Negative Impact of External Debt on Nigeria Economic Growth

external debt

The negative impact of external debt on Nigeria economic growth hardly come to the mind of the policy makers at the point of contracting the loan. Loan or borrowing to fund gaps in government revenue has become norm in Sub-Sahara Africa especially in Nigeria.

It is unfortunate how most government overlook the negative impact of external debt and focus only on the positive impact when contracting the loans. Borrowing to finance government expenditure in is not bad in itself but the mode of servicing the debt, what the debt is spend on and the host of others are the issue of concern.

Before I proceed to discuss in full the negative impact of external debt on Nigeria economic growth, let me state this clearly – “External debt is not bad in itself, after all, it is one of the best medium to finance budget deficit.”

Meaning of external debt: Nigeria external debt is that part a nation borrowing (private and public) that is contracted from foreign sources like parish club, London club, foreign corporations, government or financial institutions other than the country residents and is payable in foreign currency.

It is noted that external debt arise because 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.

Why do countries Borrow?

Nations borrow for the following reasons

  • To finance deficit budget: During economics recession or when government want to adopt an expansionary policy, they borrow money to finance their deficit budget. The borrowing could be domestic debt or external debt. It is external when it is sourced outside the country.
  • To accelerate economic growth: It is believed that reasonable level of external debt promote economic growth through factor accumulation and productivity growth. Debt in itself is not bad and is a factor for accelerating economic growth. External debt become a problem when it is not properly managed.
  • Short of capital and the needs to boost investment: A nation borrow to boost investment and employment opportunities in the country. Most countries in their development stage are likely to borrow to boost the economic activities.
  • To provide social overhead and amenities: If government taxation capability is limited and government neither want to print more money, then debt option becomes the only available avenue that the government can explore to provide social overhead capital for the citizenry.
  • To promote macroeconomic stability: A country borrow to enjoy the macroeconomic stability of economic growth, balance of payment surplus, full employment, and exchange rate stability.

Nigeria External Debt Overview

Nigeria external debt can be traced back to 1958 when 28 million US dollars was contracted from the World Bank for railway construction.

The first major external borrowing of $1billion dollars referred to as Jumbo loan was contracted from the international capital market (ICM) in 1978 increasing the total debt to 2.2 billion U.S dollars.

Ever since then, Nigeria external debt keeps on rising from one government to the other. The external debt profile of Nigeria is currently getting out of hand. Let take a closer look.

Between June 2015 to June 2016 Nigeria external debt profile has risen by 34%. The debt profile according to Debt Management Office (DMO) was at N12.12trillions as at June 2015 but rose to N16.29trillions.

The figure above does not include domestic borrowing, according to DMO domestic borrowing rose by 26.31% from June 2015 to June 2016 (N8.4tn – N10.61tn). According the report of Vanguard (2017), Nigeria has borrowed about N7.51tillion within 2 years between June 2015-June 2017. According DMO (2017) Nigeria total debt stock has risen to N19.63trillion. For instance, Federal government external debt climb from $13.81 billion in March 2017 to $15.05billion as at June 2017.

According to DMO, ‘Nigeria’s Debt Management Strategy 2016-2019’will see that at least 30 per cent of the nation’s domestic debt would fall due within a one-year period.

In the word of DMO “This debt stock is slightly lower than the published FGN’s total debt stock of $55,576.28m (N10,948,526.57m), because the Debt Management Strategy tool treats the NTBs stock based on the discount values and not on the face values; while for the external debt, the tool aggregates the debt by tranche and currency, and applies a common end-period exchange rate.

Negative Impact of the Nigeria external debt

It is interesting to note that large volume of external debt does not necessarily leads 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 slow down the economy.

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.

The inability of the Nigerian economy to effectively meet its debt servicing requirements has exposed the nation to a high debt service burden.

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

Nigeria external debt profile keeps on rising but the economic growth and other major macroeconomic goals are falling.

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

  • How has Nigeria external debt being expended?
  • Why has external 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,
  • 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.
  • Religion, Political and social – economics crisis in the country as every part of the country feels neglected.
  • Poor investment platform and environment where business thrives

An empirical research on impact of external debt on Nigeria economic growth revealed that external debt has negative impact on Nigeria economy within the sample period against the expected positive relationship.

The econometrics test like revealed that external debt negatively influence Nigeria economic growth. This therefore mean that Nigeria government should redefine the purpose for external borrowing in order to channel the resources into productive activities.

Final word, “it is only in Nigeria that government borrow from external source to pay workers salary, for consumption purpose.”

Debt should be expended on strategic area of the economy, investment in the infrastructure development, agriculture innovation that has high multiplier effect.

There should be a system of monitoring of how this said funds are expended from time to time. If this is done the many challenges will be resolved. This is just an article, you can download a full research work on Effect of Eternal debt on Nigeria economic growth.

I would like to hear your own view about Nigeria external debt problem. Don’t forget to share the article with others. If you need this article for any reason just drop your email on the comment box.

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