IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
One of a country’s primary macroeconomic goals is to achieve long-term economic growth. To achieve this goal, every government will need a significant amount of capital finance in the form of investment in infrastructure and productive capacity development (Umaru, Hamidu and Musa, 2013). As a result, their gross domestic product (GDP) grows, which, if sustained, should lead to economic development, a goal shared by all less developed countries (LDCs), including Nigeria. However, Ayadi and Ayadi (2008) observe that the amount of capital available in most developing countries’ treasuries is grossly insufficient to meet their economic growth needs, owing to low productivity, low savings, and a high consumption pattern. To bridge the resource gap, governments resort to borrowing from outside the country.
Countries borrow to promote economic growth and development by fostering an environment that encourages people to invest in various sectors of their economies (Umaru et al, 2013). Similarly, Obudah and Tombofa (2013) argued that countries may borrow for a variety of reasons, including the ability to finance their recurring budget deficit, as a means of deepening their financial markets, to fund increasing government expenditures, to supplement their limited revenue sources, and to improve their low output productivity, which results in poor economic growth. Governments borrow to supplement their limited resources in order to bridge the savings-investment gap, according to Chenery’s (1966) Dual-gap theory.
According to the Keynesian school of thought, government borrowing can be used to promote economic growth by financing government deficits.
Spending that stimulates aggregate demand and, as a result, encourages an increase in private investment. However, excessive public debt can result in a significant debt burden for the country. According to Okonjo-Iweala et al (2013), once a country’s initial stock of debt reaches a certain threshold, servicing it becomes a burden, and the country finds itself on the wrong side of the Debt Laffer Curve, with debt crowding out investment and growth. According to Bakare (2011), a country’s indebtedness does not necessarily slow growth; rather, it is the country’s inability to optimally utilize these loans to foster economic growth and development, as well as ensure effective debt servicing, that limits the benefits derivable from borrowed capital resources.
Debt, arguably, remains one of the major economic challenges confronting the world today.
Governments in low-income countries have drawn the attention of international financial institutions and bilateral lenders due to their persistent budget deficit. According to Udeh (2013), this has resulted in the adoption of several initiatives aimed at alleviating the debt burden, which continues to impede the economies of the majority of highly indebted poor countries (HIPCs). These initiatives range from debt rescheduling to debt cancellation outright.
Nigeria’s external debt can be traced back to the pre-independence period, though it was minimal until 1978, when the first Jumbo loan of more than $1.0 billion was raised from the International Capital Market (ICM)[Debt management office (DMO, 2004)]. However, since 1977, the country’s debt stock has been on a downward trend. steady increase from $0.763 billion in 1977 to $5.09 billion in 1978 and $8.65 billion in 1980, a 73.96 percent increase (DMO, 2004). This was later increased to $35.94 billion in 2004. Following debt relief in 2006, Nigeria was able to offset a significant portion of its debt, but this later began to rise. According to Amaefule (2015), Nigeria’s total debt stock stood at N12.4 trillion in December 2014.
1.2 Statement of the Problem
Nigeria, like most heavily indebted poor countries, has low economic growth and per capita income, with domestic savings insufficient to meet developmental and other national objectives. Nigerian exports were primarily primary commodities, with export earnings insufficient to finance imports, which were predominantly capital-intensive (manufactured) goods that were comparably more expensive (Siddique, Selvanathan and Selvanathan, 2015). The discovery of oil has exacerbated Nigeria’s transition to a mono-economy. The oil sector generates about 95% of foreign exchange earnings and about 80 percent of budgetary revenue. Nigeria’s inability to diversify its revenue sources, combined with corruption and mismanagement, forces it to have insufficient funds for growth and development projects such as roads, electricity, piped water, and so on.
Nigeria as a country
To liberalize her economy and boost GDP growth, the developing country implemented a number of policies, including the Structural Adjustment Programme (SAP) of 1986. To ensure the implementation of these policies, the government embarked on massive borrowings from multilateral sources, resulting in a high external debt service burden, and Nigeria was classified by the World Bank as a heavily indebted poor country (HIPC) by 1992.
Furthermore, despite the massive debts that Nigeria has accumulated over the years in order to achieve economic growth and development, high unemployment, poverty, and a low standard of living remain prevalent in the country, as observed by Aiyedogbon and Ohwojasa (2012) and Nwagwu (2012). (2014). Incapability to
Nigeria’s inability to effectively meet her debt obligations has a negative impact on the economy, as interest arrears accumulate over time, resulting in a much larger debt burden on the nation and a greater percentage of her revenue being spent on debt service arrears.
According to Audu (2004), the debt service burden has continued to impede Nigeria’s rapid economic development and exacerbated social problems because debt servicing crowds out investment and growth. Furthermore, Pattilo et al. (2002) claim that debt has a positive effect on growth at low levels, but that as debt accumulates, it begins to have a negative impact on growth.
As a result, the need to conduct the current study in order to meticulously examine the External debt liability has an economic impact in Nigeria.
1.3 Objectives of the Study
The overall goal of this research is to look into the economic impact of external debt liability in Nigeria. The specific goals are as follows:
i. To assess the impact of external debt on Nigeria’s Gross Domestic Product (GDP).
ii. To investigate the impact of external debt servicing on Nigeria’s gross domestic product.
iii. Determine the effect of the exchange rate on Nigeria’s Gross Domestic Product.
1.4 Research Questions
The following research questions will guide this study:
i. What is the impact of external debt on Nigeria’s Gross Domestic Product (GDP)?
ii. How does external debt servicing affect Nigeria’s Gross Domestic Product?
iii. How does the exchange rate affect Nigeria’s Gross Domestic Product?
1.5 Research Hypotheses
The following hypotheses will be tested by the researcher:
1st Hypothesis:
Ho: External debt has no significant impact on Nigeria’s Gross Domestic Product (GDP).
HI: External debt has a significant impact on Nigeria’s Gross Domestic Product (GDP).
Hypothesis number two:
Ho: In Nigeria, there is no statistically significant relationship between external debt servicing and GDP.
HI: In Nigeria, there is a significant relationship between external debt servicing and GDP.
3rd Hypothesis:
Ho: In Nigeria, there is no significant relationship between the exchange rate and the GDP.
HI: In Nigeria, there is a significant relationship between the exchange rate and the GDP.
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