THE IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN NIGERIA
1.1 Background of the study
Debt could be from within a nation’s boarder (Internal) or from outside (External). External debt may be defined as debt owed to non-residents repayable in terms of foreign currency, food or service (World Bank, 2014). The effect of external debt on investment and economic growth of a country has remained questionable for policy makers and academics alike. However,sustainable economic growth is a major concern for any sovereign nation, most especially the Less Developed Countries (LDCs) which are characterized by low capital formation due to low levels of domestic savings and investment (Adepoju, Salau and Obeyelu, 2007). It is expected by theses LDCs when facing a scarcity of capital would resort to borrowing from external sources so as to supplement domestic savings. Soludo (2003) asserted that countries borrow for two broad reasons; macroeconomic reason that is to finance the level of consumption and investment or to finance transitory balance of payment deficit and avoid budget constraint so as to boost economic growth and reduce poverty. The constant need for government to borrow in order to finance budget deficit has led to the creation of external debt (Osinubu and Olateru, 2006)
External debt is a major source of public receipts and financing capital accumulation in any economy (Adepojuet al, 2007). It is a medium used by countries to bridge their deficits and carry out economic projects that are able to increase the standard of living of the citizenry and promote sustainable growth and development. External borrowing ought to accelerate economic growth when domestic financing is insufficient. Extremal debt also improves total factor productivity through an increase in output which in turn enhances Gross Domestic Product (GDP) growth of a nation. The importance of external debt cannot be overemphasized as it is an ardent booster of growth, thus improves the standard of living by alleviating poverty.
It is widely recognized in the international community that excessive foreign indebtedness in most developing countries is a major impediment to their economic growth and stability (Audu, 2004; Mutasa, 2003). Developing countries like Nigeria have often contracted large amount of external debt that has led to the mounting of trade debt arrears at highly concessional interest rates. Gohar and Butt (2012) opined that accumulated debt service payments create a lot of problems for countries especially the developing countries reason being that debt is actually serviced for more that the amount it was acquired and this slows down the economic growth process in such countries. The inability of the Nigerian economy to meet its debt service payment obligations has resulted in debt service burden or debt overhang that ha mutilated against her growth and development (Audu, 2004). The genesis of Nigeria’s debt service burden dates back to 1978 after a fall in world oil prices. Prior to this occurrence Nigeria had incurred some minor debt from World Bank in 1958 with a loan of US$13.1 million for the construction of the Niger dam. The first major borrowing of US$1 billion known as the ‘Jumbo loan’ was in 1978 from the International Capital Market (ICM) (Adesola, 2009).
External debt has a significant impact on the growth and investment of a nation up to a point where high levels of external debt servicing sets and affects the growth as the focus moves from financing private investments to repayment of debts. External borrowing has positive benefits on growth but above particular points or thresholds accumulated debts begin to have a negative impact on growth. Fosu (2009) observed that high debt service payments shift spending away from health, educational and social sectors. This obscures the motive behind external borrowing which is to boost growth and development rather than get drowned in a pool of debts service payments which eats up most of the nation’s resources and hinders growth due to high interest payments on external debt.
Nigeria as a developing nation has adopted a number of policies such as Structural Adjustment Programmes (SAP) of 1986 to liberalize her economy and boost Gross Domestic product (GDP) growth. In a bid to ensure implementation the implementation of these policies, the government embarked upon massive borrowings from multilateral sources which led to high external debt service burden and by 1992 Nigeria was classified among the heavily indebted poor countries (HIPC) by the World Bank.
The Unbated increase in the level of external debt service payments has led to huge imbalances in fiscal deficits and budgetary constraints that have militated against the growth of growth of the Nigerian economy. The resultant effect of the debt quagmire in Nigeria could create some unfavourable circumstances such as crowding out of private investment, Poor GDP growth etc.
1.2 Statement of Problem
Debt could be a response to a need to meet the much needed obligations whether at the level of an individual or nation. Therefore, nations utilize the borrowing option in a bid to meet these obligations; this is how debt is created. According to Chen (2018) debt is an amount of money borrowed by one party from another. It is used by many corporations and individuals to make large purchases that they could not afford under normal circumstances. Shortfall in domestic savings to finance productive activities compels nations to borrow (Ezeabasili, 2006 and Momodu, 2012).
Researchers seems to have mixed thoughts on funding domestic investment through external borrowing. Some posit that it is inadequate while others embrace its adequacy. They assert that only if the external borrowing is used effectively in productive activities, will it facilitate reduction of imports. In line with the Economic Recovery and Growth Plan (ERGP), the suggested debt structure for Nigeria is 60: 40; the former being the percentage of external funding while the latter is domestic funding. This was considered needful as against the 80:20 ratio structure in operation at the inception of the Debt Management Office (DMO). This newly adopted funding was intended to reduce the crowding out effect of government spending on the private sector. Thus, domestic debt, in itself has the effect of crowding out private investment; an issue that is remedied by external borrowing. This is because a rise in government borrowing from the domestic economy would reduce the ability of domestic investors to access credit leading to a reduction in their investment. Furthermore, it must be stated that there are other measures of public debt other than the debt to GDP ratio often emphasized in literature and this overt emphasis has limited the broad consideration of debt issues. Some of the other measures include the Debt to Revenue, Debt to exports, Debt service payments to Revenue among others.
