1.1 BACKGROUND OF THE STUDY
Prior to Nigeria’s independence in 1960 and up to the 1970’s there was no serious debt problem facing the country. The reasons were that the ideology of development in the 1960’s did not encourage excessive borrowing from international capital market because it was through to be in appropriate. Even where borrowing was permitted to finance development it was not easy to obtain loan from the international capital market and the pre-independence period did not witness any significant growth in the level of opportunity attractive to foreign investors.
According to an International Monetary Fund (IMF) survey (Washington DC 1989). Nigerian has been ranked among the fifteen heavily indebted countries in” the world with crippling debt burden Nigerian experienced serious balance of payments difficulties around 1963 where her level of external reserves fell below the minimum of four months import as a result of this. a number of fiscal measures were adopted by Nigeria to certain the situation. This included the imposition of higher tariffs and the introduction of quantitative import restrictions.
In the early 1970’s the country’s external reserves rose sharply due to the increased importance of crude oil. This situation led to the then head of states general Yakubu Gowon into making public money creation. Consequently, the fiduciary element of the currency was expanded and a policy to hold down the cost of public debt began.
As could be observed the country took off with a cautious debt policy which led to the first major borrowing of $2.8million from the international capital market. This was later interrupted by the events of the devastating civil war. Even then, the low profile picture of public debt was maintained. What then the government did in response to the war situation was to float new public debt instruments of short term maturities, treasury bills, treasury certificates etc. in addition to the development loan stock.
The cautions debt policy especially as regards to external borrowing was maintained throughout the first and to greatest extent of the second decade of the country’s political independence.
According to Nwankwo (1989), from 1978 caution seems to have been thrown to the winds and the nation seems to have gone into an external borrowing spree. The total external debt of the federal government at the end of 1975 was N349.9million and internal debt of N1678.9million as against an external debt of N20982.7million-and internal debt of N25675million at the end of 1984.
This increased public debt scenario has obvious brig run implications on the country’s development effort and more importantly the wellbeing of her citizens. Even more disturbing is that oil revenue on which pre-casts external debt was contracted has been tilling thereby compounding debt servicing obligation.
One of the greatest problems faced by the government revenue such that any fluctuations in oil prices affect government revenue. This can be seen in the form of governments belief that it could not only afford to import large quantities of consumer goods and services, but that it could also borrow large sums of money from abroad to finance certain projects within Nigeria give the country’s high credit worthiness.
Unfortunately, when oil prices started dropping, instead of the government reducing the level of imports, it resorted to more external borrowing to fill the foreign gap.
Inspite of all efforts, the debt crisis of Nigeria keeps escalating because of unpatriotic and unscrupulous citizens of the country. Government efforts are also plagued by an inherent contradiction and politicization of federal policies and projects, which have thwarted honest measures or effort of the government to alleviate the debt crisis.
1.2 STATEMENT OF THE PROBLEM
The external debt of Nigeria dated back to the pre-independence era. Sources from the federal ministry of finance indicated that Nigeria contracted her first loan from the World Bank in 1958. The loan was a relatively small amount of US $28million for railway extension in the country. The loan has since been fully rapid. The external debt renamed relatively low during the oil boom years. In fact, during that period, the country’s foreign exchange position was healthy that Nigeria had to lend money to such institutions as the International Monetary Fund (IMF) under the oil facility in 1974. During the oil boom, it was the general perception that Nigeria was relatively “Under Borrowed.”
However, the position change dramatically in 1977 as the oil boom collapsed and was replaced by an oil glut. The reserve in out fortunes brought a lot of pressure on the government finances and consequently, it became absolutely necessary to borrow for balance of payment support. This led to the first major borrowing of $1.0billion from the International Capital Market. This loan was generally referred to as the ‘Jumbo Loan’. The loan had a short maturity period with very high interest rate.
From 1978, our external borrowing rose sharply. Most of the loans were raised from private capital markets as funds from the bilateral and multilateral institutions were not easy to source. In order to further complicate issues, some state government resorted to borrowing from external sources to finance all sorts of projects, regardless of their viability. Most of the bans were used to finance social white elephant project which were unproductive.
It has to be noted that while the debt incurred between 1970 and 1978, consisted mostly of the soft long terms loans from bilateral and multilateral institutions, the borrowing after 1978 were from private capital markets with very high interest rates. The sharp decline in oil earning as a result of the oil glut led to our difficulty in meeting out external loans obligations.
Consequently, from 1982, the country started to incur payments arrears and also became incapable of paying her imports as at when due. This development impaired the international credit worthiness of the country as most international organizations became reluctant to give additional lines of credit to the country.
