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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). Economic theory suggests that reasonable levels of borrowing by a developing country are likely to enhance its economic growth (Pattillo, Ricci, and Poirson 2002). When economic growth is enhanced (at least more than 5% growth rate) the economy’s poverty situation is likely to be affected positively. In order to encourage growth, countries at early stages of development like Nigeria borrow to augment what they have because of dominance of small stocks of capital hence they are likely to have investment opportunities with rates of return higher than that of their counterparts in developed economies. This becomes effective as long as borrowed funds and some internally ploughed back funds are properly utilized for productive investment and do not suffer from macroeconomic instability, policies that distort economic incentives, or sizable adverse shocks. Growth therefore is likely to increase and allow for timely debt repayments. When this cycle is maintained for a period of time growth will affect per capita income positively which is a prerequisite for poverty reduction. These predictions are known to hold even in theories based on the more realistic assumption that countries may not be able to borrow freely because of the risk of debt denial.
Soludo (2003), opined that countries borrow for two broad categories: macroeconomic reasons [higher investment, higher consumption (education and health)] or to finance transitory balance of payments deficits [to lower nominal interest rates abroad, lack of domestic long-term credit, or to circumvent hard budget constraints]. This implies that economy indulges in debt to boost economic growth and reduce poverty. He is also of the opinion that once an initial stock of debt grows to a certain threshold, servicing them becomes a burden, and countries find themselves on the wrong side of the debt-laffer curve, with debt crowding out investment and growth. This seems to be the position of Nigeria today because investment, which will accordingly result to high-speed growth with a positive effect on poverty, is moving sporadically in both positive and negative directions.
The history of Nigeria external debt dates back to 1958 when the sum of $28 million was contracted for railway construction. Prior to 1978, the Nigeria external debt was not much and was sustainable. The Central Bank of Nigeria (CBN) report in 1989 stated that 91.4% of the debt came from official sources and were the concessionary types of loans from bilateral and multilateral agencies. Then, much importance was not attached to debt management by Nigeria Government (Eyiuche, 2003), not only that the economy then had a magnificent growth following the oil boom of the 70’s Nigeria foreign debt profile witnessed a dynamic change after 1978 following the world oil glut. Much pressure was then exerted on government finances and it became necessary to borrow for balance of payment support and financing of developmental project.
The first major federal government borrowing of US $1 billion from the international capital market (ICM) was referred to as “Jumbo loan” increasing her total external debt to $22 billion. The condition worsened between 1981 and 1982 as various government agencies and state governments resorted to deficit budgeting partly financed through external loans secured from private sources under stiffen conditions (CBN, 1989). The Debt Management Office (DMO) annual report and account (2001) reflected a 13.8% fall of official debt sources in favour of the private debt sources which rose again to an average of 82%. Trade arrears emerged by the end of 1982 constituting a large portion of the total external debt of the nation. The jumbo loan of 1987 was supported by the promulgation of decree No 30 of the 1978 which limited the external loans that the Nigerian government could raise to $5 billion.The increase in the size of Nigerian external debt was due to the preponderance of borrowing from international agencies and countries at non concessional interest rate. This borrowing came as a result of the decline in oil earnings from the late 70’s and the emergence of high trade arrears due to inability of the country to neither easily produce nor foot the bills of importation of the needed goods and services.
In the first decade of political independence, the magnitude of external loans was minute, the rate of interest concessionary, the maturity was long-term, and the source was usually bilateral or multilateral (Ayadi and Ayadi, 2008). For much of the 1970s up to the mid-2000s, Nigeria’s external indebtedness grew phenomenally. In 1977, external debt was ₦496.9 million. This leapt by over 205 per cent to ₦1, 265.7 million in 1978 following the contraction of a “Jumbo Loan” from the International Capital Market). By 1982, external debt outstanding had reached ₦8, 819.4 million, climbing to ₦133, and 956.2 million in 1988. Total external debt stock recorded ₦240, 033.6 million in 1989, ₦648, 813 million in 1994 and ₦3, 097,383.8 million in 20002. With massive debt outstanding, debt service obligations soared as a result of rising interest rates in the international money market, declining grace periods and small grant element. This placed enormous pressure on the country’s foreign exchange and constrained import of raw materials and capital goods for domestic productive activities and, consequently, undermined growth (Ajayi, 1991, Iyoha, 1999).
