The Impact Of Debt Burden On Economic Growth Of Nigeria

The Impact Of Debt Burden On Economic Growth Of Nigeria
Abstract
The study investigated the impact of external debt on economic growth in Nigeria for the period 1980-2012. Time series data on external debt stock and external debt service was used to capture external debt burden. The study set out to test for both a long run and causal relationship between external debt and economic growth in Nigeria. An empirical investigation was conducted using time series data on Real Gross Domestic Product, External Debt Stock, External Debt Payments and Exchange Rate from 1980-2012. The techniques of Estimation employed in the study include Augmented Dickey Fuller (ADF) test, Johansen Co-integration, Vector Error Correction Mechanism and Granger Causality Test. The results show an insignificant long run relationship and a bi-directional relationship between external debt and economic growth in Nigeria.
Table of Contents
Chapter One:
Introduction
- 1.1 Background of the Study
- 1.2 Statement of the Research Problem
- 1.3 Research Questions
- 1.4 Objectives of Study
- 1.5 Research Hypotheses
- 1.6 Scope of Study
- 1.7 Significance of Study
- 1.8 Research Methodology
- 1.9 Data Sources
- 1.10 Outline of Study
Chapter Two:
Literature Review
- 2.1 Introduction
- 2.2 Review of Conceptual and Definitional Issues
- 2.3 Review of Theoretical Issues
- 2.4 Review of Empirical and Methodological Issues
Chapter Three:
Theoretical Framework & Research Methodology
- 3.1 Introduction
- 3.2 Theoretical Framework
- 3.3 Research Methodology
- 3.3.1Model Specification
- 3.3.2 Techniques of Estimation
- 3.4 Data Sources, Definitions and Measurements
Chapter Four:
Data Analysis & Interpretation
- 4.1 Introduction
- 4.2 Descriptive Analysis of the Data
- 4.3 Trend Analysis of the Data
- 4.4 Econometric Analysis of the Data
- 4.5 Conclusion
Chapter Five:
Summary, Recommendations and Conclusion
- 5.1 Summary of Study
- 5.2 Summary of Findings
- 5.2.1 Summary of Empirical Findings
- 5.2.2 Summary of Theoretical Findings
- 5.3 Recommendations
- 5.4 Conclusion
- 5.4.1 Limitations of the Study
- 5.4.2 Suggestions for further Research
- References
- Appendices
- Appendix 1: Table of Data
- Appendix 2: Table of Logged Data
- Appendix 3: Estimated Results
List of Tables
- Table 3.1 A Priori Expectation of Variables
- Table 3.2 Data Measurements
- Table 4.1 Summary Statistics
- Table 4.2 Test for Stationarity
- Table 4.3 Test for Johansen Co-integration Using Trace Statistic
- Table 4.4 Test for Johansen Co-integration Using Max-Eigen Value
- Table 4.5 Long run Normalized Co-integration Estimates
- Table 4.6 Table Showing Vector Error Correction Estimates
- Table 4.7 Test for Causality
List of Figures
- Figure 4.1 Graphical Trend Analysis of Variables
Chapter One
Introduction
1.1 Background of the Study
The Nigeria economy as we all know is characterized by a number of socio- economic problems. These problems include: import dependence, dependence on a single economic sector, weak industrial base, a low level of agriculture production, a weak private sector, dependence on foreign loan, regional inequalities and rural- urban migration, slow growth rate, inefficiency of public inequalities, low qualities of social services, unemployment, under-developed political structures and mechanisms; poor demographic indication of high fertility, breakdown in social order etc. an analysis of these problems showed that most of them are due to the structural characteristics of the economy. In order to solve these problems and ensure a meaningful development, efforts were made by the Federal Government of Nigeria to involve herself in debt, which has resulted to a very big burden to economic growth of Nigeria. International Monetary Fund (2001) state that Nigeria economy like all other developing economic countries in the world is presently undergoing a major debt crisis. The major in its history since the country’s incorporation into the world wide crisis accumulation which is believed to have resulted in market deterioration in the aggregate balance of payment deficit. A wide gap between government revenue and expenditure, the collapse of social services and infrastructures, an escalating level of inflation, an acute storage of basic consumer goods, a decline in standard of living, without doubt it is strongly believed that there are link between the decline in global economy and that of Nigeria economy.
