The Impact Of External Debt On Nigeria Economy

Project and Seminar Material for Economics

The Impact Of External Debt On Nigeria Economy


This study sought to investigate the impact of external debt on the Nigerian economy within a span of 1989-2019. In all, the models were to show the growth relationship between the independent variables-inflation rate, exchange rate, interest rate, government expenditure, external debt stock and external debt service and the dependent variable-gross domestic product (GDP). The data were collected from CBN Statistical Bulletin 2020 and the Debt Management Office (DMO) quarterly report. The Engle & Grenger Cointegration and Ordinary Least Square (OLS) were employed in the cause of this study. The Augmented Dickey Fuller test (ADF) shows that the variables are stationary and reliable for forecasting. The result of the analyses showed that rising external debt stock inhibits the pace of economic growth of Nigeria by increasing the cost of its servicing beyond the debt sustainability limit while external debt servicing was found not to impair economic growth. Summary and policy recommendations were presented in line with our stated objectives and facts then conclusions were made. It was found that external debt stock rises rapidly due to accrued compound interest and loans were secured for dubious projects. Part of the policy recommendations were that Nigeria should increase its export base by investing borrowed funds in productive ventures and she should also seek fixed interest payment, varying amortization schemes and multi-year rescheduling.

Table of Content

Chapter One

1.0 Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of Problem
  • 1.3 Research Objectives
  • 1.4 Research Questions
  • 1.5 Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Definition of Terms
  • 1.8 Organization of the Study

Chapter Two

2.0 Literature Review

  • 2.1 Conceptual Framework
  • 2.2 Concept of Food Security
  • 2.3 Food Availability, Stability of Food Supplies, Food Access and Food Utilization
  • 2.4 Challenges and Prospects of Food Security in Nigeria
  • 2.5 The African Food Crises and the Global Response
  • 2.6 Agricultural Cooperatives: Their Nature and Role in Food Security

Chapter Three

3.0 Research Methodology

  • 3.1 Design of the Study
  • 3.2 Area of the Study
  • 3.3 Sample and Sampling Technique
  • 3.4 Instrument for Data Collection
  • 3.5 Validation and Reliability of the Instrument
  • 3.6 Method of Data Collection
  • 3.7 Method of Data Analysis

Chapter Four

4.0 Results and Discussion

  • 4.1 Results
  • 4.2 Discussion

Chapter Five

5.0 Summary, Conclusion and Recommendations

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendations
  • References
  • Appendix

Chapter One

1.0 Introduction

1.1 Background of the Study

It is generally expected that developing countries, facing a scarcity of capital, will acquire external debt to supplement domestic saving (Malik et al, 2010; Aluko and Arowolo, 2010). Besides, external borrowing is preferable to domestic debt because the interest rates charged by international financial institutions like International Monetary Funds (IMF) is about half to the one charged in the domestic market (Pascal, 2010). 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. Adepoju et al (2007) stated that debt financed investment need to be productive and well managed enough to earn a rate of return higher than the cost of debt servicing

The main lesson of the standard “growth with debt” literature is that a country should borrow abroad as long as the capital thus acquired produces a rate of return that is higher than the cost of the foreign borrowing. In that event, the borrowing country is increasing capacity and expanding output with the aid of foreign savings. The debt, if properly utilised, is expected to help the debtor country’s economies (Hameed et al, 2008) by producing a multiplier effect which leads to increased employment, adequate infrastructural base, a larger export market, improved exchange rate and favourable terms of trade. This has never been the case in Nigeria and several other sub-Saharan African Countries (SSA) where it has been misused (Aluko and Arowolo, 2010). Apart from the fact that external debt had been badly expended in these countries, the management of the debt by way of service payment, which is usually in foreign exchange, has also affected their macroeconomic performance (Aluko and Arowolo, 2010; Serieux and Yiagadeesen, 2001).