Nigeria’s external debt declined considerably following the Paris Club debt exit in 2006, which led to US$18billion pay-out from an existing debt value of about US$36billion considered to be at a crisis level. This freed up colossal sums devoted to debt servicing and repayments and positioned the country to concentrate on the task of social and economic development. Indeed, the fortuitous gains from the debt relief estimated at US$1 billion annually, three quarters of which accrues to the federal government and one quarter to the states, were pooled into a Poverty Fund and channeled into specific investments to hasten the attainment of the Millennium Development Goals.
More recently, there has been heightened concern about the country’s rising debt and the implications for economic growth. The total external debt outstanding rose from $3.72bn in 2008 to $6.53bn in 2014. However, the percentage of external debt service in the same period plummeted from 11.46 per cent to 5.96 per cent (DMO, 2014). In December 31 2014, external debt stood at $6.5 billion, while more recent data (July, 2014) shows that external debt stands at US$9.35 billion. In the 2012, 2013 and 2014 budgets, ₦46.1 billion, ₦48.39 billion and ₦48.39 billion respectively were allocated to external debt services while the Medium Term Expenditure Framework and Fiscal Strategy Paper for 2014-2016 allocates ₦48.39 billion and ₦48.39 billion to debt service in 2015 and 2016 (MTEF, 2014). The National Assembly also approved a total of $7.109 billion for the federal and state governments under the 2012-2014 Medium Term External Borrowing Plan in December 2012 to fund pipeline projects in the country, which would raise the country’s foreign debt to $13.7 billion. Moreover, the government planned as part of 2013 appropriation to borrow the sum of $1 billion from the International Capital market.
From the foregoing, it is obvious that for the past three decades, Nigeria has borrowed large amounts, often at highly concessional interest rates, with the hope to put them on a faster route to development through higher investment, faster growth and poverty improvement but on the contrast economic growth and poverty situations are staggering at the back door amidst excess debt, albeit that was the initial intention. It is then obvious that the Nigerian indebtedness has gone beyond such limits and it is noteworthy if such limit is dictated to help the economy in their pursuit towards debt free or less debt burden that will enhance economic growth with a resultant improvement in poverty level. Nigeria economic growth and development had been volatile in danger and highly discouraging despite the huge external loan profile before the year 2000. Within the 80’s, the country experienced the most economic recession with declining growth rate, hyperinflation, and high unemployment rate, disequilibrium in balance of payment, industrial decadence, poor infrastructure and serious external debt burden. The poverty rate of the country stood at 65% and the country was classified as one of the weakest economies of the world on per capital basis.
1.2 Statement of the Problem
According to debt management office (DMO, 2006), Nigeria spent over $32 billion for debt services between 1985 and 2001. Apparently, greater revenue of the country was devoted in servicing her debt thus playing down investment capital and economic growth in the country. However, Nigeria had a debt relief from Paris Club that saved the country from the yearly $2.3 billion the government transferred to service its debt. It was proposed that this amount will then be available to be ploughed back and channeled to those areas that concern wealth creation, employment generation, agriculture, health, education, water supply, power generation and road construction. The country is therefore expected to be on the path of economic recovery characterized by improved power supply, greater budgeting allocation to health and education and improved living standard. The debt overhang models gave implication that large debt stocks lower growth by partly reducing investment with a resultant negative effect on poverty. Invariably, debt overhang relief should trigger economic growth; have stimulating effect on investment, development affect per capital income positively which is prerequisite for poverty reduction. Could this be said to be real in the Nigeria context or situation. Has this relief suffered from macroeconomic instability, policies that distort economic incentives or sizable adverse shocks? Prior to the relief, according to Soludo (2003), the country was on the wrong side of the debt-laffer-curve, with debt crowding out investment and growth (GDP). After the relief, what could still be crowding out investment and growth in Nigeria as the Human Development Index (HDI) as reported by United Nations Development Programme (UNDP) in 2011 ranked Nigeria 156 out of 187 countries of the world in terms of her level of income and economic growth with a HDI of 0.429 in 2005, 0.45 in 2010 and 0.459 in 2011.
