Impact of debt stock on the growth of the Nigerian economy
- Background of the study
The origin of Nigeria’s external debts date to 1958 when about US$28million was spent on railway constructions (Ani, 1997). Between 1958 and 1977, the level of foreign debt was minimal at debt contracted during the period were the concessional debts from bilateral and multilateral source with a longer repayment periods and lower interest rates constituting about 78.5% of the debt stock. From 1978, following the collapse of oil prices, which brought pressure on government finances, it became necessary to borrow for balance of payments support and project financing (Ajayi, 2003). This led to promulgation of decree no 30 of 1978 limiting the external loans the federal government could raise to N5b (Ani, 1997). The first major borrowing of US$1B referred to as Jumbo loan was contracted from the international capital market ( ICM ) in 1978 increasing the total debt to US$2.2B (Ani, 1997). Thereafter, the spate of borrowing increased with the entry of State Government into external loan contractual obligations. While the share of loans from bilateral and multilateral sources decline substantially borrowing from private sources also increased considerably. Thus by 1982, the total external debt stock was US$13.1B (Ani, 1997).
Nigeria inability to settle her import bill resulted in the accumulation of trade areas amounting to US$9.8B, between 1983 and 1988 ( Adesola, 2009). The insured and uninsured components were US$2.4 and US$7.4 B respectively. The reconciliation exercise which took place between 1983 and 1988 with London club and Paris club reduced amount to US$3.8B with an accrued interest of US$1.0 B bringing the total to US$4.8 B IN 1998 ( Adepoju,Salau and Obayelu, 2007).
The external debts rose further to US$33.1b in 1990 but declined to US$27.5B in 1991 and increased steadily to US$32.6b at the end of December 1995, the total debt outstanding at the end of 1999 was US$28.0B with Paris Club constituting the highest source with a share of 73.2% in 1999 prior to the canvas made for debt cancellation ( Adepoju, Salau, Obayelu, 2007).
Contrary to the illusory- image of an “oil-rich” country, Nigeria is a heartily indebted poor country. Its total external debt stock, as at December 2000, is estimated by the Nigerian government at about $ 28.3 Billion it includes arrears amounting to $ 14.7 Billion and late interest of over $ 5 Billion. A significant proportion of this debt (75%) is owed to official creditors. (Udoma U. 2004)
The bulk of Nigeria’s debt was incurred at non confessional terms during the late 1970s and early 1980s, during a period of significantly low interest rate regime when the London inter Bank offered (Rate (LIBOR) hovered between 3% and 4%.The debt grew rapidly through the eighties due to accumulation of debt service arrears and escalation of market interest rate. LIBOR peaked at 13% in mid 1989.(Obadan ,M 2004). As a result, the pre-1984 debt of most developing countries, Nigeria inclusive quadrupled by 1990. The collapse in oil price compounded by poor economic policies, bad management and in favorable loan terms, made it externally difficult to service the mounting external debt obligation, particularly those due to the Paris club. Hence despite the rescheduling in 1986, 1989 and 1991 arrears continue to amount, which further worsened the debt problem. Some progress was made however in restricting the commercial debts, and Nigeria has continued to service that category of debt as at when due.
The trend of the external debts highlights the fact that much of the country’s external debt is owed to fifteen creditor countries belonging to the Paris club, as a percentage of the total external debt, Nigeria’s indebtedness to this group rose almost consistently from about 30% in 1983 to about 80% in 2001.(Anyingang,R 2008). This huge external debt constitutes a major impediment to the revitalization of its shattered economy as well as the alleviation of debilitating poverty. In terms of traditional debt indicators, as shown in the annex, the debt profile started deteriorating during the second half of the eighties, and they reached precautions level in the mid – 1990s, before recording a slight improvement.
As at December 2000, Nigeria’s debt stock amounted to about 75 percent of GDP and about 180 percent of export earnings. Debt service due in 2000 was about US$3.0 billion or 14.5 percent export earnings. In 1999, for example spending on health represented and about 0.2% of GDP and 0.7 percent of GNP compared with 3.4 percent (US$1.5billion) annual budget spent on debt servicing during the same period. In 2000, US$1.9 Billion was used for debt servicing translating to about 4 times Federal Government budgetary allocation to education and about 12 times the allocation to health while in 2001 debt service payment was US$2.13 billion which amounted to 6 times of the Federal Government’s budgetary allocation to education and 17 times allocation to health for that year. (Anyingang, 2008).