Prior to the $18 billion debt cancellation granted to Nigeria in 2005 by the Paris Club, the country had external debt of close to $40 billion with over $30 billion of the amount being owed to Paris Club alone (Semenitari, 2005a). The history of Nigeria’s huge debts can hardly be separated from its decades of misrule and the continued recklessness of its rulers. Nigeria’s debt stock in 1971 was $1 billion (Semenitari, 2005a). By 1991, it had risen to $33.4 billion, and rather than decrease, it has been on the increase, particularly with the insurmountable regime of debt servicing and the insatiable desire of political leaders to obtain loans for the execution of dubious projects (Semenitari, 2005a).

Before the debt cancellation deal, Nigeria was to pay a whopping sum of $4.9 billion every year on debt servicing (Aluko and Arowolo, 2010). It would have been impossible to achieve exchange rate stability or any meaningful growth under such indebtedness. The effect of the Paris Club debt cancellation was immediately observed in the sequential reduction of the exchange rate of Nigeria vis-à-vis the Dollar from 130.6 Naira in 2005 to 128.2 Naira in 2006, and then 120.9 in 2007 (CBN, 2009). Although the growth rate of the economy has been inconsistent in the post-debt relief period as it plunged from 6.5% in 2005 to 6% in 2006 and then increased to 6.5% in 2007 (CBN, 2008), it could have been worse if the debt had not been cancelled.

However, the benefits of the debt cancellation, which was expected to manifest after couple of years, was wiped up in 2009 by the global financial and economic crisis, which was precipitated in August 2007 by the collapse of the sub-prime lending market in the United States. The effect of the crisis on Nigeria’s exchange rate was phenomenal as the Naira exchange rate vis-à-vis the Dollar rose 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 attributable to the sharp drop in foreign earnings of Nigeria as a result of the persistent fall of crude oil price, which plunged from an all-time high of US$147 per barrel in July 2007 to a low of US$45 per barrel in December 2008 (CBN, 2008).

Available statistics show that the external debt stock of Nigeria has been on the increase after the debt cancellation in 2005. The country’s external debt outstanding increased from $3,545 million in 2006 to $3,654 million in 2007, and then to $3,720 million and $3,947 in 2008 and 2009 respectively (CBN, 2009). It is therefore imperative to examine the effect of external debt of the country on her economy for us to appreciate the need to avoid being back in the group of highly indebted nations.

1.2 Statement of Problem

The huge external debt stock and debt service payments of African countries and Nigeria in particular prevented the countries from embarking on larger volume of domestic investment, which would have enhanced growth and development (Clements, etal. 2003). External debt became a burden to most African countries because contracted loans were not optimally deployed, therefore returns on investments were not adequate to meet maturing obligations and did not leave a favourable balance to support domestic economic growth. So, African economies have not performed well because the necessary macro-economic adjustment has remained elusive for most of the countries in the continent. The main interest of this study then is to investigate the impact of external debt on the Nigerian economy.

1.3 Research Objectives

The purpose of this study is to investigate the impact of external debt on the Nigerian economy. Specifically, the objectives include:

  1. To assess the effect of increase in external debt on the Nigerian economy
  2. To examine the effect of loans from the external debt sources on the Nigerian economy
  3. To examine the effect of external debt services on Nigeria’s per capita Gross Domestic Product (GDP).
  4. To examine the effect of external debt stock on the standard of living inthe Nigerian economy

1.4 Research Questions

This project is designed to tackle the following reach questions;

  1. What is the effect of increase in external debt on the Nigerian economy?
  2. What is the effect of loans from the external debt sources on the Nigerian economy?
  3. What is the effect of external debt services on Nigeria’s per capita Gross Domestic Product (GDP)?
  4. What is the effect of external debt stock on the standard of living inthe Nigerian economy?

1.5 Research Hypothesis

The following hypotheses were formulated to guide the study the hypothesis is to be tested at 0.5 alpha levels.

  • H1. Increase in external debt stock does not have significant positive effect on economic growth and vice versa.
  • H2. The application of loans borrowed from each of the external debt sources has no significant positive effect on Nigeria’s economic growth
  • H3. External debt services have no significant positive effect on per capita Gross Domestic Product (GDP) at current market prices.
  • H4. The nation’s external debt stock does not have significant positive effect on the standard of living in Nigeria.

