External Debt Burden And The Economic Growth In Nigeria

Project and Seminar Material for Economics

External Debt Burden And The Economic Growth In Nigeria


Abstract


This study examines the external debt burden and the economic growth in Nigeria. Data for the study are collected from the World Bank and Central Bank of Nigeria Statistical Bulletin. The variables on which data are sourced include gross domestic product, domestic debt, external debt, and real interest rate. Gross domestic product is the dependent variable while external debt, Domestic debt and real interest rate are the major explanatory variables. The scope of the study covers the period from 2002 to 2013 and data are analyzed using the ordinary least squares regression technique. The regression results indicate that external debt exerts a significant negative influence on economic growth and that external debt has a strong and significant more than domestic debt. The other factors are insignificant in explaining economic growth under this scenario. Thus, the study recommends a more purposeful borrowing pattern and revenue generation through profitable capital investments as the remedy for a foreign debt crisis in the country. The study also suggests a revival of abandoned industries as a more effective way of reducing foreign borrowing, creating employment opportunities and alleviating poverty in the country.


Chapter One


Introduction

1.1 Background of Study

External debt has remained one of the major challenges facing low-income nations like Nigeria due to the constant budget deficit, unfavorable balance of payment and most importantly the inevitable need for industrialization. Soludo (2003) affirms that the adverse balance of payment and budget deficit are the two major issues that lead to the acquisition of external loans.

Every country in the world aim at achieving economic growth and development. However, this is only possible if a country has adequate resources. In developing countries, especially those in sub-Sahara Africa, the resources to finance the optimal level of economic growth and development are in short supply. This is as a result of the economies ploughed with problems of low domestic savings, low tax revenues, low productivity and meager foreign exchange earnings.

Basically, for these reasons, many developing countries yearning for economic growth inevitably resort to external financing to bridge the gap between their savings and investments. In the process of obtaining finance from abroad, a country may consider several options: grants, foreign investment and loans (concessional and non – concessional) in that order. However, mix of these capital in – flow in varying proportion could be obtained depending on the socio – economic and political situation in a country.

Nigeria like most developing countries borrowed from external sources mainly for investment purposes. The country’s external debt was sustainable up to mid 1970’s. From the late 1970’s because of poor macro – economic management and declining prices of crude oil, the country’s external debt began its upward movement. Nigeria’s external debt had its origin in 1958 when a loan of USD28 Million was obtained from the World Bank to construct a railway and other developmental projects (Ndekwe, 2008). In 1985, the problem of debt servicing began as the total external debt of Nigeria rose to USD19 billion, but the government was able to repay the foreign creditors (Paris Club) more than USD35 billion while the borrowed money was then less than USD15 billion (Rieffel, 2005).

Following the apparent debt overhang in Nigeria, the Obasanjo’s led government in 2003-2007 intensely pursued debt revocation which consequently resulted to a reduction of the external debt up to USD3.4 billion in 2007 (Adedoyin, Babalola, Otekunri & Adeoti, 2016) and if translated into the local currency it amounted to N438.89 Billion (CBN Statistical Bulletin, 2018). The succeeding administrations after President Obasanjo’s tenure swiftly resumed the borrowing to such a level that Nigeria’s debt profile (comprising loans from Multilateral, Bilateral, Euro Bond, Diasporal Bond, and others) started rising again from N438.89 Billion in 2007; N523.25 Billion in 2008; N590.44 Billion in 2009; N689.84 Billion in 2010; N896.85 Billion in 2011; N1,026.90 Billion in 2012; N1,387.33 Billion in 2013; N1,631.50 Billion in 2014; N2,111.51 Billion in 2015; N3,478.91 Billion in 2016; N5,787.51 in 2017 to N7,759.20 in 2018 (CBN Statistical Bulletin, 2018). The external debt problem is becoming more and more for many reasons. This problem of increasing rate of the external debt is threatening the development programmes embarked upon by these countries: thereby retarding their economic growth and development. The reason being that the size of the debt relative to size of the economy’s GNP is enormous. Also, the current system of debt management has a serious macro – economic impact on an economy’s output: as such, there is an urgent need to reduce Africa’s total outstanding debt service payments as well as accumulating of arrears on payments.

In 1986, the Federal Government introduced the Structural Adjustment Programme (SAP) to address the problem of structural imbalance in the economy and create an atmosphere for the achievement of macro – economic stability. It is obvious that one of the integral part of the SAP is to reduce Nigeria huge debt. It is a fact that if the enormous amount spent on debt service payment could be reduced greatly, the country will be able to finance a large volume of domestic investment which would enhance growth and development.

