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  • Name: THE EFFECT OF EXTERNAL DEBT ON THE NIGERIA ECONOMIC GROWTH (1989-2010)
  • Type: PDF and MS Word (DOC)
  • Size: [435 KB]
  • Length: [50] Pages

CHAPTER ONE

INTODUCTION
1.1 BACKGROUND OF THE STUDY
The accumulation of external debt is a common phenomenon of the third
World countries at the stage of economic growth and development where the
supply of domestic savings is low, current account payment deficit is high and
import of capital is needed to increase domestic resources.
The management of Nigeria’s external debt has been a major macroeconomic
problem especially since the early 1980s. For many years now, the country’s
debt has been growing in spite of the efforts being made by the Government
to manage and minimize its crushing effects on the nation’s economy. Such
efforts range from the various refinancing and restructuring agreements to
debt conversion programme and the deliberate allocation of substantial
resources 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.
In recent years, however, some observers have held different perceptions
about Nigeria’s capacity or otherwise to service her debt. This is largely
because of the improved income to the country arising from export of crude
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oil, Nigeria’s major export. Moreover others have argued that bad governance,
especially during the military rule,largely accounted for the mismanagement of
the Nigerian economy and therefore, the people should bear the brunt.
Whatever position one holds, what appears undisputableis the increasingly
large debt service requirement which imposes considerable stress on the
Nigerian economy even when the improved resource inflow is factored into
the country’s cash flows. Indeed, the issue of sustainability of Nigeria’s debt
profile continued to be the focus of research and public debate until the recent
initiative of the Paris Club of Creditors which appears to address the issue in a
more meaningful way.
Even then the conditions and adequacy of the debt relief have continued to
generate further debate.
The objective of this paper is to review Nigeria’s external debt and the burden
it imposes, and use the various indicators and prevailing global economic
circumstances to justify the need for substantial debt relief for the country.
However, during the late 70s and early 80s, commercial banks began
playing a big role in international lending by recycling surplus OPEC
‘’petrodollars’’ and issuing general purpose loans to less developed countries
to provide balance of payment support and expansion of export sectors. While
foreign borrowing can be highly beneficial providing the resources necessary to
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promote economic growth and development, it has its cost. In recent years,
these costs have greatly outweighed the benefits for many developing nations.
The main cost associated with the accumulation of a large external debt is
‘’debt serving’’.
Debt servicing is the payment of liquidation of the principal and
accumulated interest. It is a contractually fixed exchange on domestic real
income and savings as the debt grows or as interest rate raise. Debt service
payment must be made with foreign exchange. In other words, debt service
obligation can be met only through export earnings.
However, should the composition of import change or should the
composition of export change or should interest rate rise causing ballooning of
debt service payment or should export earnings diminish, debt servicing
difficulties are likely to arise. This has been the experience of most of the
heavily indebted third World nations.
In order to solve the problem, several external debt-financing options were
adopted under the Structural Adjustment Programme (SAP) in 1986. Since the
introduction of this programme, Nigerians have been plunged into one
hardship after another ranging from the devaluation of the naira through
Second Tie Foreign Exchange Market (SFEM) now Foreign Exchange Market
(FEM) to the rising prices of commodities, inflation etc. SAP as an economic
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restructuring program is capable of alleviating the country’s debt trap, a
miracle Nigerian’s are waiting to see.
Specifically, as part of the programmatic approach to reduce the burden of
external debt, embargo on new loans, limit on debt service payment, debt
restricting and debt conversion have been adopted in recent years.
1.2 STATEMENT OF THE PROBLEM
The aim of any well-co-ordinated and articulated economic policy is to
achieve a sustained economic growth and development. However, a proper
understanding of what development is will enable a policy maker to formulate
appropriate policies for the acceleration of economic growth. In other words,
the nature of the development policy of a country will depend on how policy
makers of the country perceive growth.
The insistence of the need of external assistance obscures the necessity for
the people of poor countries themselves to develop the facilities, attitudes and
institutions which are required if these societies are to achieve sustained
substantial material process. Indeed, these insistences are external aids to help
perpetuate the ideas and attitude widespread in these countries which are
changing the economic progress.
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The rapid growing foreign debt, its consequent payment problem and lack of
appropriate debt management has plummeted the country into a turbulent
economic crisis, balance of payment problem, foreign exchange sequence
scarcity of essential items ( including raw materials and spare parts) which led
to the closure of many factories, retrenchment of workers, high rate of
unemployment and underemployment. Embarking on productive ventures for
instance led to waste of resources and of course, poor economic performance.
1.3 OBJECTIVE OF THE STUDY.
The objectives of the study include:
I) To determine the relationship between external debt and economic
growth in Nigeria.
II) To determine the impact of external debt on the economic growth in
Nigeria.
III) To examine the size and trend of external debt on the economic
growth in Nigeria.
1.4 RESEARCH HYPOTHESIS
I) H0: There is no relationship between external debt and economic growth in
Nigeria.
ii) H0: There is no impact of external debt on economic growth in Nigeria.
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iii) H0: External debt has no trend and size on the economic growth in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY.
The significance of the study has to do with the impacts or effects of the study
on the people. Therefore, the significance of this study seeks to highlight on
the following factors:
I) The study serves as a guide for future governmental policy on debt
minimization and control.
ii) Also the study will bring to notice on the entire citizens the impact of the
external debt on the welfare and living standard.
1.6 SCOPE OF THE STUDY
The project covers the structures of Nigeria’s external debt, its
management techniques and some factors that contributed to the huge debt.
The time frame of this project is 1989-2009 was chosen because it allows an
analysis of the Structural Adjustment Programme (SAP) which was at this
period, partly solve the debt crisis and partly foster sustainable economic
growth.

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1.7 LIMITATIONS OF THE STUDY
This study is basically restricted to the effect of external debt on the
Nigeria economy growth. The research was not able to gather all the necessary
materials from all the secondary sources needed for the study due to
unforeseen circumstances resulting from time and financial constraints.

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