PROJECT TOPIC- EXTERNAL DEBT AND ECONOMIC DEVELOPMENT IN AFRICA: THE NIGERIAN EXPERIENCE, 1999-2013
Study investigated the relationship between external debt and economic development in Nigeria within the period of 1999-2013. The major target of the research was to provide a framework that explains the effect of external debt on economic development and why African as a continent has remained underdeveloped despite all the huge amount of money borrowed externally. The theory of dependency theory was adopted as the analytical framework to demonstrate that Nigeria has followed a developmental strategy dictated by the interest of the imperialist or monopoly
capitalist and their local allies among the indigenous population. And how these people have succeeded in impoverishing Africa.Our method of data collection and analysis are qualitative and quantitative-descriptive methods respectively. The findings of the study revealed that there’s no relationship between external debt and development in Nigeria. The study recommends that the international economy should be restructured and unequal terms of trade balance with unfair economic trade relations should be discouraged, so as to encourage foreign exchange for national
1.1 Background of the Study
An analysis of the economy of most African nations indicates that the average per capital national income in Africa is one-third lower than that of the world’s next poorest region, South Asia. Most African countries have lower per- capital income now, than they had in 1980s. Half of Africa, 888 million people lives on less than $1 dollar a day. African entire economic output is not more than $420 billion dollars, just 1.3 percent of the world’s gross domestic product, less than a country like Mexico. African share of world’s trade has declined to less than half of what it was in the 1980s, amounting to only 1.6 percent; its share of global investment is less than 1 percent. It is the only region where school enrollment is fallen and where illiteracy is still common (Meredith, 2005).
It was expected that Nigeria would become the giant of Africa going by her human, material cum natural resources. But most surprisingly the reverse is the case. Nigerian leaders after independence shifted the responsibilities of their development to other imperialist nations of
the West and consequently sought and acquired external loan for developmental projects (Ake,2001). According to Fasipe (1990:1), “Progress in the world is characterized and helped by, inter dependence of ideas, men, foods and capital”. Madur (2003) stated that borrowing and therefore debt is neither an aberration nor peculiar to Nigeria country, it is in fact a legitimate part of everyday economic management. Hence most of the rich countries in the world today relied heavily on external loan to attain their present economic height.
Post Second World War Europe especially Germany was reconstructed and rehabilitated through external borrowing under the aegis of the Marshal Plan (Ogbenovo, 2005). Nigeria after the traumatic effect of colonialism resorted to external loan, this was expected, among other things, to be used to develop their economics and provide the socio- economic needs of their citizenry. Unfortunately, this resort to external borrowing has been a cog in the development of African nations.
This is not unconnected with their weak economic base, unfavourable terms attached to the loans, policy errors and mismanagement among others. Furthermore the postcolonial African states of which Nigeria is among became unable to repay their debt and thus got entangled in the web of debt crisis that bedeviled their socio-economic development. The External Debt Statistics: Guide for Compilers and Users jointly published by the BIS, Eurostat, IMF, OECD, Paris Club, UNCTAD and the World Bank in 2006states that: “Gross external debt, at any given time, is the outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to non-residents by residents of an economy”.
Nigeria’s debt crisis attracted global attention during the last quarter of 1982, series of prescription to get the continent out of its economic doldrums have been offered. Prominent among them is the restructuring of the Nigerian economy in line with IMF- dictated reforms of
deregulation, privatization and liberalization (Obaseki and Bello, 1995). However, many debtor countries and their sympathizers prefer debt cancellation to release fund for the development and welfare of the countries of Africa since they were overburdened by excruciating debt service
obligation. Nigeria for instance, prior to 2006 was expending $ 2 billion annually on debt servicing which was nine times the annual health budget (Okanjo – Iweala et al, 2003).
When the Obasanjo-led democratic government came on board in 1999 the situation on ground made him flag off an intensive campaign for debt relief/cancellation. This yielded positive result in April 2006 and 2007 when Nigeria’s major creditors –the Paris Club cancelled 60 percent of the total debt owed to it by the country and also settled its debt to the London Club. But the debt burden is far from being over as Nigeria’s present external debt stands at over $2.6 billion consisting bilateral and multilateral loans which have a grace period of ten years, attract yearly thirty and forty years to liquidate. As a direct consequence of external debt burden, this study investigates the impact of Nigeria’s external debt profile on the country’s socio- economic development.