The problem of the rising external debt of the less developed countries (LDCs) is giving nightmares not only to the debtor nations that is worrying about how to earn enough foreign exchange to at least service their huge external debts but also to the creditors that are worried about the tendency of the debts becoming bad and irrecoverable.
To most debtors nations, the adage “ to go a borrowing is to go assorrowing” is a biting truism. This is not to say that the researcher is against borrowing either internally or externally. In fact, from the on set, the researcher strongly believes that external funds if judiciously utilized will go a long way to help solve or at least alleviate the problems of gross under – development confronting most of the LDCs. Getting out of the “debt trap” is now the major concern of both the creditors and the debt nations. The debtors should not be made to bear the burden of miscalculation of botgh the creditors ( who were reckless in the approach to lending during this peak of the “ petro dollar boom” for being too short sighted as not to see the strings and traps attached to the loans.

Perhaps, the above cannot be more representative of the Nigeria situation which is likened to an extravagant person who is hosting his friends and associates to an all exercise – paid, no holds barred party, which after the parting found himself unable to settle even a fraction of the bill and all the guest gone, not even a person to be seen to offer moral succor to the lavish host. This vividly describes the Nigeria external debt problem. Having wasted all the borrowed funds and having nothing to show for it, Nigeria is woken up to unending knocks of the creditors.
Unfortunately, ability to pay is close to zero. This is becomes more pathetic when it can be seen that Nigeria is now called upon to pay when the economy is in a depressed mood. More so, the borrowed funds are embarked on ill conceived projects which are equally badly implemented. However, the new international economic order sets out as one of it’s objectives to secure favourable conditions for the transfer of resources to developing countries and to ensure that a country’ resources are fully utilizes for the development of the country concerned. Thus, Nigeria resorted to external borrowing early in her history so as to quicken the pace of economic development. The issue of Nigeria’s external debt generated much public concern at the beginning of 1980.

Actually, Nigeria’s external indebtedness started during the colonial days. The last of colonial borrowing was the World Bank (IBRD) loan of 1958 used to finance Nigeria Railway Corporation extension to Bornu under the guarantee of the United Kingdom Government ( Felagan 1978). It is believed that debt is generated by the gap between domestic savings and investment, and export earning which increases in absolute terms over time. As the gap widens and the debts accumulates, interest charges also accumulate and a country must borrow more to maintain constant flow of net imports and to refinance maturing debt obligations.

Nevertheless, external borrowing became a conscious public policy when in 1960, the Government promissory notes ordinance was enacted for the purpose of raising authorized loans. Under the ordinance, a sinking fund was also established for redeeming loans raised. In 1962, the external loans Act was enacted by parliament which provided for the raising of the loan outside Nigeria. Under the Act, external loans were to be used for the purpose of development program and for making loans to regional government.

In 1970, after the civil war “ The External Loan Rehabilitation, Reconstruction and Development” decree was promulgated. The decree authorized Federal Commission to raise loans outside Nigeria for amount not above N1 billion. The loan is for rehabilitation, reconstruction and development programme for making loans to state government. These various regulations on external loans became the policy guidelines not only in magnitude but also in the direction.

Nigeria’s debt crisis could also be traced to the misdirect economic policies pursued since the buoyancy of the oil market which resulted in an outright neglect of the non – oil sector of the economy especially agriculture. Owing to this neglect of other sectors in the economy, the oil sector provided over 905 of the government national revenue, so fluctuations that occurred in the oil market in 1978 and 1980s distorted the projected revenue estimates of the federal government. Hence, the government had to borrow to fill the gaps created by the fluctuation and also meets the increasing expenditures. Thus, Nigeria’s debt as recorded by the Central Bank of Nigeria in 1978 was N1, 265.7 million or US $2.2 billion; N8819.4 million or US $ 13.1 billion in 1982 and N133,956.2 million in 1988. More so, the total outstanding external debt of Nigeria went up to N240, 033.6 million in 1989 in addition, it is said that the debt keeps rising yearly ( defying Newton’s law of gravity) as Nigeria was owning N648,813 million as at 1994 and N3,097,383.8 million as at 2000.

The debt situation was also intensified by large public deficit relatively free capital in – flows, inefficient control over private capital out flows and real over valuation of the exchange rate of naira to other world currencies. For these reasons and others, debt problem has become one of the most pressing issues in the world’s political and economic relationship for a LDC like Nigeria.

