THE EFFECT OF EXTERNAL DEBT ON THE NIGERIA ECONOMIC GROWTH (1989-2010)

CHAPTER ONE

INTODUCTION

1.1 BACKGROUND OF THE STUDY

The accumulation of external debt is a common phenomenon of the third World countries at the stage of economic growth and development where the supply of domestic savings is low, current account payment deficit is high and import of capital is needed to increase domestic resources.

The management of Nigeria’s external debt has been a major macroeconomic problem especially since the early 1980s. For many years now, the country’s debt has been growing in spite of the efforts being made by the Government to manage and minimize its crushing effects on the nation’s economy. Such efforts range from the various refinancing and restructuring agreements to debt conversion programme and the deliberate allocation of substantial resources towards servicing the debt. Of particular concern to the authorities, is the heavy debt burden it imposes when compared with the country’s debt service capacity.

In recent years, however, some observers have held different perceptions about Nigeria’s capacity or otherwise to service her debt. This is largely because of the improved income to the country arising from export of crude2

oil, Nigeria’s major export. Moreover others have argued that bad governance, especially during the military rule,largely accounted for the mismanagement of the Nigerian economy and therefore, the people should bear the brunt. Whatever position one holds, what appears undisputableis the increasingly large debt service requirement which imposes considerable stress on the Nigerian economy even when the improved resource inflow is factored into the country’s cash flows. Indeed, the issue of sustainability of Nigeria’s debt profile continued to be the focus of research and public debate until the recent initiative of the Paris Club of Creditors which appears to address the issue in a more meaningful way.

Even then the conditions and adequacy of the debt relief have continued to generate further debate.

The objective of this paper is to review Nigeria’s external debt and the burden it imposes, and use the various indicators and prevailing global economic circumstances to justify the need for substantial debt relief for the country.

However, during the late 70s and early 80s, commercial banks began playing a big role in international lending by recycling surplus OPEC ‘’petrodollars’’ and issuing general purpose loans to less developed countries to provide balance of payment support and expansion of export sectors. While foreign borrowing can be highly beneficial providing the resources necessary to

3promote economic growth and development, it has its cost. In recent years, these costs have greatly outweighed the benefits for many developing nations. The main cost associated with the accumulation of a large external debt is ‘’debt serving’’.

Debt servicing is the payment of liquidation of the principal and accumulated interest. It is a contractually fixed exchange on domestic real income and savings as the debt grows or as interest rate raise. Debt service payment must be made with foreign exchange. In other words, debt service obligation can be met only through export earnings.

However, should the composition of import change or should the composition of export change or should interest rate rise causing ballooning of debt service payment or should export earnings diminish, debt servicing difficulties are likely to arise. This has been the experience of most of the heavily indebted third World nations.

In order to solve the problem, several external debt-financing options were adopted under the Structural Adjustment Programme (SAP) in 1986. Since the introduction of this programme, Nigerians have been plunged into one hardship after another ranging from the devaluation of the naira through Second Tie Foreign Exchange Market (SFEM) now Foreign Exchange Market (FEM) to the rising prices of commodities, inflation etc. SAP as an economic4

restructuring program is capable of alleviating the country’s debt trap, a miracle Nigerian’s are waiting to see.Specifically, as part of the programmatic approach to reduce the burden of external debt, embargo on new loans, limit on debt service payment, debt restricting and debt conversion have been adopted in recent years.1.2 STATEMENT OF THE PROBLEM

The aim of any well-co-ordinated and articulated economic policy is to achieve a sustained economic growth and development. However, a proper understanding of what development is will enable a policy maker to formulate appropriate policies for the acceleration of economic growth. In other words, the nature of the development policy of a country will depend on how policy makers of the country perceive growth.The insistence of the need of external assistance obscures the necessity for the people of poor countries themselves to develop the facilities, attitudes and institutions which are required if these societies are to achieve sustained substantial material process. Indeed, these insistences are external aids to help perpetuate the ideas and attitude widespread in these countries which are changing the economic progress.5

The rapid growing foreign debt, its consequent payment problem and lack of appropriate debt management has plummeted the country into a turbulent economic crisis, balance of payment problem, foreign exchange sequence scarcity of essential items ( including raw materials and spare parts) which led to the closure of many factories, retrenchment of workers, high rate of unemployment and underemployment. Embarking on productive ventures for instance led to waste of resources and of course, poor economic performance.