Impact of external debt on economic growth in nigeria

Thesis Overview

<p> </p><p><strong>INTRODUCTION</strong></p><p><strong>1.1 Background to the Study</strong></p><p>One of the key macroeconomic objectives of a nation is the achievement of sustainable economic growth. To achieve this goal, every Government requires a substantial amount of capital finance through investment expenditures on infrastructural and productive capacity development (Umaru, Hamidu and Musa, 2013). Consequently, this facilitates the growth of their gross domestic product (GDP), which if persistent should culminate in economic development, a status vigorously pursued by all less developed countries (LDCs), Nigeria inclusive. However, Ayadi &amp; Ayadi (2008) note that the amount of capital available in most developing countries treasury is grossly inadequate to meet their economic growth needs mainly due to their low productivity, low savings and high consumption pattern. Governments therefore resort to borrowing from outside the country to bridge the resource gap.</p><p>Countries borrow to promote economic growth and development, by creating conducive environment for people to invest in various sectors of their economies (Umaru et al, 2013). Similarly, Obudah and Tombofa (2013) argued that the specific reasons why countries may borrow include: to be able to finance their reoccurring budget deficit, as a means of deepening their financial markets, to enable them fund the increasing government expenditures, to enhance their narrow revenue sources and low output productivity which results in poor economic growth. According to Chenery’s (1966) Dual-gap theory, governments borrow to augment their limited resources so as to bridge the savings-investment gap.</p><p>The Keynesian economics school of thought posits that government borrowing can be used to promote economic growth, through the financing of government deficit expenditures which stimulates aggregate demand and thus encourage increase in private investments. However excessive public debt can create great debt burden for the country. Soludo (2003) in Okonjo-Iweala et al (2013) argues that once an initial stock of debt grows to a certain threshold, servicing them becomes a burden, and countries find themselves on the wrong side of the Debt Laffer Curve, with debt crowding out investment and growth. Conversely, Bakare (2011) asserts that a country’s indebtedness does not necessarily slow growth, rather it is the nation’s inability to optimally utilize these loans to foster economic growth and development and ensure effective servicing of such debt that hampers the benefits derivable from borrowed capital resources.</p><p>Debt, arguably, remains one of the major economic challenges facing governments in low income countries due to their persistence budget deficit and this has continued to attract the attention of international financial institutions, and bilateral lenders. Udeh (2013) notes that this has brought about the adoption of several initiatives capable of alleviating the debt burden which continues to hinder the growth prospects of most highly indebted poor countries (HIPCs) economies. These initiatives range from debt rescheduling to outright cancellation.</p><p>Nigeria’s external debt can be traced back to the pre independence period, though the debt level was minimal 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, from 1977, the debt stock incurred by the country has been on a steady increase, rising from $0.763 billion in 1977 to $5.09 billion in 1978 and $8.65 billion in 1980, an increase of over 73.96 percent (DMO, 2004). This subsequently rose to $35.94 billion in 2004. Following the debt relief in 2006 Nigeria was advantaged to offset substantial part of its debt but this later started to record an upward trend. According to Amaefule (2015) Nigeria’s total debt stock as at December 2014 stood at N12.4 Trillion.</p><p><strong>1.2 Statement of the Problem</strong></p><p>Nigeria like most highly indebted poor countries has low economic growth and low per capita income, with domestic savings insufficient to meet developmental and other national goals. Nigerian exports were primarily primary commodities with export earnings too small to finance imports which are mostly capital intensive (Manufactured) goods which are comparably more expensive (Siddique, Selvanathan and Selvanathan, 2015). Compounding the problem is Nigeria’s drift to mono economy with the discovery of oil. The oil sector generates about 95% of foreign exchange earnings and about 80 percent of budgetary revenue. The inability to diversify her revenue sources coupled with corruption and mismanagement compels Nigeria to have inadequate fund for growth and developmental projects such as roads, electricity pipe borne water and so on.</p><p>Nigeria as a developing nation has adopted a number of policies such as the Structural Adjustment Programme (SAP) of 1986 to liberalize her economy and boost Gross Domestic product (GDP) growth. In a bid to ensure the implementation of these policies the government embarked upon massive borrowings from multilateral sources which resulted in a high external debt service burden and by 1992 Nigeria was classified among the heavily indebted poor countries (HIPC) by the World Bank.</p><p>Moreover, despite the huge amount of debts which Nigeria has continued to incur over the years, with the aim of achieving economic growth and development, high unemployment, poverty, and low standard of living is still prevalent in the country, as observed by Aiyedogbon and Ohwojasa (2012) and Nwagwu (2014). The inability of Nigeria to effectively meet her debt obligations has adverse effect on the economy, as interests arrears accumulate over the years, thereby creating a much greater debt burden on the nation resulting in a greater percent of her revenue being spent on debt service arrears.</p><p>Audu (2004) opined that the debt service burden has continued to hamper Nigeria’s rapid economic development and worsened the social problems; this is because debt servicing crowds out investment and growth. Furthermore, Pattilo et al (2002) assert that at low levels, debt has positive effects on growth but above the threshold point accumulated debt begins to have a negative impact on growth.</p><p>This therefore has informed the need to embark on the present study with a view to painstakingly examine the economic impact of external debt liability in Nigeria.</p><p><strong>1.3 Objectives of the Study</strong></p><p>The general objective of this study is to investigate the economic impact of external debt liability in Nigeria. The specific objectives are:</p><p>i. To determine the impact of external debt on Gross Domestic Product (GDP) in Nigeria.</p><p>ii. To examine the effect of external debt servicing on Gross domestic Product in Nigeria.</p><p>iii. To find the impact of exchange rate on Gross Domestic Product in Nigeria.</p><p><strong>1.4 Research Questions</strong></p><p>This study will be guided be the following research questions:</p><p>i. What is the impact of external debt on Gross Domestic Product (GDP) in Nigeria?</p><p>ii. How does external debt servicing affect Gross domestic Product in Nigeria?</p><p>iii. What is the impact of exchange rate on Gross Domestic Product in Nigeria?</p><p><strong>1.5 Research Hypotheses</strong></p><p>The researcher intends to test the following hypotheses:</p><p><strong>Hypothesis 1:</strong></p><p>Ho: There is no significant impact of external debt on Gross Domestic Product (GDP) in Nigeria.</p><p>HI: There is a significant impact of external debt on Gross Domestic Product (GDP) in Nigeria.</p><p><strong>Hypothesis 2:</strong></p><p>Ho: There is no significant relationship between external debt servicing and Gross domestic Product in Nigeria.</p><p>HI: There is a significant relationship between external debt servicing and Gross domestic Product in Nigeria.</p><p><strong>Hypothesis 3:</strong></p><p>Ho: There is no significant relationship between exchange rate and Gross Domestic Product in Nigeria.</p><p>HI: There is a significant relationship between exchange rate and Gross Domestic Product in Nigeria.</p> <br><p></p>