Nigeria’s external debt problem started as a result of the changing structure of Nigeria’s debt. The share of official development assistance (ODA) and confessional loans has declined over the years, while the share of the debt owed to private creditors and loans contracted on market terms increased. The shift from official to private sources of credit by African and Nigeria in particular shortened loans maturity. from the average of 22years in the 1970’s to 15years in the 1980′ s and reduced grace periods from 6years to 4years. Besides the maturity transformation, the shift also involved, paying considerable higher interest rate, which has short maturities. An important consequence of the maturity transformation was of debt service obligations at a time of acute shortage of foreign exchange. This explains the rapid buildup of payment arrears and thus intensified the age-long problem of net capital flows. The consequence has been a serve bunching of amortization and interest payments since 1984 and a worsening of the debt crisis in Nigeria, and as such, this has formed the bulk of outstanding external debts. As such, the solution to the debt problem is a major task facing policy makers in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The main objective of the study is to review the implications of external debt burden on the Nigeria economy, and to identify the major causes of the debt burden. This study is to see the effect of external debt on the Nigeria economy. In the process of the study, a detailed analysis of the country’s external debt shall be made and be used to prove the hypothesis to arrive at a reasonable conclusion and recommendations.
1.4 RESEARCH QUESTIONS
In the process of carrying out this study, these are some of the research questions used for this purpose.
(i) What are the effects of debt on- the Nigeria economy?
(ii) Is the loan has any effect on foreign exchange?
(iii) Is there any relationship between external debt and Gross Domestic Product (GDP)?
(iv) Is the principal repayment of the debt has any impact on Gross Domestic Product (GDP)?
(v) What is the effect of the debt on the standard of living? However, econometrics and statistical techniques will be employed in carrying out the analysis in order to assess the impact of external debt on the Gross Domestic Product (GOP). Here, the external debt is divided into two ways parts:
Principal repayment on external debt and Interest payment on external debt
1.5 SIGNIFICANCE OF THE STUDY
The significance of the study lies in the fact that if adequate attempts are made at understanding the genesis, causes and implications of the external debt burden on the Nigeria on the Nigeria economy, it could help policy makers and government to be able to formulate policies that would help facilitate the debt problem, and adjust such policies to enhance necessary macro-economic growth and development.
Finally, it will help build up or rather contribute to existing knowledge in this field of economics, and shall make useful recommendations that would assist policy makers in formulating development plans for the Nigeria economy.
1.6 RESEARCH HYPOTHESIS
In the analysis, the following hypothesis is set up:
Ho: Principal repayment on external debt has no impact directly on Gross Domestic Product (GDP).
Hi: Principal repayment on external debt has an impact directly on Gross Domestic Product (GDP).
Ho: External debt has no impact directly on Gross Domestic Product (GDP).
Hi: External debt has an impact directly on Gross Domestic Product (GDP).
It is on the basis of this that conclusion on the study would be established and interpreted.
1.7 SOURCES OF DATA
The major of date use would be derived and based purely on secondary sources. These sources include central bank of Nigeria (CBN) Economic and Financial Reviews, CBN Annual Report and Statements of Accounts. CBN briefs and bullions. Other sources includes: Journals, Newspapers, Seminar Papers and Articles.
1.8 SCOPE AND LIMITATIONS OF THE STUDY
The study is redistricted to the foreign debt outstanding of Nigeria.
It covers a period of fourteen years, 1989-2003. although debts were incurred before and after these year’s, the study will be restricted to the above given years based on the fact that a study of this nature will not yields sufficient results if a longer period is used and also such result could equally be applied in future policy decision making process.
However, a research study of this nature, cannot be done successfully without having one or two problems one of the limitations of this study is the use of secondary data; this to the fact that it is difficult to generate primary data relevant for the study.
Secondly, the problem of irreconcilability of the available data published by the central bank of Nigeria (CBN) on one hand, and those publish by the IMF and other independent bodies on the other hand.
Also in most cases, the presentation of the debts owed by Nigeria is not clearly presented in the reports of CBN i.e. they do not follow a systematic and permanent format.
Despite these constraints, the available data will be used for an indepth analysis.
1.9 PLAN OF THE STUDY
In an attempt to do justice to the study under review, the outline of the study will be such that:
Chapter one will give a brief statement of the problem with the objectives introduction and methodology of the study.
Chapter two shall look into various theoretical background and literature review of the Nigeria external debt burden and its implication.
Chapter three shall cover the methodology of research and specification of the model.
Chapter four shall look at the descriptive analysis and statistical results and interpretation and shall analysis the study.
Chapter five of the paper shall be devoted to summary, conclusion and recommendation
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