1.1 Background to the Study
Debt borrowing is a major instrument used by the government to finance deficit budget, and it ought to accelerate economic growth especially when domestic financial resources are inadequate and need to be supplemented with funds from both local and foreign countries. Economist believes that reasonable level of borrowing promotes economic growth through factor accumulation and productivity growth (Emori, 2015).
The reason is because countries at their initial stage of development usually have low capital stock and their investment opportunities are often limited, resulting to borrowing to supplement the national income. Emori (2015) further argued that if the borrowing countries channel their resources properly into productive investment that they will not only enjoy macroeconomic stability but also an accelerated economic growth and development. According to Ahmet, Burhan and Emsen, (2012), most developing countries result into both domestic and foreign borrowing, because of insufficient domestic economic resources and less tendency of saving, especially in the less developed and developing countries.
One major source of aid is foreign borrowing or external debt. The motive behind external debt is due to the fact that countries especially the developing one lack sufficient internal financial resources and this calls for the need for foreign aid. (Bilginoglu and Aysu, 2008).
Governments borrow to fill the vacuum created by the fiscal gaps in the proposed expenditure and expected revenue within a fiscal period. If government does not want to compromise macroeconomic stability by printing more money and if government taxation capability is limited, then debt option becomes the only available avenue that the government can explore to provide social overhead capital for the citizenry (Ibi and Aganyi, 2015). Governments borrow in principle to finance public goods which increase welfare and promote economic growth. Government spending generally has to be financed either through taxation, seignior age (money printing), or with debt.
Arnone (2005) defines external debt as that portion of a country’s debt that is acquired from foreign sources such as foreign corporations, government or financial institutions. According to Ogbeifin (2007), external debt arises as a result of the gap between domestic savings and investment. As the gap widens, debt accumulates and this makes the country to continually borrow increasing amounts in order to stay afloat. He further defined Nigeria’s external debt as the debt owed by the public and private sectors of the Nigerian economy to non-residents and citizens that are payable in foreign currency, good and services.
Nigeria like other developing countries had faced domestic financial constraint. This constraint has made external debt an essential complement to domestic resources for promoting sustainable economic growth among these developing countries. This is possible if the economic benefits from such projects are larger than the interest paid on the debt servicing (Obadan, 2004). External debt is a major source of public receipts. The accumulation of external debt should not signify a slow economic growth of the borrowing countries.
According to Were (2001), it is a country’s inability to meet its debt obligation compounded by the lack of information on the nature, structure and magnitude of external debt that makes external debt an economics problem. Soludo (2003) opined that countries borrow for two broad categories; macroeconomic reasons to either finance higher investment or higher consumption and to circumvent hard budget constraint. This implies that an economy borrow to boost economic growth and alleviate poverty. He argued that when debt reaches a certain level, it begins to have adverse effect, debt servicing becomes a huge burden and countries find themselves on the wrong side of the debt-laffer curve, with debt crowding out investment and growth. The debt service burden has militated against Nigeria’s rapid economic development and worsened the social problems (Audu, 2004).
According to Omoleye, Sharma, Ngussam, and Ezeonu (2006), Nigeria is the largest debtor nation in the Sub-Saharan Africa. The genesis of Nigeria’s external debt can be traced to 1958 when 28 million US dollars was contracted from the World Bank for railway construction. Between 1958 and 1977, the need for external debt was on the low side. However, due to the fall in oil prices in 1978 which exerted a negative influence on government finances, it became necessary to borrow to correct balance of payment difficulties and finance projects. The first major borrowing of 1billion US dollars referred to as Jumbo loan was contracted from the international capital market (ICM) in 1978 increasing the total to 2.2 billion U.S dollars (Adesola, 2009).
The spate of borrowing increased thereafter with the entry of the state government into external loan contractual obligation. According to the Debt Management Office (DMO), Nigeria’s external debt outstanding stood at N17.3 billion. In 1986, Nigeria had to adopt a World Bank/International Monetary Fund (IMF) sponsored Structural Adjustment Programme (SAP), with a view to revamping the economy making the country better able to service her debt (Ayadi and Ayadi, 2008).
