THE IMPACT OF EXTERNAL DEBT MANAGEMENT ON THE NIGERIA ECONOMY

THE IMPACT OF EXTERNAL DEBT MANAGEMENT ON THE NIGERIA ECONOMY

ABSTRACT

Nigeria’s external debt, including its size, structure, source, type, and composition the work analyzes the indexes for measuring the debt burden and examines alternative debt scenarios. It distinguishes between the internal and external factors influencing external debt accumulation, identifies the changes in the international environment necessary to alleviate the debt burden, and examines the relationship between export performance and the debt burden. After reviewing the structure of the Nigerian economy and its political history, the work concludes that Nigeria’s debt crisis is the result of structural defects inherent in the economy since independence. The work finds that the indicators of the debt burden have been relatively high. The behavior of these indicators, under varying assumptions, is explored using a growth-cum-debt model. The external and internal causes of debt accumulation are tested econometrically, and the results show the most important variables to be the real effective exchange rate and the terms of trade. The work ends with some policy prescriptions for dealing with the debt crisis.

 CHAPTER ONE

1.0       INTRODUCTION

1.1       BACKGROUND OF THE STUDY

It is generally expected that developing countries, facing scarcity of capital, will acquire external debt to supplement domestic saving. The rate at which they borrow externally—the “sustainable” level of foreign borrowing—depends on the links among external and domestic saving, investment, and economic growth. The main lesson of the standard “growth with debt” literature is that a country should borrow externally as long as the capital thus acquired produces a rate of return that is higher than the cost of the foreign borrowing. In that event, the borrowing country is increasing capacity and expanding output with the aid of foreign savings (Bernal, 1987:155).

In theory, it is possible to calculate the sustainable level of foreign borrowing, based, for example, on the terms, maturity, and availability of foreign capital. In practice, however, the task is nearly impossible, since such information is not readily available. Thus, various ratios, such as that of debt to exports, debt service to exports, and debt to GDP (or GNP), have become 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 foreign debt.

If additional foreign borrowing increases the 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 grow faster than the country’s capacity to service it (Ajayi and Kahn 2000: 23).

According to Afxentiou, and Serletis (1996: 30), countries in sub-Saharan Africa have generally adopted a development strategy that relies heavily on foreign financing from both official and private sources. Unfortunately, this has meant that for many countries in the region the stock of external eternal debt has built up over recent decades to a level that is widely viewed as unsustainable. For example, in 1975 the external debt of sub-Saharan Africa amounted to about $18 billion. By 1995, however, the stock of debt had risen to over $220 billion. The standard ratios reflect this huge build up of debt. The region’s aggregate debt –export ratio rose from 51 percent in 1975 to about 270 percent in 1995 (excluding South Africa, the ratio was above 300 percent). For all low- and middle income developing countries, the average ratio of debt to exports was less than 150 percent. Similarly, the debt -GNP ratio for sub-Saharan Africa was 14 percent in 1975, but by 1995 it had reached more than 74 percent. Although debt-service ratios have remained relatively low because of the highly confessional nature of external financing provided to Africa, many countries in the region have been unable to service their debt without recourse to rescheduling under Paris Club arrangements or by accumulating arrears. The massive growth in external debt in sub-Saharan Africa over the past two decades has given rise to concerns about the detrimental effects of the debt on investment and growth, principally the well-known “debt overhang” effect.

Furthermore, there is now considerable evidence that the build up in debt was accompanied by increasing capital flight from the region. In other words, sub-Saharan Africa was simultaneously an importer and an exporter of capital. Service delivery by key institutions designed to mitigate the living condition of vulnerable groups were hampered by decaying infrastructure due to poor funding. By cutting down expenditure on social and economic infrastructure, the government appears to have also constrained private sector investment and growth through lost externalities. This has reduced total investment, since public investment is significant proportion of the total investment in the country.

External debt arises mainly when a given country’s imports is greater than its exports. So this debt arises directly because of the imbalances between balance of trade and balance of payment, or indirectly when a country borrows from richer or wealthy country/bodies in order to finance their mentioned imbalancement. And debt, especially external one usually has a devastatic gametic, macroeconomic effect. Yes it’s what portrays any nations stand and image before other nations in the international community as was the case of my country Nigeria, when it began to experience this cankerworm called external debt. This was as a result of fall in the price of the almost mono-export product of my country called crude oil, in the early 1980’s. Things really meant too bad for the inhabitants of my country. Just because of export is less than import. What factors lead to its failure? What has been the impact of this external debt in the Nigerian economy? These and other things are what really this project is set up to research on.

 1.2       STATEMENT OF THE PROBLEM

Nigeria as one of the developing countries in Africa has over the years involved in the servicing of its foreign debts borrowed either from the world bank/international monetary fund (IMF). In trying to make an inquiry into the theory of debt, the use to which debt as a means of financing government programmes and of course changing the magnitude of such debt which will arise from retirement of some debt, contracting more debt or redeeming debts of high interest rate and replacing them with ones of low interest (Emekweue, 1993:127).

