ANALYSIS OF EXTERNAL DEBT AND ECONOMIC GROWTH IN NIGERIA
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ANALYSIS OF EXTERNAL DEBT AND ECONOMIC GROWTH IN NIGERIA
ANALYSIS OF EXTERNAL DEBT AND ECONOMIC GROWTH IN NIGERIA, CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
Every country on the planet strives for economic growth and development. This, however, is only achievable if a country has sufficient resources. Resources to finance optimal levels of economic growth and development are few in developing countries, particularly in Sub-Saharan Africa. This is due to economies grappling with issues such as low domestic savings, poor tax revenues, low productivity, and meagre foreign exchange profits.
For these reasons, many developing countries seeking economic growth must rely on external financing to close the gap between their savings and investments. A country may examine numerous methods for getting foreign financing,
including grants, foreign investment, and loans (concessional and non-concessional), in that order. However, depending on a country’s socioeconomic and political status, a combination of these capital inflows in varied proportions may be obtained.
Nigeria, like most emerging countries, borrowed money from outside primarily for investment purposes. Up until the mid-1970s, the country’s external debt was manageable. The country’s external debt began to rise in the late 1970s as a result of weak macroeconomic management and falling crude oil prices.
Thus, in 1975, the external debt was $557.74 million. Nigeria’s debt peaked at $33.1 billion in 1990, then fell to $27.1 billion in 1997 before rising to $28.8 billion in 1998. However, one of the most serious issues confronting African countries is the magnitude of their external debt. For a variety of factors, the foreign debt crisis is growing increasingly severe.
The challenge of rising interest rates on external debt is jeopardising these countries’ development goals, slowing economic growth and development. The reason for this is that the debt is massive in comparison to the GDP of the economy.
Furthermore, the existing debt management system has a significant macroeconomic impact on an economy’s output; as a result, there is an urgent need to minimise Africa’s total outstanding debt service obligations as well as the accumulation of arrears on payments.
The Federal Government introduced the Structural Adjustment Programme (SAP) in 1986 to address the problem of structural imbalance in the economy and to create an environment conducive to achieving macroeconomic stability.
It is apparent that one of the primary goals of the SAP is to reduce Nigeria’s massive debt. It is true that if the massive amount spent on debt service payments could be significantly reduced, the country would be able to finance a large volume of domestic investment, boosting growth and development.
The problem of rising LDC external debt is causing nightmares not only for debtor nations concerned about how to earn enough foreign exchange to at least service their massive external debts, but also for creditors concerned about the debts’ tendency to become bad and irrecoverable.
The phrase “to go a borrowing is to go assorrowing” is a bitter truism for most indebted nations. This is not to mean that the researcher is opposed to internal or external borrowing.
Indeed, the researcher believes that external funding, if used wisely, will go a long way towards helping to solve or at least ameliorate the problems of gross underdevelopment that most LDCs face.
Getting out of the “debt trap” is now the primary preoccupation of both creditors and debtors. borrowers should not be forced to carry the weight of both creditors’ (who were careless in their attitude to lending during the peak of the “petro dollar boom”) and borrowers’ (who were too short-sighted to perceive the strings and traps linked to the loans).
Perhaps, the above cannot be more representative of the Nigeria situation, which is likened to an extravagant person who is hosting his friends and associates to an all-expense-paid, no holds barred party, and after the parting finds himself unable to settle even a fraction of the bill and all the guests gone, not even a person to be seen to offer moral succour to the lavish host.
Unfortunately, ability to pay is close to zero, which is even more pathetic given that Nigeria is now being asked to pay when the economy is in a slump, and the borrowed funds are being spent on ill-conceived projects that are equally poorly implemented.
However, one of the new international economic order’s objectives is to secure favourable conditions for the transfer of resources to developing countries, and to ensure that a cou
Actually, Nigeria’s external debt began during colonial times, with the World Bank (IBRD) loan of 1958 utilised to finance the Nigeria Railway Corporation extension to Bornu under the assurance of the United Kingdom Government (Felagan 1978).
Debt is thought to be formed by a deficit between domestic savings and investment and export earnings, which grows in absolute terms over time. Interest charges grow as the difference widens and debts accrue, and a government must borrow more to maintain a consistent flow of net imports and refinancing maturing debt obligations.
Nonetheless, when the Government Promissory Notes Ordinance was created in 1960 to raise authorised loans, foreign borrowing became a conscious governmental policy. The ordinance also established a sinking fund for the redemption of loans raised.
