CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Just as individuals cannot live in isolation, so does a country. This is because our wants are numerous while the available resources to satisfy them are limited. For a large part of these wants to the met, a country needs to interact with other economic units as well as `other countries especially in the procurement of financial assistance. It is therefore generally expected that developing countries facing scarcity of capital, will contract external borrowingsto supplement domestic debt because the interest rate charged by international financial institutions like international monetary funds(IMF) is about half to the one whether or not external debt would be beneficial to the borrowing nation depends on whether the borrowed money is used in the productive segments of the economy or for consumption. Adepoju et al (2007), stated that debt financial investment need to be productive and well managed enough to earn a rate of return higher than the cost of debt servicing.
The effect of external debt servicing on investment and economic growth of a country has remained questionable for policy makers and academics alike. There has not been consensus on the impact of external debt on economic growth. External debt may be used to stimulate the economy but whenever a nation accumulate substantial debt, a reasonable proportion of public expenditure and foreign exchange earnings will be absorbed by debt servicing and repayment with heavy opportunity cost (Albert, Brain and Palitha, 2005). Excessive external debt constitutes obstacle to sustainable economic growth and poverty reduction (Mayhyere and Hashemite, 2003; Sanus, 2003 and Berensmann, 2004).
Those who argue that external debt has positive effect on the economy do that from the stand point that external debt will increase capital inflow and when used for productive ventures, accelerates the pace of economic growth. The capital inflow may be associated with managerial know-how, technology, technical expertise as well as access to foreign market. The above is in agreement with the views of the keynesian’s theory of capital accumulation as a catalyst for economic growth. However, external debt may have negative impact on investment through debt overhang and credit-rationing problem (Edward, 1989 as in Udeh et al, 2016).
Bamisihi (2005), confirmed that, according to a United Nations Export Group (1960), if would be for capital formation in the economy. Therefore, capital accumulation may well be regarded as the core process by which all other aspects of growth are made possible (Obilayo, 1992).
Onyido (2004), stressed that in an economy like ours which is in a hurry to develop in the face of serious constraints, much reliance is therefore placed on the financial system and its component for the mobilization of funds for economic development (Int’l Journal of Investment & Finance).
Available statistics show that external debt stock of Nigeria has been on the increase after the debt cancellation in 2005. The External debt in Nigeria averaged 6375.33 million USD from 2008 until 2015, reaching an all time high of 10718.43 million USD in the fourth quarter of 2015. According to Nwanko, the Nigerian external debt has risen to $11 billion with debt sustainability ratio of 12.51 to the GDP.
Given the rising stock of external debt in Nigeria and its servicing obligation, it is important therefore that the country should undertake critical examination of the general implication of the loan on economic growth. It is against this background that it becomes imperative to assess the effect of external debt servicing on the economic growth in Nigeria from 1990-2015.
1.2 STATEMENT OF PROBLEM
Just like other highly indebted poor countries, Nigeria also have low economic growth and low per capital income, with domestic savings insufficient to meet developmental and other national goals.
Nigerian exports were primarily primary commodities with export earnings inadequate to finance imports which are mostly capital intensive (manufactured) goods which are comparably more expensive (Siddique et al, 2015) compounding the problem is Nigeria’s drift to mono economy with the discovery of oil. The oil sector generates about 95% of foreign exchange earnings and about 80 percent of budgetary revenue. The inability to diversify her revenue sources coupled with corruption and mismanagement compelled Nigeria to have insufficient fund for growth and developmental projects such as roads, electricity, pipe borne water etc.
The need for economic growth and development forced Nigeria to acquire external debt. The first major external loan of US $28 million by Nigeria was taken from World Bank in 1958 to finance railway construction. Ever since then, there has been accumulation of loans aimed at various development projects without obvious outcomes as expected. As the amount of loans increased, Debt Management Office (DMO) was established in October, 2000 prior to the establishment of national debts. At the moment, debt management office in collaboration with CBN and Federal Ministry of Finance manage Nigeria’s debts.
