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

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,  macro- economic 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 is 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:

-What is the basis of Nigerian borrowing loans from foreign countries and how has this loan benefited Nigeria?

-What is the impact of foreign debt on Nigerian economy from 1985 – 2005?

-What are the impacts of these loans on the macroeconomic and social welfare in the

Nigerian economy?

-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 has government policies affects management of Nigerian foreign debt?

5.To  ascertain  those  factors  that  hindered  effective  management  of the  Nigerian foreign debt.

6.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 significiant impact on the Gross Domestic Product Rate

(GDP)

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

Rate (GDP).

H2:Nigeria external debt has significiant effect on the multilateral trade. Ho2:Nigeria external debt has no significiant effect on the multilateral trade. H3:Nigerian external debt has significiant impact on the rate of inflation. Ho3:Nigerian external debt has no significiant impact on the rate of inflation.

H4:Nigerian external debt services has significiant effects on the balance of payment system.

Ho4:Nigerian  external  debt  services  has  no  significiant  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.

1.7LIMITATIONS OF THE STUDY

It is necessary to mention that the researcher was beset with many problems in the course of this work.

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  or  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 a 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.

•Sustainble 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 standardised private deals.

₦5,000.00 – DOWNLOAD FULL PROJECT DOWNLOAD FULL PROJECT Added to cart

---

---

---

---

Related Project Topics :