Parliament passed the External Loans Act in 1962, which allowed for loans to be raised outside of Nigeria. External loans were to be used for development programmes and to make loans to regional governments, according to the Act.
Following the civil war, the “External Loan Rehabilitation, Reconstruction, and Development” directive was issued in 1970. The decision authorised the Federal Commission to raise loans outside of Nigeria up to N1 billion.
The money would be used to fund a repair, reconstruction, and development programme for the state government. These different external loan laws became policy guidelines not only in magnitude but also in direction.
Nigeria’s debt crisis can also be traced back to misguided economic strategies implemented during the oil market’s boom, which resulted in an outright neglect of the non-oil sector of the economy, particularly agriculture.
Because of this neglect of other areas of the economy, the oil sector generated over 905 of the government’s national revenue, therefore variations in the oil market in the 1978 and 1980s affected the federal government’s expected revenue predictions.
As a result, the government had to borrow to fill the gaps left by the volatility while simultaneously meeting rising expenditures. Thus, according to the Central Bank of Nigeria, Nigeria’s debt in 1978 was N1,265.7 million (US $2.2 billion), N8819.4 million (US $ 13.1 billion) in 1982, and N133,956.2 million in 1988.
Furthermore, Nigeria’s total outstanding external debt increased to N240,033.6 million in 1989, and it is stated that the debt continues to rise yearly (defying Newton’s law of gravity), with Nigeria holding N648,813 million in 1994 and N3,097,383.8 million in 2000.
The debt crisis was exacerbated further by a significant public deficit, relatively unfettered capital inflows, ineffective control over private capital outflows, and a real overvaluation of the naira in relation to other international currencies.
For these and other reasons, Nigeria’s debt problem has become one of the most important concerns in the world’s political and economic relationships.
In essence, what counts most is not the amount of foreign loans, but how the loans are utilised in the development process. If these loans are used for current consumption, they will have little impact on future economic growth; however,
if they are invested rationally in productive projects, they will contribute positively to real growth and increase the economy’s productive potential. The truth is that development is solely dependent on persistent increases in real income, which can only be obtained or accumulated through economic expansion.
Economic growth, on the other hand, focuses on changes in the economy’s productivity through time. Growth occurs when overall production increases faster than population. As a result, it is the country’s ability to maintain a strong defence or to fund another national endeavour.
In truth, economic growth is defined as an ever-increasing supply of commodities and services available to suit the needs of the economy throughout time. As a result, the larger the debt-service payment ratio, the lower the rate of economic growth. Nigeria’s principal burden of public debt has certainly been pushed to the future, slowing economic growth.
Because of our massive public debt, the rate of investment tends to be low and the unemployment rate tends to be high. Furthermore, our reputation has suffered, and industrialised nations have lost faith in our economy.
This surge could lead to a reduction in the flow of foreign investment into Nigeria, which could have serious ramifications for the country’s economic development prospects.
With the oil glut and lower revenue, our external debt liabilities are anticipated to rise, and our economy will be unstable. If the debt problem is not adequately managed, it would lead to a liquidity and foreign exchange crisis, slowing Nigeria’s economic growth and development.
STATEMENT OF THE PROBLEM
Nigeria’s external debt has grown to enormous proportions, dominating the international economy and politics. Foreign loans and help are no longer employed as a tool of support, but rather as a tool of oppression, suppression, and persistent underdevelopment.
There is little doubt that managing Nigeria’s external debt has taken on essential importance. This may be observed in the rising quantity of outstanding external debt and the cost of servicing the massive debt.
From the safe haven of funding from the International Monetary Fund (IMF) and the Africa Development Bank (ADB). Nigeria became one of the world’s largest debtor countries and was classified as one of the fifteen most indebted countries on the banker plan list.
The country’s external indebtedness was very low at the end of the civil war in 1970 and was of little concern until 1974. However, by 1977, Nigeria’s external debt was N496.9 million, and it increased by more than 205% to N1,265.7 million or US $ 2.2 billion in 1978, dubbed to as the ” Jumbo Loan” and contracted from the international capital market (ICM). This had skyrocketed to US $32.6 billion by the end of December 1995.
With massive amounts of debt outstanding, debt service obligations skyrocketed as a result of rising interest rates in the international money market and dwindling grace periods and grant elements, leaving little foreign cash for the import of external raw materials and consumer goods.
