SIGNIFICANT EFFECT OF EXTERNAL DEBT ON NIGERIA ECONOMIC GROWTH

CHAPTER ONE

INTRODUCTION

1.1      Background of the study

In less developed nations,like Nigeria, the consequence of initially distoreted economy  by the fiscal deficits and desire to make the nation market economy makes them to engage in large scale borrowing from abroad to finance their budget deficits and to cover the shortage of domestic investment which constrained economic growth.The large  budget deficits were mainly financed through external debt in

Nigeria This research  work focuses on the effect of debt inflow on growth rates, as well as determining which economic, political and institution factor undermine or amplify the effectiveness of debt management with respect to growth.. I investigate whether numerous debt initiatives during the 1980s and 1990s have had a significant effect on economic growth rate in Nigeria and in other

developing countries in generally. The major initiatives during that  period were negotiatives as bilateral agreement under the guidance of the part club of creditors. These agreements were complemented later on the   Heavily Indebted Poor Countries (HIPC) debt relief initiative in 1996 and its “enhanced” version in 1999. The heavily indebted poor countries initiative, the first cordinated

effort by international financial community to reduce the foreign debt of the  world poorest  countries was, base on the theory that economic growth in these countries was being stifted by heavies debt burdens making it vitually impossible for them to escape poverty. The ultimate objective of incurring debt is to uplift the living standard of the generality of people and equally the overriding aims of

foreign loans are to yield profitable returns to the western money lender, which leads Nigeria government by Babangiders Administration to introduce the Structural Adjustment Programme (SAP) in 1989. Having a clear idea of which channels through which the debt- investment and the debt growth relations work is important in order to design better policies in highly indented poor countries, giving different weights and properties to stock or flow reductions. The basic findings of this preliminary draft suggest that debt service payments could have an actual negative effect on investment ratio, while they do not direct affect economic growth. With respect to the debt-investment relationship, there is evidence of the debt overhang effect, since debt has a

non-linear effect on the rate of investment; this relationship vanishes when we turn to the debt growth nexus, in which the preferred specifications support a strong and negative effect of external indebtedness on economic growth.

SIGNIFICANT EFFECT OF EXTERNAL DEBT ON NIGERIA ECONOMIC GROWTH

 1.2   Statement of the Problem.

The deteriorating affect on the Nigeria’s external debt situation is critical aspect of the dynamic changes in the country’s economy.Olukoshi (1990) observed that Nigeria debt crisis resulting from a market deterioration in the aggregate performance of the production sectors of the economy has led to chronic balance of payment deficit, a yawing gap between government revenue and expenditure, the

collapse of social and infrastructural service, an escalating level of inflation and reduction in the rate of private and public investment rate. There are theoretical arguments supporting the idea that high debts dampen economic growth, especially because they lower the rate of investment and introduce a lot of uncertainty and vocatility in the economic system.

        Thus, some of the returns from investing in the domestic economy are effectively “taxed away” by existing foreign creditors, and in investor is discourage. Debt overhang also depressed growth by increasing investors uncertainty about actions the government might take to meet its onerous debt servicing obligations.

          As the stock public sector debt rises in Nigeria, investors worry that the government will finance its debt service obligations through distortionary measures, such as rapidly increasing the money supply (which causes inflation). Even when they do invest, they are more likely to opt for production with quick returns rather than for projects that enhances growth on a suitable basis over the long -run.

          Other results includes an acute shortage of basic consumer goods, a drastic decline in standard of living, high degree of openness and the dependence of industrial production on importation, large public sector and over-regulation of economic activities and decline in external assets.

          Based on the above problems the research sets out to find solutions to the following question.

  • What are the causes of external debt accumulation?.
  • Is Nigeria external debt increase the rate of economic growth or is Nigeria external rate decrease or constant the rate of economic growth?
  • What is the relationship between increasing constant and falling external debt and economic growth?.
  • To what have the debt management Strategies have applied in Nigeria economic growth?
  • What are the likely solutions to the external debt accumulation and debt crisis?

To the interest of this study, to examine the straight and weakness of external debt on economic growth, we need a good expository approach to the debt crisis in Nigeria.