World Bank and IMF (April 2001) states that debt raised by the government either arose from internal sources (Domestic debts) or external sources (Foreign debts) for the execution of government programmes. When government actual revenue performance fall short of projected estimates, government resorts to borrowing to finance project that are of social and economic importance to the nation. Funds from internal sources includes: treasury bill certificates and government development stocks. While when funds are sources from external bodies like Paris club, London club, multilateral and private sectors, international banks, external debt is incurred. Debt management office (2009) says that debt is the amount of fund Nigeria is owing to the outside Countries and also within the country at any given time and these debts inhibits our economic progress and revival, weakens investment and crowd out growth. As with other third world war countries, Nigeria debt crisis is part of a wide crisis accumulation. The management of Nigeria’s debt brings about some kind of economic stabilization programmed to provide the policy framework for the servicing, refinancing and rescheduling of the country. In the face of the country’s growing debt crisis, foreign creditors begin to insist on the articulation and implementation of austerity measure as a precondition for negotiation terms for the rescheduling, refinancing and servicing of Nigeria debt and unlocking lines of credit. They are encouraged in this by the institutions that monitors stabilization programmes in the international of economic system, the IMF and the world bank, using the various loan at their disposal and the stick of punitive, international financer boycott to impose a particular kind of adjustment package on the developing countries. CBN (2002) and stabilization policy (October 2008).Major factors contributed to the increase in Nigeria’s debts. This include: preponderance of borrowing from international community at a higher interest rates, dependence in revenue from crude oil, decline in oil production and the emergence to trade arrears. As developing economy characterized by low productive base, the supply of goods and services is augmented with import. With this, the Nigeria’s import bills through dropped from N9.89 trillion to N5.62 trillion from 2012 to 2013.
THE SUM NEWSPAPER (APRIL 2013). The money still owed is still exorbitant, other major contributor to the increase in Nigeria’s debt were that some project tied loans were contracted without consideration for economic viability. All this caused the Nigeria’s debt to rise so high.IMF (2003) wrote that Nigeria’s debt rose to $6.53billion in 2012, the federal government, the 36 states and the federal capital territory have borrowed a total of $860 million (N134.16billion) in the last one year from external sources, information available from the debt management office has shown that that total debt rose to $5.67billion on December 31st 2011, representing an increase of 15.19 percent.
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. Pattilo, Poirson and Ricci (2002) 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 (Omotoye, Sharma, Ngassam and Eseonu, 2006) 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 (Ayad and Ayadi, 2008). Nigeria’s external debt stock rose from US$28454.8 million in 1997 to US$31041.6 and US$37883.1 million in 2001 and 2004 with 80.3, 64.67 and 52.58 percentages of GDP respectively. On the other hand South Africa’s external debt stock stood at US$25272.4 million, US$24050 million and US$27112.4 million in 1997, 2001 and 2004 with 16.98, 20.34 and 12.52 percentages of GDP respectively. The unabated increase in the level of external debt service payments has led to huge imbalances in fiscal deficits and budgetary constraints that have militated against the growth of the Nigerian economy. The resultant effect of the debt quagmire in Nigeria could create some unfavourable circumstances such as crowding out of private investment, poor GDP growth e.t.c (Ngonzi OkonjoIweala, 2011).
1.2 Statement of the Research Problem
Nigeria an oil rich state was very buoyant until in the late 1970,s when she took the first loan since then; there has been an incessant cases of borrowing from the international community at very high interest rate. Dependence in oil revenue, importation of goods and services and over estimation of budget led to further borrowing. The inability of the federal government to pay large amount of money to repay both principal and interest of borrows capital have resulted in the accumulation of arrears and have attracted penalties that put unbearable burden on the economy and masses at large. The process of managing debt called for the information of social stabilization programmes, foreign countries insist on the articulation and implementation of austerity measures as a precondition for negotiating terms. For the rescheduling of refinancing and servicing of debt and unblocking lines of credit. It is believed that debt service put the government in a position where lesser attention and resources are allocated to core areas of the economy like education, health and poverty alleviation. It is also believed that debt weaken our trading position and our resources so we are unable to trade fairly. There is this notion that if we are to revive our country, we need to have respite from debt especially external debt.
1.3 Research Questions
This research seeks to investigate the impact of external debt on economic growth in
Nigeria and therefore tries to answer the following research questions:
- Does a long run relationship exist between external debt and economic growth in Nigeria?
- Is there causality between external debt and economic growth in Nigeria?
- What are the causes of Nigeria’s external debt burden?
1.4 Objectives of Study
The broad objective of this study is to ascertain the impact external debt burden has on economic growth in Nigeria.
Other specific objectives include:
- To determine long relationship between external debt and economic growth in Nigeria.
- To examine causality between external debt and economic growth in Nigeria.
- To identify the causes of external debt burden in Nigeria.
1.5 Research Hypotheses
The hypotheses to be tested in the course of this study include:
Hypothesis 1
- H0: There is no significant long run relationship between external debt and economic growth in Nigeria.
- H1: There is a significant long run relationship between external debt and economic growth in Nigeria.
Hypothesis 2
- H0: There is no causal relationship between external debt and economic growth inNigeria.
