IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN NIGERIA.
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IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN NIGERIA.
Chapter one
INTRODUCTION
1.1 Background for the Study
One of a country’s primary macroeconomic objectives is to achieve long-term economic growth. To attain this goal, every government must invest significant amounts of capital in infrastructure and productive capacity development (Umaru, Hamidu, and Musa, 2013).
As a result, this promotes the rise of their GDP, which, if sustained, should lead to economic development, a goal pursued actively by all less developed nations (LDCs), including Nigeria.
However, Ayadi and Ayadi (2008) observe that the quantity of capital available in most developing countries’ treasuries is grossly insufficient to meet their economic growth needs, owing to poor productivity, low savings, and a high consumption rate. To fill the resource imbalance, governments turn to external borrowing.
Countries borrow to promote economic growth and development by establishing an environment that encourages people to participate in various sectors of their economy (Umaru et al, 2013).
Similarly, Obudah and Tombofa (2013) argued that countries may borrow for a variety of reasons, including the ability to finance their recurring budget deficit, to deepen their financial markets
to fund rising government expenditures, to improve their limited revenue sources, and low output productivity, all of which result in poor economic growth. According to Chenery’s (1966) Dual-gap hypothesis, governments borrow to supplement their limited resources and close the savings-investment gap.
The Keynesian economics school of thought contends that government borrowing can be utilised to foster economic growth by financing government deficit expenditures, which stimulate aggregate demand and hence support an increase in private investment.
However, high public debt can result in a significant debt burden for the country. According to Soludo (2003) in Okonjo-Iweala et al. (2013), once an initial stock of debt reaches a certain threshold, servicing it becomes a burden, and countries fall off the Debt Laffer Curve, with debt crowding out investment and growth.
Bakare (2011), on the other hand, claims that a country’s indebtedness does not necessarily slow growth; rather, the nation’s inability to optimally utilise these loans to foster economic growth and development, as well as ensure effective debt servicing, undermines the benefits derivable from borrowed capital resources.
Debt, arguably, remains one of the most significant economic difficulties confronting governments in low-income countries due to persistent budget deficits, and this has continued to pique the interest of international financial institutions and bilateral lenders.
According to Udeh (2013), this has resulted in the implementation of many programmes aimed at easing the debt burden, which continues to impede the growth prospects of most highly indebted poor countries’ (HIPC) economies. These attempts range from debt restructuring to outright cancellation.
Nigeria’s external debt may be traced back to pre-independence times, although the debt level was low until 1978, when the first Jumbo loan of more than $1.0 billion was raised from the International Capital Market (ICM)[Debt management office (DMO, 2004)].
However, the country’s debt stock has steadily increased since 1977, going from $0.763 billion in 1977 to $5.09 billion in 1978 and $8.65 billion in 1980, an increase of more than 73.96 percent (DMO, 2004).
This later increased to $35.94 billion in 2004. Following debt relief in 2006, Nigeria was able to offset a significant portion of its debt, although this trend has since shifted upward. According to Amaefule (2015), Nigeria’s overall debt stock as of December 2014 amounted at N12.4 trillion.
1.2 Statement of Problem
Nigeria, like most heavily indebted impoverished countries, has slow economic growth and low per capita income, with insufficient domestic savings to satisfy developmental and other national goals.
Nigerian exports were predominantly primary commodities, with export revenues insufficient to cover imports, which were mostly capital intensive (manufactured) goods that were correspondingly more expensive (Siddique, Selvanathan, and Selvanathan, 2015).
Compounding the dilemma is Nigeria’s shift to a mono-economy following the discovery of oil. The oil sector accounts for around 95% of foreign exchange earnings and roughly 80% of budgetary revenue.
Nigeria’s inability to diversify its revenue sources, along with corruption and incompetence, leaves it with insufficient funds for growth and development projects such as roads, power, piped water, and so on.
Nigeria, a developing country, has implemented a number of initiatives, including the Structural Adjustment Programme (SAP) of 1986, to liberalise its economy and promote Gross Domestic Product (GDP) growth. To enable the implementation of these programmes, the government borrowed substantially from multilateral sources, resulting in a large external debt payment load, and the World Bank classed Nigeria as a heavily indebted poor country (HIPC) in 1992.
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