The increasing fiscal deficits driven by the higher level of external debt servicing is a major threat to growth of Nigeria economy. The resultant effect of large accumulation of debt exposes the nation to high debt burden. Nigeria is arguably the richest nation on the continent of Africa, yet due to the numerous macroeconomic problems, such as inflation, unemployment, mono product (sole dependency on crude oil as a major source of revenue), corruption and mounting external debt and debt service payment, majority of her citizen fall below the poverty line.
Therefore, this study seeks to thoroughly and empirically investigate the consequential effect of Nigeria’s external debt on her economy and arrive at a logical conclusion.
1.2 Statement of the Problem
A number of interrelated factors contributed to the rise in external debt including macroeconomic policy, increases in the price of a number of primary commodities encouraging countries to borrow, low real interest rates and a favourable world environment. Unfortunately, the favourable conditions were short-lived and when they did change over the 1980s, heavily indebted countries experienced difficulty in servicing the debt (Noko, 2015).
Therefore huge external debt does not necessarily imply a slow economic growth; it is a nation’s inability to meet its debt service payments fueled by inadequate knowledge on the nature, structure and magnitude of the debt in question (Were, 2001).
It is no exaggeration that this is the major challenge faced by most developing countries, Nigerian inclusive. The inability of the Nigerian economy to effectively meet its debt servicing requirements has exposed the nation to a high debt service burden. The resultant effect of this debt service burden creates additional problems for the nation particularly the increasing fiscal deficit which is driven by higher levels of debt servicing. This poses a grave threat to the economy as a large chunk of the nation’s hard-earned revenue is being eaten up. The question then becomes why has external borrowing not accelerated the pace of growth of the Nigerian economy? This research will focus on these issues in external debt to determine the impacts of external debt on Nigeria’s economic growth by expanding the scope of study beyond what has been done in times past and employing some advanced econometric test to curtail the incidence of spurious regression.
1.3 Research Questions
This research seeks to investigate the impact of external debt on Nigeria economic growth and therefore tries to answer the following specific research questions:
- To what extent has external debt impacted on economic growth of Nigeria?
- Is there any observed long-run relationship between external debt and Nigeria economic growth?
1.4 Objectives of the Study
The main objective of the study is to investigate on the impact of external borrowing on Nigeria’s economic growth. The specific objectives of study are to:
(i) Empirically investigate the impact of external debt burden on Nigeria’s economic growth.
(ii) Examine the long-run relationship between external debt and Nigeria’s economic growth.
1.5 Statement of Hypothesis
In order to have a framework for the study and also to answer the research questions above, the following hypotheses were formulated:
- H0: External debt has no significant impact on Nigeria’s economic growth.
- H0: There is no long-run relationship between External debt and economic growth of Nigeria.
1.6 Significance of the Study
This study is focused on providing alternative measures to tackling external debt management problems. It will also serve as a tool in revamping government policies towards loan procurement and debt servicing in Nigeria. This work will serve as a yardstick for further research and documentation on Nigeria’s external debt crisis. This study will further be significant as its findings will provide a basis which will aid policy makers in proffering polices aimed at managing the debt crisis situation in Nigeria. The research will also be very significant to students of economics – with key interest on debt financing and management. And finally, the research will serve as a reference guide to other researchers who will find the research helpful in conducting further research on the topics.
1.7 Scope and Limitation of the Study
The study seeks to analyze Nigeria’s external debt and its impact on her economic growth. In order to fully capture its effect on the economy, a thorough empirical investigation will be conducted with data covering a period of 44 years i.e. 1970-2014. This period was chosen to cover the period after the oil collapse and also the post debt-relief era. This study is limited by the following factors;
Paucity of Materials: Materials for the study were not adequate and consistent thereby resulting to extra effort by the researcher to validate the data.
Inaccessibility of Data: Difficulty in accessing data for the study was yet another limitation. This had its own toll on the research work because it limited the data that was used for the study.
Financial Constraint: Lack of adequate funds on the part of the researcher constituted another problem.
However, amidst all these enumerated constraint faced by the researcher, efforts was adequately made by the researcher to ensure the reliability of the result by subjecting the research to many advanced econometric test to fish out any possible spuriousity of result among others.
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