In essence, what matters most is not the amount of the foreign loans but the ways and manner the loans are used in developmental process. If these loans are used for current consumption, they will have minimal impact on future economic growth but if invested rationally in productive ventures, they will contribute positively to real growth and enhance the productive capacity of the economy. The fact is that development depends purely on a sustained increase in real income, which can only be achieved or accumulated from economic growth.

Economic growth however, emphasizes on the changes in economy’s productivity over time. Growth tends to occur when total production increases more rapidly than population. Thus, it is the country’s ability to maintain a strong defense or to pay for some other national project. As a matter of fact, economic growth is an ever increasing quantity of goods and services available to meet the economy’s need over time. As a result, the higher the ratio of debt servicing payments, the lower the level of economic growth. The primary burden of Nigeria’s public debt is indeed shifted to the future, thereby retarding economic growth. The rate of investment tens to be low and unemployment rate become high because of our huge public debt. Furthermore, our reputation is tarnished and the developed nations are no longer confident in our economy. This rise to reductio0n in the flow of foreign investment to Nigeria, which could have profound consequences for the economic development prospect of the nation. With the oil glut and reduced revenue, it is expected that our external debt liabilities will increase and our economy will be unstable. The debt crisis if not well managed will lead to liquidity crisis and foreign exchange crisis, which will retard the rate of economic growth and development in Nigeria.


1.2 Statement Of The Problem

The issue of external debt in Nigeria has become an immense status bestriding the main stream of international economy, and politics. Foreign aids are no longer used as instrument of assistance but as a weapon of oppression, suppression and perpetual under development. The need to examine and hence, utilize the machinery of foreign debt is anchored on a number of challenges and this includes:

  1. Underdevelopment of the Nigeria Economy
  2. The unreliability of Domestic debt facilities
  3. Effect of external debt burden on Gross domestic product GDP)

Lack of capital in the country has been the major cause of underdevelopment in Nigeria, as a. result there is need to inject funds into the system from other economies so as to keep up the growth in the country This can easily be sought from external financial institutions, Domestic debt in Nigeria have not only been characterized by its short term nature, but it has also by fluctuations, The reality on grounds that Nigeria firms and investors prefer to invest their idle funds in company shares and treasury bills than in Government bonds. Economic growth over the years has been in Government bonds, Economic growth over the years has been identified as a long term project.

In this direction, the need fur external debt cannot be understated as a reliable substitute to the usually high interest charge domestic debt which in most times does not exceed a year. The burden and dynamics of external debt shows that they do not contribute significantly to financing economic growth in Nigeria as in most case, debts accumulates because of the servicing and principal itself, The burden of external debt could constitute negative impact on G.DP of Nigeria as this is a measure of economic growth.


1.3 Objectives of the Study

The central objective of the research is to assess the impact of external debt burden on the Nigeria economic growth. Other specific objective includes:

  1. To measure the impact of external debt on the Growth of the nation;
  2. To evaluate the significance of external debt as against domestic debt in Nigeria;
  3. To measure the effect of external debt burden on GDP level.

1.4 Research Questions

As a basis upon which this study is conducted, the following research questions are relevant:

  1. What is the impact of external debt on the Growth of the nation?
  2. To what extent has external debt been significant over domestic debt?
  3. Is there any relationship between External debt burden and GDP level?

1.5 Statement of Hypothesis

For the purpose of evaluating or in order to efficiently and objectively analyze or achieve the above objective; the hypothesis is formulated thus:

  1. Ho1: External debt does not have impact on the growth of the Nigeria economy.
  2. Ho2: External debt is not more significant than domestic debt in Nigeria.
  3. Ho3: There is no relationship between external debt and GDP level in Nigeria.

1.6 Scope of Study

The scope of study will be impact of external debt burden on the Nigeria Economic Growth between 2002 – 2013, which is a period of 12 years. The study covers the whole economy of Nigeria and will be limited to evaluation of external debt burden and impact on economic growth of Nigeria. One problem of this study is the unreliability of Domestic debt facilities. An objective is to evaluate the relevance of external debt over domestic debt.

The area of population is Nigeria and the variables to be used are

Gross domestic product (GDP), Gross domestic product growth rate (GDP growth rate), Domestic debt, External debt, Real interest rate.


1.8 Limitations of the Study

In the course of carrying out this study, some problems were encountered which ranges from non- availability of relevant recent data to the paucity of available ones. This display of uncooperative attitude by those who are supposed to be the custodian of the data, also affected this in many ways. To this extent a considerable exercise and judgments was necessitated in dealing with the data. Time and fund also are included in the limiting factors to the collection of adequate data. Enough time is needed in order to travel to other financial institutions and other federal and state ministries of finance in order to get adequate information needed. This also poses a problem of finance due to transportation cost and the present economic situation in the country.