The problems associated with debt and debt servicing compelled Sanusi (2003) to warn that rising Nigeria’s debt is an impediment to economic growth and development. Similar view was expressed by Campbell (2009) when he said that government debt can easily become a burden on the economy weakening its foundation warning that authorities should recognize that accumulating debt also means accumulating risks by increasing claims on unrealized future income.
From the above, it is glaring that there were different views on the impact of external debt servicing on the economy hence the need for policy makers to have a better appreciation of its impact on the economy at various levels of debt accumulation to enable them make an informed decision since there are time when debt is desirable and undesirable.
1.3 OBJECTIVE OF THE STUDY
The overall objective of this study is to carry out a comprehensive study of the impact of external debt servicing on economic growth in Nigeria.
Specifically, this study seeks to achieve the following objectives:
- To determine the long run relationship between external debt servicing and economic growth in Nigeria
- To identify the causes of external debt servicing burden in Nigeria
1.4 RESEARCH QUESTIONS
The following research questions shall help in achieving the aims of this research work:
- would government external borrowing have any relationship with the Nigeria’s economic growth?
- To what extent has debt servicing impacted on the economic growth of Nigeria?
1.5 RESEARCH HYPOTHESIS
Following the theoretical framework highlighted herein, the study will be guided by the research hypothesis.
H0: There is no significant relationship between external debt servicing and economic growth.
H0: There is no significant relationship between external debt stock and economic growth.
1.6 SIGNIFICANCE OF THE STUDY
This work is geared towards guiding Nigeria’s policy makers to providing solution to the issue of external debt servicing and its management so as to reduce external debt servicing burden if not totally eradicate it. It is also focused at guiding regulatory authorities and other stakeholders e.g. CBN towards effective monetary policy and regulations.
1.7 SCOPE AND LIMITATION OF THE STUDY
This study covers external debt servicing impact on Nigeria’s economic growth.
The scope of this study is limited by a number of factors, like the inability to get some of the secondary materials needed for this study, inability to get some of the required information via the means questionnaire and oral interviews due to distance and inadequate fund. Apart from the above listed limitations/setbacks, there was also limited time. In attempt to see that this research work achieves the objective for which it is undertaken, the researcher engaged in secondary data collection.
1.8 ORGANIZATION OF THE STUDY
This project work is divided into five chapters.
Chapter one serves as introduction, with background of the study, statement of the problem, objective of the study, research questions, research hypothesis, significance of the study, scope and limitations of the study as well as definition of terms.
Chapter two hinges on Literature Review, extensive discussion of both conceptual, theoretical framework and empirical review of different authors.
Chapter three dwells on the methodology for the study. It entails research design, data analysis and model specification.
Chapter four entails a detailed discussion of the research findings. The results of the analysis and their interpretations were all discussed extensively here.
Finally, chapter five dwells on the summary of the research findings, conclusion and policy recommendations are all discussed in this chapter. The contributions herein will add to the body of knowledge.
1.9 DEFINITION OF TERMS
Effect: A significant or strong influence.
External: Outside of something; on the exterior. Foreign; relating to or connected with foreign nations.
Debt: Money that one person or entity owes or is required to pay to another, generally as a result of a loan or other financial transaction.
London club: This is a cartel of international commercial banks which handle private debts and other commercial debts and operate strictly on commercial terms.
Paris club: These are groups of creditor countries with no permanent members who meet to negotiate debt rescheduling for borrowing countries.
Debt rescheduling: This is an arrangement of payment terms of the external loan. It involves sitting with creditors to rearrange the payment terms of an existing debt because of some debtor country’s internal economic conditions which are not favourable for the continuous servicing and payment as had earlier been agreed.
Economic Growth: This is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another.
Debt Service: This is a contractually fixed charge on domestic real income and savings. As the size of debt grows, or as interest rate rises, debt services charge increases. Debt service payment is done only with export changes, curtailed import, or with further external borrowing. This if the export carrying diminishes, debt service difficulties are likely to arise (Ushahemba et al. 2016).