However, if the debt is externally created, the primary burden can be shifted forward in time since there may not be any domestic sacrifice of resources when such debts are contracted. The servicing of this debt (payments of interest) has constituted a real burden because domestic incomes are reduced by the necessity to transfer resources abroad to service and liquidate the debt on maturity. It is against this background that the researcher is bound to envisage conflicts between creditor countries and Nigeria (debtor country) in term of servicing the loan. Thus, this problem could be stated in the form of the following research questions:

1. What is the basis of Nigerian borrowing loans from foreign countries and how has this loan benefited Nigeria?
2. What is the impact of foreign debt on Nigerian economy from 1985 – 2005?
3. What are the impacts of these loans on the macroeconomic and social welfare in the Nigerian economy?
4. What is the cost benefit of borrowing loans from foreign countries by Nigeria? Thus, the researcher will be looking for the answers to the above problems.

1.3       RESEARCH QUESTIONS

This study seeks to answer the following questions:

1. What are the sources of Nigerian external debt?
2. Has external debt impacted positively on the GDP growth rate?
3. What are the effects of foreign debt on the performance of domestic economy?
4. How government policies have affects management of Nigerian foreign debt?
5. To ascertain those factors that hindered effective management of the Nigerian foreign debt. What are those factors that have hindered and effective management of Nigeria’s foreign debt?

1.4       OBJECTIVES OF THE STUDY

The objectives of this research is generally to assess the impact of foreign debt management on the Nigerian economy as well as identifying various problems militating against prudent management of loans borrowed from foreign countries.

Thus, the study is set out to achieve the following:

1. To determine various sources of Nigerian foreign debt.
2. To assess the effects of foreign debt on the Gross Domestic product on the Nigerian economy.
3. To analysis the impact of Nigerian foreign debt to the development Nigerian economy.
4. To find out the effects of government policies on the implementation of foreign loans borrowed.
5. To ascertain those factors that hindered effective management of the Nigerian foreign debt.
6. To finally to make recommendations

1.5       RESEARCH HYPOTHESIS

H1: Nigerian external debt has significant impact on the Gross Domestic Product Rate (GDP)

Hoi: Nigerian external debt has no significant impact on the Gross Domestic Product

Rate (GDP).

H2: Nigeria external debt has significant effect on the multilateral trade.

Ho2: Nigeria external debt has no significant effect on the multilateral trade.

H3: Nigerian external debt has significant impact on the rate of inflation.

Ho3: Nigerian external debt has no significant impact on the rate of inflation.

H4: Nigerian external debt services have significant effects on the balance of payment system.

Ho4: Nigerian external debt services have no significant effects on the balance of payment system.

1.6       SCOPE OF THE STUDY

The main objective of this study is to assess the impact of foreign debt management on the Nigerian economy for the periods of twelve years (1994 -2005).

Thus, we have been guided by this consideration to limit our scope to this study. The researcher did delve into the experiences of other countries foreign debt management. It also assessed the general economic situation of foreign debt management in Nigeria.

1.7       LIMITATIONS OF THE STUDY

It is necessary to mention that the researcher was beset with many problems in the course of this work, they include; High cost of sourcing data from internet, sources and conducting a research study of this nature in Nigeria.

The researcher believes that those problems have not in any way affected the outcome and relevance of the work.

 1.8       SIGNIFICANCE OF THE STUDY

1. The research is meant to be particularly educative in the sense that it is going to help us expose some of the experiences Nigeria has acquired in the course of servicing her foreign debts. It will also enable us to know whether Nigeria’s relationship with her creditors country has been beneficial or not to the general macro-economic development of the Nigeria economy.
2. In as much as a lot of write-up and publications have appeared from these long periods of Nigerian debt servicing, most of these expression have neither economic nor even any basis at all. Besides very few Nigerians are really concerned with the main issues involved or have critically analysed Nigerian foreign debt situation. Though, such analysis can be very difficulty, complicated and time consuming, indeed that only those qualified and equipped can meaningfully undertake or embark on such. Essentially, this research is a blood attempt in that direction.
3. Moreover, there is need to provide a documented analysis of the “impact of Nigerian foreign debt on the Nigerian economy”.
4. Finally, this study is meant to be beneficial to the policy makers, business investors, bankers, financial managers, the general public and the Nigerian economy as whole as well as other developing nations who may embark in the art of serving or borrowing foreign loans.

1.9       DEFINITION OF TERMS

• GDP (Gross Domestic Product)

According to Okeke (1990: 297) Gross Domestic Product is the total value of goods and services produced in the country at a given time normally a year.

• External Debt

External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country.

• Sustainable Debt

According to Orji (2001: 36), sustainable debt is 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, avoiding accumulation of arrears, while allowing an acceptable level of economic growth.

• Currency Option

According to Akinsulire (2002: 474), this gives the holder the right but not the obligation to sell or put/buy/call the contract currency at a set price and at a given date.

• Interest Rate Swaps

According to Akinsulire (2002: 474), this is an agreement between two parties to exchange interest payments for a specific maturity on an agreed principal.

• Debt Swap

According to Akinsulire (2002: 474), this is set of transactions called debt equity swap in which the firms buys country’s dollar debt and swap this debt with Central bank for local currency that can be used to acquire a local enterprise.

• Currency Swap

According to Akinsulire (2002: 474), this is a simultaneous borrowing and lending operation whereby two parties exchange specific amount of two currencies at the outset at the spot rate. The parties undertake to reverse the exclusive rate after a fixed term at a fixed exchange rate.

• Currency Future

According to Akinsulire (2002: 474), this is a contract for future delivery of a specific quantity of a given currency with the exchange rate fixed at the time the contract is entered into.

• Currency Forward Contract

According to Akinsulire (2002: 474), this is similar to future contracts except that they are not traded on organized market. They are non standardized private deals.

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