Due to the above limitations, the researcher therefore had to restrict the collection of data within Abuja only especially as a result of financial constraint.


1.9 Definition of Terms

External Debt

External debts are debts incurred when the government of a country borrows from a foreign banks, Government and International institutions like IMF, WORLD BANK, PARIS CLUB etc. Also it can be seen as unpaid portion of external resources required for developmental purposes and balance of payment support which could not repaid when they fell due.

Balance of Payment

A systematic record of all transactions between residents of one country and the rest of the world. It is a statement of all the financial and economic transactions between one country and the rest of the world over a given period of time. It becomes unfavorable or adverse when there is excess importation over exportation.

Economic Growth

Is a long term rise in capacity to supply increasingly diverse economic goods to its populations. This growing capacity is based on advancing technology, the institutional and ideological adjustment that it demands. It refers to increasing real output or real per capital output of economy.

Economic Development

A multidimensional process involving the reorganization and re orientation of entire economic and social system.


Chapter Five


Summary, Conclusion and Recommendations

5.1 Summary

In this study, our focus was to examine external debt burden and the economic growth in Nigeria. The study specifically was aimed at assessing the various ways external debt has negatively affected the economic growth and GDP level of Nigeria.

The study adopted the research the econometric analysis techniques of ordinary least squares (OLS) multiple regression techniques. The findings revealed that external debt have a negative effect on the GDP level and economic growth of Nigeria.


5.2 Conclusion

External debt accumulation is an economic burden that hinders economic growth instead of improving it as expected. When an external debt accumulates over time, it results in debt overhang and the developing country in question remains a perpetual dependent country to the foreign creditor countries using debt servicing instrument to exploit them. Under this scenario, the huge part of the debtor country’s resources goes into debt servicing in order for the country to remain credit worthy. This is the situation Nigeria is facing by ensuring that no stone is left unturned in servicing external debt so as to attract more debt. As a result, the external debt profile keeps rising as well as the servicing cost. The economic implication is that external debt impacts negatively on economic growth while the increase in foreign debt leads to debt overhang which depresses the economy. Thus, the seemingly economic improvement experienced by judiciously servicing debt and making Nigeria credit worthy is a mere sham because the increasing level of external borrowing is detrimental to the economy, GDP level and is also enslaving the nation.


5.3 Recommendations

The study recommends a more purposeful borrowing pattern and development of infant industries. In order to develop infant industries so as to reduce external borrowing, the government is encouraged to consider a partnership with foreign counterparts who have the expertise to develop certain natural resources that are yet untapped in some parts of the country. These untapped mineral resources found in various parts of the country include bitumen, coal, columbite, gold, iron ore, kaolin, limestone, marble, tin, uranium (Mutiu, 2016) among others.

Borrowing should not be for political campaigns but for the establishment of lucrative industries such as agribusiness and manufacturing industries. It is usually disheartening to observe that most external debts are incurred for political reasons and not profitable ventures. It is advisable to have revenue generation and economic development as the focus in all manner of external borrowing. This goal can be achieved through adequate feasibility study required to establish the profitability of capital investment and the likelihood of realizing the goal before foreign borrowing is undertaken by the government. Most failed capital projects have been as a result of lack of proper analysis of the projects and use of the right human resources in the right places. So, the use of the capable human capital is advocated in this study to drive the economy and to make proper use of borrowed funds for profitable capital investments.

The study is also suggesting the revival of abandoned industries in the country. Some industries that have been abandoned over the years can be revived to continue in business, employ experts within the country and run profitably. For instance, the federal government recklessly abandoned Ajaokuta Steel Company (ASCO) after spending about USD7 Billion and almost less than USD1 Billion dollar for completion (Jegede, 2013). The borrowed funds can be used to revive ASCO and Delta Steel Company (DCL) which have the capacity to generate sufficient revenue for the country and employing many jobless Nigerian youths as well as helping in poverty reduction. The study equally suggests the revival of the Nigerian textile industry which contributed about 15% of the manufacturing earnings to the GDP and about 60% to 70% of the textile industry capacity in Nigeria and West Africa but is presently in comatose (Olagide, 2019). The textile industry collapse led to textile importation of about N300 billion which results in the government losing over N75 billion unpaid duties each year due to massive smuggling (Olajide, 2019).


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