OBJECTIVES OF THE STUDY
The study’s broad objectives are primarily:
1. To conduct a comprehensive examination of Nigeria’s external debt crisis from 1993 to 2004.
2. To examine the external debt difficulties and their repercussions for the economy of debtor countries.
3. To investigate the factors influencing nations’ debt servicing capacity.
4. Analyse the influence of an economy’s foreign debt crisis on the level of money supply.
5. To suggest and advocate measures to improve Nigeria’s debt management policies.
6. To assess the impact of the foreign debt situation on employment levels.
7. To identify the factors that influence economic growth.
RESEARCH QUESTIONS
1. What were the causes of Nigeria’s external debt issues between 1992 and 2004?
2. How severe is the external debt situation, and what influence does it have on the economies of debtor countries?
3. What variables influence a country’s ability to service its debt?
4. How much influence does external debt have on an economy’s money supply?
5. How may Nigeria’s debt management policies be improved?
6. What is the impact of the foreign debt situation on employment?
7. What is the situation of Nigeria’s economic growth?
RESEARCH HYPOTHESES
The hypotheses are written as follows for the aim of analysing or objectively analysing or achieving the above goal:
1A. Ho: External debt has no substantial impact on Nigeria’s GDP growth rate.
B. Hello: External debt has a big impact on Nigeria’s GDP of economic growth.
2A.Ho: External borrowing has no major impact on the level of the economy’s money supply.
Hello, external borrowing has a substantial impact on the amount of the economy’s money supply.
3A. Ho: The level of external debt has no substantial effect on employment.
B. Hello, the degree of foreign debt has a substantial impact on employment.
SIGNIFICANCE OF THE STUDY
Nigeria’s economy is sensitive to exogenous shocks due to its nature. Over time, the Nigerian economy has had a bad balance of payment that could be easily repaid from domestic sources, making foreign borrowing unavoidable. The negative impact of external debt and economic growth-related problems on the Nigerian economy has grown unbearable.
As a result, the study will be important in educating Nigerians by revealing one of the major reasons why the Nigerian economy is growing at a very slow rate, which can be traced back to the large amount of foreign earnings spent on external debt services rather than domestic investment.
As a result, unchecked expansion in foreign cash outflows to service rising debt will only exacerbate Nigeria’s underdevelopment. This means more poverty, ignorance, sickness, and other potential sociopolitical diseases.
Furthermore, this study will be of great assistance to the Nigerian government, particularly the current government, in determining the effectiveness of previous years’ external debt and economic growth policies,
as well as the next steps to take in reducing the total outstanding external debt, because it is clear that Nigeria’s external debt is now growing at an alarming rate. It should be noted that this study is relevant not only to Nigeria, but to practically all of the nations designated as LDCs, owing to a number of shared characteristics.
SCOPE, LIMITATIONS, AND DELIVERIES
SCOPE – The study spans the years 1992 to 2004 and focuses solely on Nigeria’s external debt as well as economic growth.
LIMITATIONS – During the process of conducting this investigation, certain issues arose, ranging from a lack of relevant recent data to a scarcity of available ones. This uncooperative attitude by individuals who are supposed to be the custodians of the data also had an impact. In dealing with the data, a significant amount of exercise and judgement was required.
Time and money are some obstacles that hinder the acquisition of adequate data. Enough time is required to travel to other financial institutions and other federal and state ministries of finance in order to obtain the necessary information. This also poses a financial issue due to shipping costs and the country’s current economic state.
DELIVERY – Due to the aforementioned constraints, the researcher was forced to limit data collecting to Enugu only, owing to funding constraints.
DESCRIPTION OF TERMS
EXTERNAL DEBT – External debts are debts incurred when a country’s government borrows from foreign banks, governments, and international organisations such as the IMF, World Bank, Paris Club, and so on.
It can also be viewed as an unpaid fraction of external resources required for development reasons, as well as the balance of payment assistance that could not be reimbursed when it became due.
BALANCE OF PAYMENT – A systematic record of all transactions between inhabitants of one country and the rest of the world over a certain time period. When there is an excess of importing over exports, it becomes unfavourable or adverse.
ECONOMIC GROWTH – Is a long-term increase in the country’s ability to deliver increasingly diverse economic goods to its people. This increasing capability is based on the advancement of technology, as well as the institutional and ideological changes that it necessitates. It refers to raising the economy’s real output or real per capital output.
ECONOMIC DEVELOPMENT – A multidimensional process in which the entire economic and social system is reorganised and reoriented.
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