The emphasis on economic and monetary integration among economies of the world may not be realized in face of rising external debt of developing countries including Nigeria. Even the current much talked about “Vision 2020” may turn out to be an illusion if this fundamental problem of debt burden is not dealt with properly. In order to justify further the critical importance given to external debt in Nigeria, the objective of this work is to examine empirically the relationship between external debt and some key growth variables in Nigeria. This will be undertaken with a view to proffering some policy recommendations for both the private and public sector to improve on the ways in which external debt is put into developmental usage in Nigeria and by implication economic growth.
In the light of this escalating and disturbing external debt growth rate and given the priority of current government at making Nigeria one of the largest 20 economies in the world by the year 2020 in line with the vision 2020 objectives, it is important to investigate the effect of external debt on some macroeconomic indicators in Nigeria.
Many studies have attempted to investigate the relationship between external debt and economic growth. These studies include those of (Ajayi, 1991; Adam, 2004; Green and Villeneva, 1991; Savvides, Kumar and Maclambo, 1996; Deshpande, 1997; Iyoha, 1999). Most of these studies were done in environments different from that of Nigeria. Again, the time frame considered in these studies was short, and, the results from them are conflicting. These works have somehow not contributed adequately to the knowledge gap in the literature, thus warranting a more systematic and comprehensive study of the relationship between external debt and economic growth in Nigeria.
1.3 Research Questions
Having considered the problems inherent in borrowing externally specifically the impact growth and investment, the following research questions were asked;
1.4 Objectives of the Study
The central objective of this study is to empirically investigate the impacts of external debt on economic growth in Nigeria over the period of 1980 to 2015. In line with this, the specific objectives of this study are on;
1.5 Study Hypotheses
This study will empirically test the following hypotheses;
H0: external debt does not significantly affect economic growth in Nigeria.
H1: external debt significantly affects economic growth in Nigeria.
H0: external debt servicing does not significantly affect economic growth in Nigeria.
H1: external debt servicing significantly affects economic growth in Nigeria.
1.6 Scope of the Study
The broad objective of this study is to determine the impact of external debt on economic growth in Nigeria. The study is limited to ascertaining the impact of external debt economic growth in Nigeria. Secondary data are adopted for the study which covers a period of thirty-five years, between 1980 and 2015.
1.7 Significance of the Study
This thesis, apart from achieving its main objectives, will contribute immensely in the following ways;
1.8 Organization of Study
This thesis is divided into five chapters. The structural framework of this thesis is thus defined as follows:
Chapter one gives an introduction of the topic and overview of public debt management in Nigeria and the evolution of both public external and domestic debt. Imperatively, the research topic, objectives and significance of the study is highlighted in this section.
Chapter two examines theoretical aspects to external debt and its determinants. It also examines empirical studies undertaken in Nigeria and elsewhere in the World. The impetus of empirical literature review is to gain insight on how various variables used in similar studies have been measured and the methodology employed.
On the basis of the literature review, Chapter three explains the methodology to be employed in the course of the study. Reasons for the choice of the methodology to be employed have also been advanced.
Chapter four confers econometric analysis and interpretation of empirical results, inferring to the estimation results. Chapter five draws conclusion and policy recommendation with respect to external debt phenomenon in Nigeria. Challenges encountered during the whole research as well as arguments for future research to fill the literature gap in this area are also advanced.