The Impact Of Foreign Loan And Foreign Investment On The Nigeria Economy

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The Impact Of Foreign Loan And Foreign Investment On The Nigeria Economy


Abstract


This study examined the impact of foreign loan and foreign investment on the Nigerian economy. Real gross domestic product was used as a proxy for economic growth which is the dependent variable while external debt stock, foreign direct investments and exchange rate were the independent variables. External debt stock and foreign direct investments were used to capture the economic situation 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.


Chapter One


Introduction

1.1 Background of the Study

In a word where nation are unequally endowed with human natural, financial resources, a high degree of interdependent do exist. No nation can therefore operate as an Island for survival may be impossible. This interpedently is so vital that it cuts across ideological and potential political lines. Hence we see, for instance trade between the Eastern and Western blocks despite their strong ideological differences.

Sustainable economic growth is a major concern for any sovereign nation most especially the Less Developed Countries (LDCs) which are characterized by low capital formation due to low levels of domestic savings and investment (Adepoju, Salau and Obayelu, 2007). It is expected that these LDC’s when facing a scarcity of capital would resort to borrowing from external sources so as to supplement domestic saving (Aluko and Arowolo, 2010; Safdari and Mehrizi, 2011; Sulaiman and Azeez, 2011). Soludo (2003) asserted that countries borrow for two broad reasons; macroeconomic reason that is to finance higher level of consumption and investment or to finance transitory balance of payment deficit and avoid budget constraint so as to boost economic growth and reduce poverty. The constant need for governments to borrow in order to finance budget deficit has led to the creation of Foreign Loan (Osinubi and Olaleru, 2006).

Foreign Loan and foreign investments are a major source of public receipts and financing capital accumulation in any economy (Adepoju et al, 2007). It is a medium used by countries to bridge their deficits and carry out economic projects that are able to increase the standard of living of the citizenry and promote sustainable growth and development. Hameed, Ashraf and Chaudary (2008) stated that external borrowing ought to accelerate economic growth especially when domestic financing is inadequate. Foreign Loan also improves total factor productivity through an increase in output which in turn enhances Gross Domestic product (GDP) growth of a nation. The importance of Foreign Loans and investments cannot be overemphasized as it is an ardent booster of growth and thus improves living standards thereby alleviating poverty.

It is widely recognized in the international community that excessive foreign indebtedness in most developing countries is a major impediment to their economic growth and stability (Audu, 2004; Mutasa, 2003). Developing countries like Nigeria have often contracted large amount of Foreign Loans that has led to the mounting of trade debt arrears at highly concessional interest rates. Gohar and Butt (2012) opined that accumulated debt service payments create a lot of problems for countries especially the developing nations reason being that a debt is actually serviced for more than the amount it was acquired and this slows down the growth process in such nations. The inability of the Nigerian economy to meet its debt service payments obligations has resulted in debt overhang or debt service burden that has militated against her growth and development (Audu, 2004). The genesis of Nigeria’s debt service burden dates back to 1978 after a fall in world oil prices. Prior to this occurrence Nigeria had incurred some minor debts from World Bank in 1958 with a loan of US$28million dollars for railway construction and the Paris Club debtor nations in 1964 from the Italian government with a loan of US$13.1 million for the construction of the Niger dam. The first major borrowing of US$1 billion known as the ”Jumbo loan” was in 1978 from the International Capital Market (ICM) (Adesola, 2009).

External borrowing has a significant impact on the growth and investment of a nation up to a point where high levels of Foreign Loan 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 Foreign Loan.

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 Foreign Loan 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 Foreign Loan stock follows an upward pattern over the years while the former is relatively stabilized (Ayad and Ayadi, 2008). Nigeria’s Foreign Loan 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 Foreign Loan 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 Foreign Loan 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 Okonjo Iweala, 2011).


1.2 Statement of Problem

Owing to such inequalities and independence, there is a constant flow of international resources from one country to another, particularly from surplus to deficit areas. There resources are transferred through many methods that sis foreign loans and investments both of which bring about economic development if well directed and utilized. “Huge Foreign Loan does not necessarily imply a slow economic growth; it is a nation’s inability to meet its debt service payments fueled by inadequate knowledge on the nature, structure and magnitude of the debt in question” (Were, 2011).

In the same vain a heavy influx of foreign investments is very good to economic growth.
My research study will focus on the impact of foreign loan and foreign investment on the Nigerian economy.


1.3 Aims and Objectives of the Study

  1. To examine critically the relationship between foreign loans and foreign investment to Nigeria.
  2. To examine causality between foreign loans, foreign investment and economic growth in Nigeria
  3. Find out the reason behind foreign loan and foreign investment in economic an industrial development of Nigeria.

1.5 Research Hypothesis

Ho: There is no long run relationship between foreign loan, foreign investment and economic growth

Ho: There is no causal relationship between foreign loan, foreign investment and economic growth in Nigeria.


1.5 Significance of Study

Foreign loans and foreign investment to Nigeria has been a matter of great concern to the Government of Nigeria.
This study seeks to investigate the direct impact of foreign loans and foreign investment ON economic growth in Nigeria by finding a long run and causal relationship between Foreign Loan 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 foreign loans and foreign investment situation in Nigeria.


1.6 Scope and Limitation of the Study

The study is expected to cover the research aspect, however due to time visit more banks and financial constraint of the research been due to the non-availability of some required materials to conduct the research work. in spite of these constraints, an attempt had been made to solve processes involved to the best of our knowledge. 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 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 Foreign Loan 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 and Conclusion

5.1 Summary of Study

The aim of this study is to examine the impact of foreign loan and foreign investment on the Nigerian economy. This is done by examining the long-run and causal relationship between foreign loan, foreign investment 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 economic situation in Nigeria.


5.2 Conclusion

This study examined the impact of foreign loan and foreign investment on the Nigerian economy. Real gross domestic product was used as a proxy for economic growth which is the dependent variable while external debt stock, foreign direct investments and exchange rate were the independent variables. External debt stock and foreign direct investments were used to capture the economic situation 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.


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