As at 2003 the debt crisis of Nigeria reached a maximum proportion when the country was to transfer as much as $2.3 billion to services its ddebt (bakare, 2010).
During this period the world leaders were granted debt relief to some highly indebted poor countries of the world and as at the Paris club was not ready to listen to Nigeria as an oil company but with the help of the finance ministry Okonjo Iweala meeting all the necessary justification was granted the debt relief. Paris club agreed to write off 60% of the $30.85billion owed to its club members. The deal was finally signed in July 2005 (bakare, 2010).
The exit from the Paris club in 2005/2006 resulting in a steep decline in debt stock from $46.269 billion at 31/10/04 tp $17.35 billion by 31/12/06 (DMO Act 2003, as amended)
Debt composition and debt structure is now more favorable so that by 31/12/10 total debt was $35.1 billion external debt was 13.05%(78% in 2004) 93% of external debt as at 2010 was concessional( DMO Act 2003, recently amended) debt to GDP ratio as at 2010 was 18.06% compared to the threshold of 4% adopted by the Federal Government and reduced to 25% in 2010(DMO Act 2003,recently amended) Nigeria external debt stock stood at $5.2 billion as at March, 2011. The increase from December 2010 amount to $4.2 billion, this is attributed to internal capital market and exchange rate variation (World Bank Statistics, 2010).
1.2 Statement of the Problem
For many years now, developing nations have amassed foreign borrowings in expectation of transforming them into rapid growth and development. On the contrary, they have succeeded in getting into a debt trap which is taking its toll on their economic development and growth plans, usually in the form of depleted resources (through massive debt repayment) which could have been gainfully invested. This can be seen in the year 2000 when our debt service was about $3.0 billion, also debt stock act as a tax on future income and production and discourage investment by the private sector this was in line with Debt-Overhang theory which state that accumulated debt burden adversely affect the rate of private investment and also in line with several empirical studies for example the one conducted by Adepoju, Salau,and Obayelu (2007) and concluded that accumulation of external debt adversely affected Nigeria economy growth. Over time, the debt stocks of most developing countries have generally increased despite its inconsistent movements with their growth rates. Even in Nigeria, despite the debt relief from London club and Paris club of creditors in the year 2006, Nigeria external debt stood at $5.2 billion as at 2011. This could not measure the findings of Iyoha (2000), who opines that a 75% debt stock reduction would have raised the investment/GDP ratio would have fallen by 65%.
1.3 Objectives of the Study
The main objective of this study is to assess the impact of debt stock on the growth of the Nigerian economy while the specific objectives of this study include the following;
- To ascertain the impact of debt owed to the London club of creditors on the total debt of Nigeria.
- To ascertain the impact of debt owed to the Paris club of creditors on the total debt of Nigeria.
- To ascertain the impact of external debt payments on Nigeria’s GDP.
1.4 Research Questions
The following research questions guided the study:
- What are the reasons for external debt
- What are the contributions of external debt to Nigeria economy
- What are the effect of high rate of debt
- What may be the reasons for debt relief
- How does external debt affect the GDP of Nigeria
1.5 Research hypotheses
This is the area where we subject our statistical data to quantitative test to make sure that they are valid. The hypotheses are tested to show that all theoretical explanations made so far about the impact of external debt burden on the growth of Nigerian economy are put into a mathematical model that represent a real life situation. In this sense, the accuracy and authenticity of data is guaranteed. The following hypotheses are hereby postulated:
In stating the hypotheses, H0 denotes the Null hypothesis while H1 represents the Alternative hypothesis.
H1 : London club of creditors debt owed by Nigeria does have significant impact on the total debt of Nigeria.
H0 : London club of creditors debt owed by Nigeria does not have significant impact on the total debt of Nigeria.
