Impact of Debt Burden on Nigeria economy

Impact of debt burden on Nigeria economy 1981-2016.  Download the full research work from chapter one to end.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Debt whether domestic or externally sourced remains one of the key instrument used by policy makers to spur the economic activities of a nation in order to put the economy on the part of growth and development. It is interesting to note that debt in itself is not bad as no nation nor individual can attain substantial level of growth without contracting debt from time to time. It is the inability of a country to service its debt that make debt an issue of concern.

Debt is an important source of finance mainly used to supplement the government funds for supporting development and other needs of a country. However, if the debt is not used in income-generating and productive activities, the ability of a debtor nation to repay the debt is significantly reduced. It is often argued that the excessive debt constitutes an obstacle to sustainable economic growth and poverty reduction in a nation (Ayadi, 2009).

Debt is that portion of a nation fund sourced from individuals, corporate organisations and countries to complement its revenue to meet some developmental project. It could be sourced domestically or externally, when it is sourced from individuals organisation within the borrowing country then we call it domestic or internal borrowing often through the sales of government treasury bills and bonds.

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. 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.

Nigeria like other developing countries had faced domestic financial constraint. This constraint has made debt an essential complement to domestic resources for promoting sustainable economic growth. However, accumulation of debt should not signifies slow economic growth of the borrowing countries.

According to Noko (2014), it is a country’s inability to meet its debt obligation compounded by the lack of information on the nature, structure and magnitude of debt that makes debt an economics problem. Soludo et al (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 on the economy, 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.

In Nigeria, debt service burden has become a serious issue in the country. The chart below show that Nigeria debt service payment is growing exponentially. In fact 2017 budget presented by president Buhari set outside 1.66 trillion naira only for debt service payment far above the capital and recurrent expenditure. The image below revealed Nigeria debt profile and debt service payment between 2000-2015.

Source: CBN, 2015

Arguably 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 (Adejuwon et al, 2010).

However, borrowing should be channeled to meaningful economic activities, government should borrow to finance capital project and not recurrent expenses. In order words, government should not borrow for consumption purpose. The problem Nigeria is facing today is that the government borrow to consume and pay salaries.

The increasing fiscal deficits driven by the higher level of debt servicing is a major threat to growth of Nigeria economy and the resultant effect of large accumulation of debt exposes the nation to high debt burden.

Nigeria is about the richest nation on the continent of Africa, yet due to the numerous macro-economic problems, such as inflation, unemployment, mono product (sole dependency on crude oil as a major source of revenue), corruption and mounting debt service payment, majority of her citizen fall below the poverty line of daily $1.5. Therefore, this paper seeks to thoroughly and empirically investigate the consequential effect of debt burden on Nigeria economic performance and arrive at a logical conclusion.

1.2 Statement of the Problem

The high debt profile of Nigeria despite cancellation of some external debt by London club, Nigeria still remain among the top most indebted countries in the whole world. It is unfortunate how successive government in Nigeria overlook the negative impact of domestic and especially external debt and focus only on the positive impact when contracting the loans.

According to Were (2001, cited in Noko, 2014) 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 that breed economic hardship and woes in a country.

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.

Countries like Japan has a very large volume of external debt profile but at the same time has large volume of external reserves in US dollar. It is the lack of precise definition of external borrowing that often leads to mismanagement of funds.

Managing debt service burden entails reducing the burden of external and domestic debt in the country. According to DMO over 50% Nigeria budget are allocated to servicing her debt not even repaying the capital borrowing.

Nigeria debt burden profile keeps on rising but the economic growth and other major macroeconomic goals are falling this can be seen from Nigeria debt profile image.

And this has raise many questions among the stake holders like:

  • How has Nigeria debt being expended?
  • Why has the huge Nigeria borrowing not accelerated the pace of growth of the Nigerian economy?
  • Is there any measure to reduce the debt service burden on Nigeria economy?

The debt burden of Nigeria economy over the years has some interrelated factors that contributed to it including:

  • Macroeconomic policy imbalances- conflicting policies,
  • Increases in the price of a number of primary commodities encouraging countries to borrow,
  • High prime lending rates discouraging private sector investment.
  • Poor economic planning or feasibility study.
  • Corruption or embezzlement of public funds by the policy makers.

This high debt serving burden resulting from improper management of the nation borrowing and wealth has led to:

  • To fall in aggregate demand in the nation overtime
  • Increase in poverty and hunger especially in the rural areas.
  • Increases in the profile of unemployment among the youths who are the most vulnerable.
  • Fall in the economic growth resulting to the current economic recession going on in the country.

Thus this research aim at investigating the impact of debt burden on Nigeria economic growth within the sample period of 1981-2015.

1.3 Research Questions

This and many other non-identified problem has resulted to many question asked by economic actors and policy makers to include:

  1. Is there any observed long-run relationship between debt burden and Nigeria economic growth?
  2. To what extent has debt burden impacted on economic growth of Nigeria?
  3. What measures can be put in place to combat the current debt burden ravaging the economy of Nigeria.

1.4 Objectives of the Study

The main objective of the study is to investigate the relationship between external debt and 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:

  1. H0: Debt burden has no significant impact on Nigeria’s economic growth.
  2. H0: There is no long-run relationship between debt burden and economic growth of Nigeria.

1.6 Significance of the Study

This study is focused on providing alternative measures to tackling domestic and 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 debt burden 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 34 years i.e. 1981-2015. 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, effort was adequately made by the researcher to ensure the reliability of the result by subjecting the research to many advance econometric test to fish out any possible spuriousity of result among others.

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