THE EFFECT OF EXTERNAL DEBT ON ECONOMIC GROWTH OF NIGERIA

CHAPTER ONE

INTRODUCTION
BACKGROUND TO THE STUDY
It is expected generally that countries facing a scarcity of capital will definitely resort to acquiring external debt to supplement domestic savings (Pattilo, et al 2002). The rate at which the borrow abroad (the sustainable level of foreign borrowing) depends on the links between the foreign domestic saving investment and economic growth. The main lesson of the standard “growth with debt” literature is that a country should borrow abroad as long as the capital thus acquired produces a rate of return that is higher thus acquired produces a rate of return that is higher than the cost of the foreign borrowing. In the event, that the borrowing country is increasing capacity and expanding output with the aid of foreign savings.
In theory, it is possible to calculate the sustainable level of foreign borrowing based, for instance on the terms, maturity and availability of foreign capital. In practice, however, the task is nearly possible since such information is not readily available. Thus, various ratio such as that of debt to export, debt service to export and to GDP (or GNP), have become the standard measures of sustainability. Even though it is difficult to determine the sustainable level of such ratios, their chief practical value is to warn of potentially explosive growth in the stock of debt service burden more than it increases the country’s capacity to carry that burden, the situation must be reversed by expanding exports. If it is not and conditions do not change, more borrowing will be needed to make payments and external debt will be needed to make payments and external debt will grow faster than the country’s capacity to serve it.
The origin of Nigeria’s external debts dates back to 1958 when a sum of $ 28 million was contracted for railway construction. Between 1958 and 1977, the level of foreign debt was minimal as debt contracted during the period were the concessional debts from bilateral and multilateral sources with longer repayment periods and lower interest rates constituting about 78.5 percent of the total debt stock. From 1978, following the collapse of oil prices which exerted considerable pressure on government finances, it became necessary to borrow for balance of payment support and project financing. This led to the promulgation of decree No.30 of 1978 limiting the external loans, the federal government could raise to 5 billion naira. The first major borrowing of $ 1 billion referred to as jumbo loan was contracted from the international capital market (ICM) in 1978   increasing the total debt to $2.2 billion.
Thereafter, the spate of borrowing increased with the entry of state governments into external loan contractual obligations. While the share of loans from bilateral and multilateral sources also increased considerably. Thus, by 1982, the total external debt stock was $12.1 billion. Nigeria’s inability to settle her import bills resulted in the accumulation of trade areas amounting to $9.8 billion between 1982 and 1988. The insured and uninsured components were $2.4 billion and $7.4 billion respectively. A reconciliation exercise which took place between 1973 and 1988 with Paris club and London reduced the amount to $ 3.8 with an accrued interest of $1.0 billion bringing the total to $4.8 in 1998. The external debts rose further to $33. 1 billion in 1990 but decrease to $ 27.5 billion in 1991 and increased steadily to $ 32.6 billion at the end of December 1995. The total debt outstanding the highest source with a share of 73.2 percent in 1999 prior to the canvass made of debt cancellation.
As at December 2000, Nigeria debt stock amount to about 75% of GDP and about 180% of export earning. Debt service due in 2000 was about $ 3.0 billion or 14.5% of export earnings. In 1999 for instance, expenditure on health represented about 0.2% of the total GDP and 0.7% of GNP compared with 3.4% ($1.5 billion) annual budget of GNP spent on debt servicing during translating to about 4 times federal Government budgetary allocation to education and 12 times the allocation to health while in 2001, debt service payment was $ 2.13 billion which amount to 6 times of the federal government budgetary allocation to education and 17 times allocation for the year. The debt burden on less developed countries can be traced to the early 1980s after the oil price increase of the 1970s (Ezike and Mojekwu 2011). It was the product of reaction by the international community to “oil price shocks”. One of the legacies of African countries from the crises has been an increasing debt burden which constituted a major constraint to growth and development. External debt because a burden to African countries because contracted loans were not optimally deployed, therefore, returns on investments were not adequate to meet maturing obligations and also hindering economic growth. African economies have not performed well, partly because of the increased outflow of resources to service debt obligations and partly because the necessary macro-economic adjustment has remained elusive for most of the countries in the continent.