- H1: There is a causal relationship between external debt and economic growth inNigeria.
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 with data covering a period of 32 years i.e. 1980-2012. This period was chosen to cover the period after the oil collapse and also the post debt-relief era.
1.7 Significance of 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.
This study seeks to investigate the direct impact of external debt burden on economic growth in Nigeria by finding a long run and causal relationship between external debt and economic growth. This study is significant as its findings will provide a basis which will aid policy makers in proffering polices aimed at managing the debt crisis situation in Nigeria.
1.8 Research Methodology
The methodology adopted in this study is Co-integration analysis using the Augmented Dickey Fuller (ADF) unit root test, Johansen Co-integration and Vector Error Correction techniques of estimation which provides coefficient estimates of the time-series data used in analysis. It also carries out a causality test using Granger Causality test to check for a causal relationship between external debt and economic growth in Nigeria.
1.9 Data Sources
This study makes use of mainly secondary data obtained from World Bank reports, CBN statistical bulletins and reports, journals, articles, newspapers and other statistical sources.
1.10 Outline of Study
This study is divided into five chapters.
- Chapter 1 contains the general introduction which provides the background to the study, statement of problem, scope of the study, significance of study, objectives of the study, research questions, research hypotheses, research methodology as well as the data sources.
- Chapter two examines the works of other economists on the subject matter of external debt and it consists of conceptual and definitional issues, theoretical, empirical and methodological review and a summary of literature.
- Chapter 3 provides the theoretical framework of the study and the methodology employed. It also contains the specification and estimation of the model.
- Chapter four carries out a descriptive, trend and empirical analysis of the model estimated in chapter three.
- Chapter five contains the summary, conclusion and recommendations.
Chapter Five
Summary, Recommendations & Conclusion
5.1 Summary of Study
The aim of this study is to examine the impact of external debt on economic growth in Nigeria. This is done by examining the long-run and causal relationship between external debt and economic growth. The study carries out an empirical analysis to determine the relationship between the variables. This brought about a number of findings and these findings will provide recommendations for managing the debt situation in Nigeria all of which are outlined in this chapter.
5.2 Summary of Findings
5.2.1 Summary of Empirical Findings
The empirical analysis carried out revealed a significant long run relationship between real gross domestic product (LRGDP) and external debt service payments (LDSP) and Real Gross Domestic Product exchange rate (EXR) and an insignificant long run relationship between LRGDP and external debt stock (LEDS). Also the Granger causality test showed that external debt (LEDS) Granger causes economic growth (LRGDP) and economic growth (LRGDP) Granger causes external debt (LEDS).
5.2.2 Theoretical Findings
The result shows an inelastic relationship between Real Gross Domestic Product and External Debt Stock. A unit change in external debt will bring about a less than proportionate change in real gross domestic product.There is an inelastic relationship between Real Gross Domestic Product and External debt service Payments. A unit change in external debt service payments will bring about a less than proportionate change in real gross domestic product. There is a positive relationship between Real Gross Domestic Product and Exchange rate. A unit crease in exchange rate will bring about a 0.006284 increase in real gross domestic product.
5.3 Recommendations
Based on the above findings, the following recommendations are given:
Firstly, external debts should be contracted solely for economic reasons and not for social or political reasons. This is to avoid accumulation of external debt stock overtime and prevent an obscuring of the motive behind external debt.
Secondly, the authorities responsible for managing Nigeria’s external debt should adequately keep track of the debt payment obligations and the debt should not be allowed to pass a maximum limit so as to avoid debt overhang.
Lastly the Nigerian government should promote exportation of domestic products as a high exchange rate will make our goods more attractive in the foreign market and will increase foreign exchange earnings.
5.4 Conclusion
This study examined the impact of external debt on economic growth in Nigeria. The study sought out to find a significant long run and causal relationship between external debt and economic growth. Real gross domestic product was used as a proxy for economic growth which is the dependent variable while external debt stock, external debt service payments and exchange rate were the independent variables. External debt stock and external debt service payments were used to capture the external debt burden in Nigeria. The Johansen co-integration test was used to test the first hypothesis of no long run relationship between external debt and economic growth. The null hypothesis was accepted as the results showed no long run relationship between external debt and economic growth. The Granger causality test was used to test the second null hypothesis of no causal relationship between external debt and economic growth in Nigeria. The null hypothesis is rejected as the results show that there exist bi-directional causal relationship between external debt and economic growth. Based on these findings recommendations were given.
5.4.1 Limitations of Study
The researcher faced challenges in acquiring secondary data on some variables for Nigeria and as such these variables were exempted from the model.
5.4.2 Suggestions for further research
Further research should be done on the channels through which external debt may affect economic growth in Nigeria.


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