Debt relief is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations. Traditionally, from antiquity through the 19th century, it refers to domestic debts, particularly agricultural debts and freeing of debt slaves.
In the late20th century it came to refer primarily to Third World debt, which started exploding with the Latin American debt crisis (Mexico 1982, etc.).
In the early 21st century, it is of increased applicability to individuals in developed countries, due to credit bubbles and housing bubbles. The debt crisis of Nigeria reached a maximum proportion in year 2003 when the country was to transfer as much as $2.3 billion to service its debt. During these periods, the world leaders were granting debt relief to some highly indebted poor countries of the world. The IMF and the World Bank which initiated the move did not consider Nigeria as a poor country since it has oil. And since oil has maintained an all-time high price range since1999, getting relief was near impossible as the Paris club was not ready to listen to Nigeria. Meanwhile, President Olusegun Obasanjo in conjunction with his finance minister Okongo Iweala had prioritized securing debt relief from the creditor as a cardinal objective of his administration.
This was essential because Nigeria already had a debt overhang problem which was having a debilitating effect on the economy in terms of the resources available to service debt; it’s crowding out effect on private investments and its constraint on the growth and development of the nation.
However, one popular efficiency argument for the provision of the debt relief is the socalled debt overhang, which was evident in Nigeria. Thus, a strong justification really exists for the struggle for debt forgiveness initiated by the then administration .
And since, it is evident that huge debt burdens was associated with low investment, poverty and low economic growth in Nigeria, the debt relief should have a stimulating effects on investment, alleviates poverty and trigger economic growth and development. As matter of fact, the objective of debt relief programme was to reduce the external debt of severely indebted poor countries to a sustainable level to enhance investment and further economic growth. It was highly expected that the debt forgiveness initiatives especially the Heavily Indebted Poor Countries initiate (HIPC) launched by the IMF and the World Bank in 1996and 1999, respectively would set free HIPC resources for spending on the poor.
Consequent upon the foregoing argument, the HIPC initiative introduced some guiding principles regarding a country’s eligibility for debt relief. To be considered for HIPC initiative assistance, a country must face an unsustainable debt burden, beyond traditionally available debtrelief
mechanisms and establish a track record of reform and sound policies through IMF and IDA supported programmes.
In the late 1999, the HIPC initiative was expanded in order to provide deeper and more rapid debt relief to a larger number of countries. The enhanced HIPC initiative (HIPCII) integrated debt relief plans into a comprehensive poverty reduction strategy requiring Poverty Reduction Strategy Papers (PRSP) on broad- based participatory process as a necessary condition to qualify for debt relief. With this approach, the global donor community for the first time took governance structures in the debtor countries (at least implicitly) into account. Furthermore, the thresholds for sustainable debt levels were redefined and lowered to a debt-per-export ratio of 150% and debt-to-revenue ratio of 250%.
The eligibility of a country is proved in a staged process. If a country is deemed eligible, the debt relief is delivered at the socalled completion point. During the period of the initial decision point and the completion point, the progress of the country with respect to institutional reforms and structural adjustments is under observation and supported by the IMF and the World Bank. In practice, the time span between HIPC II and the completion point is rather large. Some countries are still waiting to reach the completion point. Sequel to the approval of a 2 years policies support instruments that monitored Nigeria’s economic reforms drive, Paris club agreed to write off 60% of the $30.85 billion owed to its club members.
The deal was finally signed in July 2005.
Thereafter, the country was able to offset the remaining 40% debt owed to Paris club. By March 2006, Nigeria owed nothing to Paris club. This debt relief eventually saved the country from the yearly $2.3 billion debt service burden. It was however 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 significant debt relief as a matter of fact should help the country’s goal of reducing poverty, accelerating the pace of growth and development and provide some boost for the ongoing reforms and millennium development goals. One would expect that by now, 4 years after debt forgiveness to Nigeria, the country should be on the path of economic recovery characterized by improved power supply, greater budgetary allocation to health and education, reduction in unemployment rate, improvement in road network, improvement in the living standard etc. which will be a good sign with respect to the expected impact of recent debt forgiveness benefit.
But to the contrary, the country appears to be deteriorating further with worsen power supply, higher rate of unemployment poorer road network and lower living standard. There is no evidence of accelerating pace in the growth and development of the country. Rather what we have is the signal of economic stagnation characterized by double digit inflationary trend and set back in poverty alleviation initiatives. This situation is quite worrisome. It is instructive therefore to find out the direction and the extent of the impact of the debt relief on the economic growth of the country. This forms the basic objective of the study. In this study however, we analyze the effectiveness of the debt forgiveness. For this purpose, we ask whether or not the debt relief has been effective in stimulating economic growth.