Nigeria took the jumbo loan in 1978 which was used productively for needed infrastructures like the Dam, etc but recent debts have not been put to seemingly adequate productive use in the country. Hence, strengthening the position of some researchers who have thus questioned the need for debt contraction and accumulation. They say it creates the intergenerational and intragenerational inequity since it benefits the present but burdens the future generations who have to clear the debt. According to the King James version of the Christian Holy book, “a good father leaveth inheritance for his children”; this sort of debt contradicts the implied meaning of that verse. As a result, this study seeks to assess the effect of external debt on economic growth in Nigeria as well as provide further evidences on the impact of debt on the process of growth in Nigeria
1.3 Justification of the study
In other to foster the national reliance and provide improved economic well being for the people; Nigeria took loans, aids and grants both internally and externally for development; and those loan have turn into a huge burden to her, and making it difficult to have adequate financial resources for social services and the provisions of infrastructure essential for development (Momoh, 2005). In his analysis however, it was observed that large percentage of the foreign loan Nigeria got has not necessarily used for financing of development project but were rather looted and shared by the political leaders; and its repayment/servicing became a big burden for the countryBut Ake (2001) observed that the foundation for debt in Africa was laid soon after independence when the new leaders of Africa settled on economic development. His observation revealed that the debt crisis in Africa is a shared responsibility between the countries of Africa and their creditors. He insisted that the creditor countries should take the large share of the blame because it was their activities in Africa during the colonial era that actually weakened the structures of Africa economy.
This resulted in the emerging leaders at the independence of African state, to hook on the developed economy of the western states for their economic and development survival. Ake argues that the consequence was what has become known as dependent development, because the conditions attached to the foreign loan/aid took for granted the validity of its inherited economic structure (Ake, 2001).
This view was collaborated in Igwe (2005) writing on the World Bank and International Monetary Fund (IMF) and Nigeria’s Reform process, noted that Nigeria is a peripheral state in the world capitalist system. Nigeria political independence was not liberation from the claws of colonial masters inasmuch as economic independence is absent. The inherited structures (economic, political and social) which were meant to help in economic advancement were well under the influence and control of the imperialist capitalism. These equally apply to our government and national development plans. In his argument, he maintained that the poor performance of the public sector helped to increase the depression in the midst of harsh economic conditions in most countries including Nigeria, which as a consequence lead to balance of payment problems, debt servicing obligations, default in loan repayment. This forced theleaders to turn to multilateral financial institutions, which in turn prescribed measures that were meant for economic reforms of distressed countries in need of assistance. The important issue here is what are the indicators for external debt sustainability and how would Nigeria be able to keep or maintain its debt at a sustainable level?
In order to at least, escape from dictates from multilateral financial institutions, default in loan payment, debt servicing obligations and so on. Sustainable debt is however the level of debt which allows a debtor country to meet its current and future debt service obligations in full, without recourse to further debt relief or rescheduling and avoiding accumulation of arrears, while allowing an acceptable level of economic growth (UNCTAD/UNDP, 1996).
According to IMF Debt, and Reserve-related indicator of external debt sustainability analysis is generally conducted in the context of medium term scenarios. These includes numerical evaluations that take account of expectations of the behavior of economic variables and other factors to determine the conditions under which debt and other indicator would stabilize at reasonable levels, the major risks to the economy, and the need and scope for policy adjustment. In these analysis macroeconomic uncertainties, such as the outlook for the current account, and policy uncertainties, such that fiscal policy, tend to dominate the medium-term outlook.
The important issue here is how would Nigeria avoid strenuous debt which usually attached strident measures that affects her negatively? This is because the issue of debt service payments; as it affect development negatively have faced Nigeria and other countries since early eighties. At a time when as result of the faster growth of debt service over external reserve; the Nigeria’s debt burden increased and made payment a difficult task. Just as the country expanded annually $3 billion about 30% of our total revenue on servicing the foreign debt that was initially $17 billion, being the actual capital borrowed (Okonjo-Iweala et al., 2014).
1.4 Research objectives
The main objective of this study is to ascertain the impact external debt has on economic growth in Nigeria. Other specific objectives include:
1. To determine the long run relationship between external debt and economic growth in Nigeria.
2. To examine causality between external debt and economic growth in Nigeria?
3. To identify the causes of external debt burden in Nigeria.
1.5 Research questions
This research seeks to investigate the impact of external debt on economic growth in Nigeria and therefore tries to answer the following research questions:
1. Does a long run relationship exist between external debt and economic growth in Nigeria?
2. Is there a causality between external debt and economic growth in Nigeria?
3. What are the causes of Nigeria’s external debt burden?
1.6 Research hypothesis
The hypotheses to be tested and the course if this study includes:
H0: There is no significant long run relationship between external debt and economic growth in Nigeria.
H1: There is a significant long run relationship between external debt and economic growth in Nigeria.
H0: There is no causal relationship between external debt and economic growth in Nigeria.
H1: There is a causal relationship between external debt and economic growth in Nigeria.
1.7 Scope of Study
The study seeks to analyse Nigeria’s external debt and its impact on her economic growth. In order to fully capture its effect on the economy, a thorough empirical investigation will be conducted with data covering a period of 18 years i.e. 2000-2018.
1.8Definition of terms
Debt burden: this is a large sum of money that a country or organization owes to another and which they find very difficult to pay.
Debt: Money that one person or entity owes or is required to pay to another, generally as a result of a loan or other financial transaction.
Economy: A country’s system of using its resources to produce wealth, or the relationship between production, trade and supply of money in a particular region or country.
Debt servicing: this is the cash that is required to cover the repayment of the interest and principal on a debt for a particular period.
External debt: it is the portion of a country’s debt that is acquired from foreign sources such as foreign corporations, government or financial institutions.
Economic Growth: economic growth refers to an increase in aggregate production in an economy.