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PROJECT TOPIC AND MATERIAL ON IMPACT OF EXTERNAL DEBT ON ECONOMIC DEVELOPMENT OF NIGERIA
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- Name: IMPACT OF EXTERNAL DEBT ON ECONOMIC DEVELOPMENT OF NIGERIA
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The study examines the impact of external debt on the economic development of Nigeria. In line with the broad objective of the study, two specific objectives were examined viz: To determine the impact of external debt on economic development in Nigeria and to examine if there is a causal relationship between external debt and economic development in Nigeria. To achieve these, the study estimated an error model as well as a pairwise granger causality test. Time series data of human development index (HDI), external debt, exchange rate, money supply, interest rate differential and gross domestic product obtained from CBN Statistical bulletin and world economic indicators were used for the purpose of the analysis. The result of the analysis suggests that external debt has an inverse relationship with economic development in Nigeria and that there is no causal relationship between external debt and economic development in Nigeria. The study recommends that governments should borrow money domestically rather than externally and that government should ensure that borrowed funds are efficiently utilized in carrying out projects that will benefit the people.
- Background to the Study
The core objective of any nation is to achieve sustained economic development. This is because unlike economic growth, that refers to increases in a country’s production or income per capita, economic development refers to economic growth accompanied by changes in output distribution and economic structures. However, the poor saving habit of most developing countries creates a savings and investment gap which leads to paucity of funds to finance development projects by the governments thus, most countries resort to external borrowing as a means to bridging the financial constraint induced by savings investment gap (Umaru et al; 2015).
External debt is therefore defined as the stock of debt owed to non-residents, government, businesses, and institutions and payable in foreign currency, goods or services. External debt includes both short term debt with a maturity of one year or less; long-term debt with a maturity of more than one year. External debt includes public and publicly guaranteed debt as well as private debt (Obudah and Tombofa 2015).
The poor saving habit of most developing countries create a savings and investment gap which leads to paucity of funds to finance public projects by the governments. Thus, most countries resort to external borrowing as a means of bridging the financial constraint induced by the saving-investment gap. When external debt is productivity invested in viable projects with a higher rate of return than that of the interest on the loan, it serves as an engine of economic growth (Udeh, 2015).
In effect, for external debt to stimulate economic development it is a necessary and sufficient condition that it has to be properly managed. It follows that to ensure sustainability, borrowing such as Nigeria need to adopt efficient external debt management strategies, which entail carefully planned schedules of external debt acquisition, deployment and retirement (Iweala et al; 2013).
The history of Nigeria external debt dates back to 1958 when the sum of $28 million was contracted for railway construction. The next external Nigerian government borrowing was $1 billion referred to as “Jumbo loan” from the International Capital Market [ICM] which increased her total external debt to $22 billion. However, Nigeria’s debt profile witnessed a dynamic charge after 1978 following the world oil glut. Much pressure was then exerted on government finances and it became necessary to obtain more external debt for balance of payments support and financing of developmental projects (Aiyedogbon and Ohwojasa 2012) and (Nwagwu 2014)
The escalating external debt profile of Nigeria reached a maximum proportion in the 2003 when the country was to transfer as much as $2.3 billion to service her debts (Adekunle, 2013). According to Okonjo- Iweala, (Soludo and Kabadayi, 2012). the accumulated effect of the debt at maturity began to yield some serious strains on the nations macroeconomic indicators. For example, the naira depreciated, the nation’s foreign reserves and revenue declined while inflation and unemployment intensified (Adesola, 2014).
At this point, according to Soludo , the debt country was on the wrong side of the debt-laffer-curve, with debt crowding out investment, debt servicing was eating a major Chunk of the budget, and the economy was generally distressed.