1.6 Significance of the Study

This study is focused on providing alternative measures to tackling external debt management problems. It will also serve as a tool in revamping government policies towards loan procurement and debt servicing in Nigeria. This work may also serve as a yardstick for further research and documentation on Nigeria’s external debt crisis.

1.7 Definition of Terms

External Debt:

Is the portion of a country’s debt that is borrowed from foreign lenders, including commercial banks, governments, or international financial institutions. These loans, including interest, must usually be paid in the currency in which the loan was made.

Economic Growth:

Can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy over time. Statisticians conventionally measure such growth as the percent rate of increase in the real gross domestic product, or real GDP.


Have a strong effect on someone or something.

1.8 Organization of the Study

This study is divided into five chapters. The first chapter is the introduction which contains the background, research problems and objectives. The second chapter is the literature review and the third chapter is the research methodology. In the fourth chapter, the researcher analyses the data and discusses the results. The fifth chapter is the last chapter which presents the summary, conclusion and recommendations.

Chapter Five

5.0 Summary, Conclusion and Recommendations

5.1 Summary

Specific findings of the study are as follows:

  1. Aggregate external debt stock in Nigeria could not offer sufficient reasons for changes in Nigerian GDP over the period and also it does not have a significant positive effect on economic growth in Nigeria.
  2. The application of loans from the Paris Club has positive but insignificant effect on economic growth; application of loans borrowed from the Multilateral has positive and significant effect on economic growth; external debt sourced from the London Club has significant but negative effect on economic growth. External debts sourced from bilateral creditors had significance positive effect on economic growth. The overall effect shows that external debt stock borrowed from the various creditors has significant effect on economic growth in Nigeria.
  3. External debt services paid out over the years have insignificant negative effect on economic growth in Nigeria.
  4. External debt has a negative and significant effect on the standard of living in Nigeria. This implies that external debt stock has contributed significantly in degrading the standard of living in Nigeria.

5.2 Conclusion

External sector financing has remained one of the avenues through which nations (developed, developing and under developed) finance their budget gaps. The main essence for such borrowing is to develop the critical sectors of the economy and also improve the standard of living of her citizens. If the loan is applied judiciously and the investment climate is favourable, it will produce a leverage condition that will add to the creation of value chain within the context of the domestic economy. Against this backdrop, the study in the main sought to assess the effect of external debt on economic growth in Nigeria, and found among others that the effect of aggregate external debt stock on the nation’s GDP was not statistically significant; more than 60% of changes in GDP were captured by the disaggregated analysis of external debt stock as external debt services failed to explain changes in economic growth; there was no significant positive effect of external debt services on economic growth and the nation’s external debt stock contributed significantly in degrading the standard of living in Nigeria.

5.3 Recommendations

  1. The aggregate contribution of external debt stock is positive but not significant. Nigeria should review her external debt policies in line with the desire to increase the productive base of the economy and enjoy a leveraged advantage. If the application of the loan stock is done wisely, it will contribute to value creation.
  2. The contributions of the debt stock from the Multilateral, and Bilateral creditors are positive and significant to economic growth. Nigeria should sustain this form of relationship and ensure that Bilateral and Multilateral relationships are established among nations especially by making export of goods a top priority of the government
  3. Aggregate external debt services could explain only 30% of changes in economic growth. Also, there is negative and significant effect of debt services on economic growth in Nigeria. The debt service obligations do not seem to align properly with the debt stock in terms of their effects on economic growth. Nigeria should therefore review her debt management policies to fall in line with the objective to deepen the economy and avoid the debt overhang syndrome that characterised Nigeria’s debt management initiatives before the final exit from the Paris Club.
  4. The contributions of external debt stock to improvement in the standard of living is significant, but negative. The DMO should consider developing a template that could incorporate the human development index (education, per capita income and health) as a variable to measure economic growth.

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