H2 : There is significant relationship between Paris club of creditors debt owed by Nigeria on the total debt of Nigeria.
H0 : There is no significant relationship between Paris club of creditors debt owed by Nigeria on the total debt of Nigeria.
H3 : External debt payment does have significant impact on the Real GDP in Nigeria.
H0 : External debt payment does not have significant impact on the Real GDP in Nigeria.
1.6 Significant of the Study
Basically, the purpose of any scholarly research consists of the accumulation and codification of facts. These facts are meant to assist in solving certain human problems be that political, social and economic. The research significant is to acquaint us with the impact of external burden on the growth of Nigeria economy. It would also help us to know the individual significant of the debt owed to London club of creditors, Paris club of creditors, Multilateral debt and Others on total external debt.
It would also contribute to existing literature on the subject matter by investigating empirically the causation between Nigeria external debt and the country’s economic growth. It will also help us to know the source of debt a country should engage in either domestic debt or foreign debt.
1.6 Scope of the Study
This study investigate the impact of external debt on economic growth of Nigeria, the study covered the impact of debt owed to Paris club, London club and Multilateral creditors, also to ascertain the impact of external debt payments on Nigeria’s GDP.
This study would be limited to journals, magazines, and articles on external debt in Nigeria. Other relevant information from selected annual report of Debt Management Office on external debt, Central bank of Nigeria bulletin, published thesis, literature and various text books by different authors on external debt will be reviewed.
1.8 Limitations of the Study
There were some factors that militated against this study. However the researcher was able to overcome them and as much this study was properly carried out.
Time constraint and financial implications are some of the problems which the researcher encountered. This was so because he had to combine academic work and some interviews held. Also there was a problem in transporting and pointing of works, surfing the internet due to lack of funds.
However as noted above these factors did not affect the result of the research because the researcher was able to mitigate such limitations through help of friends and time management by the researcher.
1.9 Definition of Terms
- CBN: The acronym of Central Bank of Nigeria. It is the apex regulatory authority of the Nigeria Financial sector. It has power to remove erring managers and officials of banks and other financial institutions. (Ibe, 2012)
- Capital market: The capital market is a network of financial institutions and facilities that interact to mobilize and allocate long term savings in an economy. The long term funds are exchanged for financial assets issued by borrowers or traded by holders of outstanding eligible instruments. (Ibe, 2012)
- Exchange rate: This is the price of one currency in terms of another. It is the rate at which currency exchange for each other from one country to another country. (Ibe, 2012)
- Balance of payments: These are records of economic transactions between the residents of a country and the rest of the world during a given period of time. (Ibe, 2012)
- Gross National Product (GNP): This is the value of a country’s production of goods and services. It is also known as the Gross National Income (GNI) (Ibe, 2012)
- Gross Domestic Product: It is the current market value of all goods and services produced in a country in a given income period, usually a year. (Awoke et al, 2005)
- Debt stock: It refers to the total value of the debt that a nation owes to all lenders. (www.ehow.com/into_7985029_debt_stock_definition.html)
- Debt burden: It is the amount of debt a particular country has, considered as a burden on its economy and people and a hindrance to their progress. (www.collinsdictionary.com/dictionary/english/debt_burden)
- Debt structure: It is the sum of cash a borrower must repay through periodic installments or in a lump-sum payment. (www.ehow.com/info_8338498_debt_structure.html)
- Debt service: It is the amount of money required to make payments on the principal and interest on outstanding loans, the interest on bonds, or the principal of maturingbonds.(financial_dictionary.thefreedictionary.com/_/dict.aspx?rd=1&word=debt+servicing)
- Accrued interest: It is the interest on a bond or loan that has accumulated since the principal investment, or since the principal investment, or since the previous coupon payment if there has been one already. (en.m.wikipedia.org/wiki/Accrued_interest)
- Foreign debt: It is resources or money used in a country which is not contributed by the government and does not in any way belong to them and it is been sourced externally. (Oyejide, 1985)
- Concessional debt: It is a debt with an original grant element of 25% or more. (www.indexmundi.com/facts/indicators/dt.dod.allc.zs)
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