Given the theoretically articulated benefit of external debt on economic development, the downturn in Nigeria’s economic development that accompanied her rising debt profile is therefore puzzling. It is either the theoretical linkage between external debt and economic development is wrongly conceived or that Nigeria’s country-specific characteristics generated contradicting conditions that not only frittered away the assumed benefits of external debt but induced growth impending effect on the economy (Amassoma 2016)
It is therefore imperative for an investigation to be carried out to solve the puzzle created by what appears to generate an inverse relationship between external debt and economic development as against the positive one articulated theoretically. This can be objectively achieved based on the empirical evidence of a thorough research which is the basic objective of this study.
1.2. Statement of Problem
The relationship between external debt and economic development in LDCs such as Nigeria has been of interest to researchers and policy makers for many years. This interest stems from the perceived consequences of external debt on some macroeconomic variables and ultimately on economic growth and development (Bakare, 2013)
According to data from the DMO, as of December 2015, Nigeria external debt stood at 2.11 trillion naira this however rose to about in 11.41trillion in 2016. Burdened with astronomically large external debt which is compounded further by exchange rate depreciation, high interest rate on loan and mismanagement of funds against this back drop economic growth and development have stagnated and in some cases even declined as the negative effect of the begin to site (Egbetunde 2015)
The deterioration in the economic fortune of Nigeria due to large external debt is rather surprising. It was expected that the external loans would be properly utilized for productive investment and the returns on them ploughed back into the economy and allow for timely debt repayments (Egbetunde 2014). It is for this reason that Ajayi and Iyoha (2015) in Amassoma (2013) posit that the issue of debt and lack of growth are clearly interrelated.
In their view (Ajayi, and Iyoha Ibid, 2012), excessive stock of debts retard growth and hamper the socio-economic development of sub-saharan countries. The large debt stock and crushing debt service burden have induced macroeconomic instability, sizeable adverse shock and economic retrogression. All in contradiction to the prediction of fast economic growth driven by external debt financing. (Umaru, 2013).”
This observed contradiction between external debt and economic development is a serious problem in the economic literature that requires extensive research to be resolved. This study is therefore carried out to achieve this objective. In addition, its empirical findings should generate new insight into the external debt economic growth nexus. Thus, it will fill the gap in the literature created by the observed puzzling evidence of inverse relationship between external debt and economic development. Hence the focus of this research is to resolve these research questions:
- What are the impact of external debt on economic development of Nigeria?
- What are the direction of causality between debt and economic development of Nigeria?
- Objectives of the Study
The broad objective of the study is to examine the impact of external debt on economic development. The specific objectives are;
- To determine the impact of external debt on economic development of Nigeria.
- To determine the direction of causality between debt and economic development of Nigeria.
- Research Hypotheses
The following hypothesis will be stated in null form,
H0: External debt has no significant impact on economic development of Nigeria.
H1: External debt has significant impact on economic development of Nigeria.
H0: There is no direction of causality between debt and economic development of Nigeria.
H1: There is direction of causality between debt and economic development of Nigeria.
- Significance of the Study
The study will examine the impact of external debt on economic development of Nigeria. The study will be of immense benefit to the following group;
National planning committee: The findings and recommendations of the research work will assist members of National planning committee in proper planning on how to reap the country of external debt burden that country owe to other countries and international organization like Paris club.
Government: The study will also assist Government in utilizing the external debt borrowed in the key sectors of the economy.
Private firms: To private firm, the study will assist manager in knowing which sector of economy to invest.
Policy makers: The study will assist policy maker in formulating policy that assist the country in proper utilization of the external debt and external debt payment in the county.
Students: To students, the study will serve as conceptual guide to incoming students in the same field of study.
- Scope of the Study
The study will focus on the impact of external debt on economic development of Nigeria. The study will cover from 1985 to 2016. Annual time series data will be sourced from the Central Bank of Nigeria Statistical Bulletin will be used for the analysis. Variables to be used include external debt, real gross domestic product (RGDP), exchange rate, interest rate differential, Money supply and economic development (proxied by human development index).
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