PROJECT TOPIC- EXTERNAL DEBT AND ECONOMIC DEVELOPMENT IN AFRICA: THE NIGERIAN EXPERIENCE, 1999-2013
1.2 Statement of the Problem
Nigeria after independence had a low and insignificant ratio of external debt to Gross Domestic Product (GDP) of 3.4 percent. (Fajana 1990). It was on this promising economic condition that Nigeria launched her first five years National Development Plan that was expected to usher in rapid development and emancipate it from the chains of colonial legacy. But, partly because of the ravages of the Civil War (1967- 1970) and largely because of its burning desire for rapid socio- economic development, the Nigeria government resorted to development finance from public funds mostly from bilateral and all multilateral lending bodies.
Since the five year plan of the early 1960 up to date, Nigeria launched several development plans sourcing finance from the international capital market that is notorious for its high rates of interest and terms of repayment. Yet development seems to elude the country. Nigeria is classified as one of the severely indebted low – income countries that are greatly afflicted by underdevelopment, dependency, global poverty and external debt, in spite of its widely acknowledge oil wealth. Coupled with this is the magnitude of capital flight from the country in the form of debt servicing payments that not only absorbs major properties of export earnings but also eats into the funds that could have been used to provide essential facilities and improve the welfare of its citizens (Aja, 2003: 106). This tends to negate the past imaginative and generation efforts at finding solutions to the debt crisis.
Nigeria’s external debt prior to April 2006 as 2 billion dollars and increased to about $31 billion due to debt servicing between 1977 and 2005 in addition to debt repayment of the actual $13.5 billion. Olusegun Obasanjo during his regime implored fervently for debt cancellation cum relief so that he would channel about $45 million that occur daily from the sales of crude oil to poverty reduction and socio- economic project. In spite of the debt repayment to its major creditors Paris and London Club, Nigerians are yet to experience any fundamental change on their socio- economic lives.
Notwithstanding one can categorically affirm that it is not yet uhuru since the country is still not only saddled with an external debt burden of over $2.6 billion and a staggering amount of N1.87 trillion domestic debt (The Guardian, 2007). These are made up treasuring Bill worth N754billion presenting equal percent of the total debt. Treasuring Bonds of N413.6 billion accounting for 22.16 percent of the stock and finally development stock made up of N720 million, which is 0.04 percent of the debt (DMO, 2007).
Despite this uninteresting reality, most scholars on Nigeria’s debt crisis like Oyejide et al, (1985) tend to ignore the implication of the large amount of domestic debt. Management policy have failed to address Nigeria’s debt crisis, they prefer to dissipate their intellectual energy on celebrating a debt repayment that seem to be a waste of the nation’s resources. Authors, such as Okonjo-Iweala (2003), Madovo, (2003), Akhakpe (2007), CIA (2010) and Awolowo and Aluko (2010) among others failed to probe the subsisting complementary interest of the country’s ruling class and that of the international bourgeoisie with regard to debt repayment issue.
Theliterature review demonstrate that authors like Soludo (2003) Okonjo-Iweala (2003), Akhakpe (2010), Ogbeifun(2007) and Aluko and Awolowo (2010) agree that external debt has been one of the challenges of the Nigeria state. They note that a great deal of the nation’s revenue was spent on debt payment and servicing which deprived her of much needed income to undertake infrastructural development and improve the living standards of the people. Notwithstanding, the fail to account for the impact of the debt rescheduling on the development of the nation. Therefore, this study seeks to investigate external debt and underdevelopment in Nigeria between 1999 and 2013. It seeks to establish if debt rescheduling resolved Nigeria’s external on West and its effect on her underdevelopment. The study shall attempt to fill this gap within the context of the questions stated below:
1. Does debt rescheduling resolve Nigeria’s external dependence on the West and underdevelopment?
2. Does the structure of the Nigerian economy undermined economic development?
1.3 Objective of the Study
The central objective of this study is to examine the link between Nigeria’s external debt and the challenges of underdevelopment between 1999 and 2013. The specific objectives are:
1. To analysis if debt rescheduling has led to Nigeria’s external dependence on the west and underdevelopment;
2. To determine if the structure of the Nigerian economy undermines economic development.