donors (South Korea, North Korea, China etc.), majority of
countries in Africa like Nigeria have remained backward. Nigeria has continued
to benefit from all sorts of foreign assistance and in fact still collect at
least as much as the amount collected in the early 1980s, yet socio-economic
development has remained dismal (Fasanya and Onakoya, 2012).
Aside foreign aid, external borrowing
has also over the years attracted much concern as an important aspect of any
country’s macroeconomic policy framework. A developing country wishing to
mobilize capital resources to foster economic development may at one time or
the other resort to borrowing (internally or externally) to supplement domestic
savings. Soludo (2003), reacting to this, opined that countries borrow for two
broad reasons: macroeconomic reasons higher investment, higher consumption
(education and health) or to finance transitory balance of payments deficits to
lower nominal interest rates abroad, lack of domestic long-term credit, or to
circumvent hard budget constraints. This implies that economy indulges in debt
to boost economic growth and reduce poverty. He is also of the opinion that
once an initial stock of debt grows to a certain threshold, servicing them
becomes a burden, and countries find themselves on the wrong side of the
debt-laffer curve, with debt crowding out investment and growth. This seems to
be the position of Nigeria today because investment, which will accordingly
result to high-speed growth with a positive effect on poverty, is moving
sporadically in both positive and negative directions.
Sanusi (2003) opined that an
escalating debt profile presents serious obstacles to a nation’s path to
economic growth and development. The cost of servicing public debt (domestic and
external) may expand beyond the capacity of the economy to cope, thereby
impacting negatively on the ability to achieve the desired fiscal and monetary
policy objectives.
However, whether or not external debt
would be beneficial to the borrowing nation depends on whether the borrowed
money is used in the productive segments of the economy or for consumption
(Ezenwa, 2012).
Governments are
not island on its own; it would require aid so as to perform efficiently and
effectively. One major source of aid is foreign borrowing or external debt. The
motive behind external debt is due 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 framework 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 a nation
cannot be overemphasized. Hameed, Ashraf, and Chaudhary (2008) stated that
external borrowing ought to accelerate economic growth especially when domestic
financial resources are inadequate and need to be supplemented with funds
abroad.
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 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 reasons to either finance higher
investment or higher consumption and to circumvent hard budget constraint. This
implies that an economy borrow to boost economic growth and alleviate poverty.
He argued that when debt reaches a certain level, it becomes to have adverse
effect, debt servicing becomes a huge burden and countries find themselves on
the wrong side of the debt-laffer curve, with debt crowding out investment and
growth. The 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 first major
borrowing of 1billion US dollars referred to as Jumbo loan was contracted from
the international capital market (ICM) in 1978 increasing the total to 2.2
billion U.S dollars (Adesola, 2009). The spate of borrowing increased
thereafter with the entry of the state government into external loan
contractual obligation. According to the Debt Management Office (DMO),
Nigeria’s external debt outstanding stood at N17.3 billion. In 1986, Nigeria
had to adopt a World Bank/International Monetary Fund (IMF) sponsored
Structural Adjustment Programme (SAP), with a view to revamping the economy
making the country better-able to service her debt (Ayadi and Ayadi, 2008).
The increasing
fiscal deficits driven by the higher level of external debt servicing is a
major threat to growth of the nation. The resultant effect of large
accumulation of debt exposes the nation to high debt burden.
1.2 Statement of the Problem
“Huge external debt does not necessarily imply slow economic
growth; it is a nation’s inability its debt service payments fueled by
inadequate knowledge on the nature, structure and magnitude of the debt in
question” (Were, 2001).
This can be said to be a problem being faced by Nigeria. Nigerian
exports were primarily commodities with export earnings too small to finance
imports which are mostly capital intensive goods which are comparably more
expensive. Compounding the problem is Nigeria’s drift to mono economy with the
discovery of oil which is today the major challenge the country is facing. 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.
1.3 Objectives of the Study
The main objective of the study is to determine the impact of
external debt on the economic growth of Nigeria.
However, the specific objectives are:
1. To ascertain the impact of external debt on Gross Domestic Product
in Nigeria.
2. To determine the effect of external debt servicing on Gross
Domestic Product in Nigeria.
1.4 Research Questions
1. What is the impact of external debt on Gross Domestic Product in
Nigeria?
2. What is the effect of external debt servicing on Gross Domestic
Product in Nigeria?
1.5 Research Hypotheses
The study was guided by the following null hypotheses:
Ho1 External debt has no significant impact on Gross Domestic Product
in Nigeria.
Ho2External debt servicing has no significant effect on Gross
Domestic Product in Nigeria.
1.6 Scope of Study
The study seeks to analyze Nigeria’s external debt and its impact
on her economic growth. In order to fully capture its effect on the economy, a
thorough empirical investigation will be conducted.
1.7 Significance of
Study
Nigerian
Government: 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.
Findings of this study will aid the Nigerian government in her
quest to reduce the burden of external debt.
Policy
makers: This study is significant
as its findings will provide a basis which will ai policy makers in proffering
polices aimed at managing the external debt issues in Nigeria.
Researchers:Academicians of all
level will find this study useful tool of reference when conducting any similar
research.================================================================
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