The Economic Implication Of Increasing External Debt Liability In Nigeria

The Economic Implication Of Increasing External Debt Liability In Nigeria

External Debt

The operation of Nigeria’s external debt has been a major macroeconomic problem especially since the early 1980s. For numerous times now, the country’s debt has been growing in malignancy of the sweats being made by the Government to manage and minimize its crushing goods on the nation’s frugality. similar sweats range from the colorful refinancing and restructuring agreements to debt conversion programme and the deliberate allocation of substantial coffers towards servicing the debt. Of particular concern to the authorities, is the heavy debt burden it imposes when compared with the country’s debt service capacity( Ogunlana, 2005).

previous to 1978, the position of Nigeria’s external debt was veritably low, standing at about$3.1 billion and represented slightly6.2 percent of GDP. still, by1977/1978 when Nigeria endured a temporary decline in oil painting bills, the first Goliath loan of$1.0 billion was raised from the International Capital Market( ICM) with grace and prepayment ages of three and eight times, independently, and a fairly high rate of interest,( LIBOR1.0 percent) compared with the living debts that were largely from the multinational and concessional sources with long maturity period and other more generous terms of prepayment. At the peak in medial – 1989, LIBOR was13.0 per cent. That loan was followed by the alternate Goliath loan of$ 750 million in1978/1979.

Between1979/1980, there was an over- turn in the global oil painting request which bettered Nigeria’s foreign exchange flux. The relaxation of profitable policy measures and the relinquishment of deflationary measures urged massive importation of goods and services which brought about rapid-fire reduction of reserves. Shortly later, the global oil painting request witnessed serious glut which brought down the price of crude oil painting with the attendant ruinous impact on the Nigerian frugality.

The thinking that the oil painting glut would be short- lived urged both the countries and the Federal Government to engage in external borrowing. They flagrantly traduced Decree 30 of 1978 which fixed the limit of external borrowing at N5.0 billion US($8.3 billion) and embarked on undiplomatic and massive external borrowing from the ICM to finance all feathers of systems. also, the massive importation which prevailed and the magpie allocation of import license with total casualness to the position of reserves and capacity to pay, redounded in massive figure up of trade arrears for both ensured and uninsured trade credits( Ogunlana, 2005).

Indeed, the reality and the magnitude of Nigeria’s debt problem didn’t dawn on the country until 1982 when creditors refused to open new lines of credit. This led the country to seek relief in the form of refinancing of the trade arrears. The first of similar exercise was in 1983 covering outstanding letters of credit as at 13th July, 1983 for$2.1 billion. By 1988, the terms of Promissory Notes issued for trade credits were reasoned and the total value of notes issued added up to$4.8 billion.

Accordingly the position of external debt rose fleetly from$9.0 billion in 1980 to$17.8 billion and$25.6 billion in 1983 and 1986 independently. The position of debt had since risen to$35.9 billion by the end of 2004 despite all the disbursements, deliberate policy of drastic abridging of farther external borrowing and the colorful debt operation strategies espoused, including debt conversion and buy- back.

These developments fully altered the structure and character of Nigeria’s external debt from largely concessional sources of long maturity to short/ medium with tough prepayment terms. Of the total debt outstanding, the value and share of the Paris Club debt increased precipitously from$5.8 billion or33.5 per cent in 1984 to$21.7 billion or66.5 per cent and$30.8 billion or85.8 per cent in 1995 and 2004 independently. On the negative, the share of multinational debt as well as private debt( promissory notes and London Club Banks) have declined persistently over the times from a aggregate of$11.5 billion or66.5 per cent in 1984 to slightly$5.1 billion or14.2 per cent in 2004.

The deliberate policy of the government to limit farther borrowing, including from concessional sources, the strict compliance with the prepayment terms of multinational loans as well as the deal regarding London Club debt which nearly handed total result to similar debt, reckoned for the declining trend in the stock of debt owed to these sources. On the other hand, the conditions and terms of debt cataloging with the Paris Club assessed delicate conditions which didn’t only make prepayment delicate, and extremely tight, but made the debt possessed to this source to grow fleetly over the times. Paris Club debts are sanctioned bilateral debt and import credit which were guaranteed by colorful Export Credit Agencies( Abrego and Ross, 2001).