1.2     STATEMENT OF THE PROBLEM
It is no exaggeration to claim that Nigeria’s huge external debt burden was one of the hard knots of the structural adjustment programme (SAP) introduced in 1986 by the Babangida administration. The high level of debt service payment prevented the country from embarking on larger volume of domestic investment which would have exchanged growth and development. With the recent debt forgiveness granted to Nigeria, one would expect the economic process of the country to be increased. The channels through which indebtedness works against growth are identified as currents stock of external debt as a ratio of GDP which may stimulate growth and debt ratio to capture the crowding out effects. Debt service payment reduced export earnings and other resources and therefore retard growth.
Nevertheless, the debts if well utilized, that is, spent on productive ventures are capable of moving the economy forward. In that case, the returns from these economic activities will be sufficient enough to pay off both the interest rate and the principal while those productive activities continue to yield returns for the economy even in the nearest future. Anyway, given the number of years, since Nigeria had been independent and the substantial debt it has incurred coupled with the economy of similar or lesser aged developing countries. The main interest of this study is to investigate the effect the external debt on the economic growth development.

1.3     RESEARCH QUESTION
The following research questions would be considered in the course of the study:
What has been the pattern of Nigeria’s external debt in the parts?
To what extent did external debt impact on the economic growth?
What has been the effect of external debt on the per capita income of the country?

1.4     RESEARCH HYPOTHESIS
Ho:   There is no significant relationship between external debt stock and economic growth of Nigeria.
H1:    There is significant relationship between external debt economic growths of Nigeria.
H0:    There is no significant impact of external service payment on the economic growth of Nigeria
H1:    There is significant impact of external service payment on the economic growth of Nigeria on the economic growth of Nigeria
Ho:   There is no significant relationship between the external debt and per capital income in Nigeria.
H1:    There is significant relationship between the external debt and per capital income in Nigerian

1.5     PURPOSE OF THE STUDY
The study will focus on the following objectives in the other chapters:
Empirically investigate he effects of external debt on the growth process of the country (Nigeria);
Explore  the impact of the debt cancellation on the Nigerian economic growth;
Investigate the politics of the debt forgiveness and the possible effect of Nigeria economy.
To know the impact of the external debt on the per capital income in Nigeria.

1.6     SIGNIFICANCE OF THE STUDY
The significance of this study are as follows:
The study would provide an econometric basis upon which to examine the effect of external debt on Nigeria economic growth.
It would provide an objective view to the relevance of debt cancellation to Nigerian economy.
It would provide an insight to the effect of the external debt as the per capita income of Nigeria.
The study would also reflect impact of various measures or strategies employed in the past to reduce external debt.

1.7     SCOPE OF THE STUDY
The scope of this study shall cover the external debt trend of Nigeria over the years to date. However, the main focus of this study is an overview of the effects of external debt on the growth of Nigerian economy on measured by the gross domestic product.
The empirical investigation of the effect of external debt on the economic growth of Nigeria shall be restricted to 1970 to 2008

1.8     LIMITATION OF THE STUDY
Attention was given to other courses required by this programme. Thus, time happens to be the major limit or challenge encountered by this study.
Considering the fact that cost of living as a student, tends to be aggravating on daily basis, finance also posed a major limitation to this study.

1.9     DEFINITION OF TERMS
Some of the terms that were used in the study are as follows;
External debt; refers to money borrowed by a country from foreign (usually European, North American or Japanese) lenders. Interest on this debt must be paid in the currency in which the loan was obtained.
Gross external debt; at any time is the outstanding amount of those actual current, and not contingent, liabilities that require payments of principal and/or interest by the debtor at some points in the future and that are owed to nonresidents by residents of an economy.
Principal and interest: the amount the debtor to the creditor is known as the principal amount. Interest can accrue on the principal amount resulting in an interest cost for the debtor –
Economic growth; This has to do with the productive increase in the goods and services produced in a country.