1.3                 Objective of the Study

  1. To examine the significant effect of external debt on Nigeria economic growth.
  2. To examine the causes of external debt growth in Nigeria.
  3. To scrutinize the cause of external debt growth in Nigeria.
  4. To make policy recommendations that will help alleviate the external debt crisis in Nigeria so that the rate of economic performance would be improved.
  5. Most economies especially in the less developing countries have at one period or the other experienced short-falls between saving and investments, therefore the purpose will be to look at the causes of these short-falls and other related factors that have led to the debt crisis and also to proffer appropriate recommendations on how to handle the debt crisis.
  6. SIGNIFICANT EFFECT OF EXTERNAL DEBT ON NIGERIA ECONOMIC GROWTH

1.4                   Statement of Hypothesis

          The following hypothesis are to be tested in this research work.

  1. The external debt has no significant effect on Nigeria economic growth rate.
  2. The external dent has a significant effect on Nigeria’s economic growth rate.

1. 5                  Significance of the Study

This research work tries to reveal the causes of external debt growth in Nigeria. It also tends to determine whether there is a significant impact of external debt burden on economic performance rate- By establishing link between debt and economic growth rate. It helps to determine whether the external debt economic growth ratio is rising or falling in the economy. It further provides policy

makers with objective information for use in formulating policies to address the external debt crisis. The study will be of great advantage to economists and researchers because it provides them with a base for further studies

1.6                    Scope and Limitation of the Study

This research work covers the relationship between external debt and economic growth over the period of 1984 to 2003 in Nigeria

It is interesting to find how external debt effect economic growth and how big impacts will it be. It is important to detect channels through which the impact is likely to occur.

The studies on external debt and its effect on the economy growth rate have been conducted by several writers. Some of the existing literatures includes Daniel J Mitehel Ph.D (2005); Pushpa-Kmari (1995); Wiert Wiertsema (2005); Benedict Clement, Rna hatta Charya  and Toan Quoz Ngugen (1985); Andrea F. Prebitero (2002). Although some preoccupies with the study of the causes of

external debt, debt management strategies, and heavily indebted poor countries; they could not reach a consensus on the exact  causes of the external debt growth. Equally, data inaccuracy imposes limitations, data sources are numerous but they often contain information, which cannot be compared. In some sources, gross values of some variables were provided instead of net values that would have more accurate estimate output (Onah 1994:153).

1.7                   Definition of Terms

Budget deficit:  It is current expenditures in excess of

current income. Most frequently used to describe the

Situation where government income tax receipts fails to

cover government expenditure.

Crowding out Public Investment: Means that a large debt service discourages public investment, since its soak up resources from the government budget and reduces the amount of money available for productive investment (Andrea F. 2003).

Debt: It is an obligation or liability arising from the borrowing of finance or taking of goods and services on credit i.e. against an obligation to pay later. Depending on the terms of transaction. Interest is payable at specified periods on most form of debt.

Debtor Nations: It is a nation, which has been a net borrower from other countries or has been at the receiving end of investment by foreign enterprises and has thereby accumulated a volume of net debts and obligation of these countries.

Debt Overhang: This means that whether the stock of debt is too large, the expected interest payment are a positive function of output. Thus, investment decreases, because their return will be taxed away by foreign creditors, and the pace of economic growth will slow down ( Kruman, 1988 and Sach 1989).

National Debt or Public Debt: It is the debt of a country owes to its citizens or to other countries or organisation such as the Paris Club, International Monetary Fund (IMF), Multilateral credit and commercial creditors.

Uncertainty: The presence of a large external debt make the micro economics environment; this effect is not only related to the variability of the main macro economic indicators (interest rate, total trade, balance of trade, inflation rate), but also to the policy and institutional framework. The consequences  are not only related to scarce investments, but also to a limited access to International Financial markets and to capital plight  (Andrea F. 2003)

Services of debt: It is the payment of the interest due on a debt by debtor nation to creditor nation.

SIGNIFICANT EFFECT OF EXTERNAL DEBT ON NIGERIA ECONOMIC GROWTH

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