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The study examines The Effect of External Debt and Balance of Payment on Economic Growth in Nigeria. This study covers a time span of 35 years (1980-2014). The analytical technique used in this study is multiple regression and the data is secondary and sourced from Central Bank of Nigeria (CBN) publications such as CBN statistical bulletin, CBN annual report as well as economic review documents. The results were obtained using Eview version 8.0 and the major findings is that External Debt has a negative significant effect on economic growth in Nigeria and Balance of payment does not have statistical significant effect on economic growth of Nigeria within the period under review. The study thus recommended that; External debts should be contracted solely for economic reasons and not for social or political reasons to avoid accumulation of external debt stock overtime and Debt Management Office (DMO) should set mechanisms in motion to ensure that loans are utilized for the purpose for which they were acquired among others, to ensure Nigeria in the long run aside having a favourable balance of payment would attain the status of an industrialized Nation at the barest debt.



1.1 Background of the Study

It is generally expected that developing countries, facing a scarcity of capital, will acquire external debt to supplement domestic saving (Malik et al, 2010; Aluko and Arowolo, 2010). Besides, external borrowing is preferable to domestic debt because the interest rates charged by international financial institutions like International Monetary Funds (IMF) is about half the one charged in the domestic market (Pascal, 2010). However, whether or not external debt would be beneficial to the borrowing nation depends on whether the borrowed money is used in the productive segments of the economy or for consumption. Adepoju et al (2007) stated that debt financed investment need to be productive and well managed enough to earn a rate of return higher than the cost of debt servicing.

The main lesson of the standard “growth with debt” literature is that a country should borrow abroad 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. The debt, if properly utilised, is expected to help the debtor country’s economies (Hameed et al, 2008) by producing a multiplier effect which leads to increased employment, adequate infrastructural base, a larger export market, improved exchange rate and favourable terms of trade. But, this has never been the case in Nigeria and several other sub-Saharan African Countries (SSA) where it has been misused (Aluko and Arowolo, 2010). Apart from the fact that external debt had been badly expended in these countries, the management of the debt by way of service payment, which is usually in foreign exchange, has also affected their macroeconomic performance (Aluko and Arowolo, (2010); Serieux and Yiagadeesen, (2001).

Prior to the $18 billion debt cancellation granted to Nigeria in 2005 by the Paris Club, the country had external debt of close to $40 billion with over $30 billion of the amount being owed to Paris Club alone (Semenitari, 2005). The history of Nigeria’s huge debts can hardly be separated from its decades of misrule and the continued recklessness of its rulers. Nigeria’s debt stock in 1971 was $1 billion (Semenitari, 2005). By 1991, it had risen to $33.4 billion, and rather than decrease, it has been on the increase, particularly with the insurmountable regime of debt servicing and the insatiable desire of political leaders to obtain loans for the execution of dubious projects (Semenitari, 2005).

Before the debt cancellation deal, Nigeria was to pay a whopping sum of $4.9 billion every year on debt servicing (Aluko and Arowolo, 2010). It would have been impossible to achieve exchange rate stability or any meaningful growth under such indebtedness. The effect of the Paris Club debt cancellation was immediately observed in the sequential reduction of the exchange rate of Nigeria vis-à-vis the Dollar from 130.6 Naira in 2005 to 128.2 Naira in 2006, and then 120.9 in 2007 (CBN, 2009). Although the growth rate of the economy has been inconsistent in the post-debt relief period as it plunged from 6.5% in 2005 to 6% in 2006 and then increased to 6.5% in 2007 (CBN, 2008), it could have been worse if the debt had not been cancelled.

However, the benefits of the debt cancellation, which was expected to manifest after couple of years, was wiped up in 2009 by the global financial and economic crisis, which was precipitated in August 2007 by the collapse of the sub-prime lending market in the United States. The effect of the crisis on Nigeria’s exchange rate was phenomenal as the Naira exchange rate vis-à-vis the Dollar rose astronomically from about N120/$ in the last quarter of 2007 to more than N150/$ (about 25% increase) in the third quarter of 2009 (CBN, 2009). This is attributable to the sharp drop in foreign earnings of Nigeria as a result of the persistent fall of crude oil price, which plunged from an all-time high of US$147 per barrel in July 2007 to a low of US$45 per barrel in December 2008 (CBN, 2008).

Available statistics show that the external debt stock of Nigeria has been on the increase after the debt cancellation in 2005. The country’s external debt outstanding increased from $3,545 million in 2006 to $3,654 million in 2007, and then to $3,720 million and $3,947 in 2008 and 2009 respectively (CBN, 2009). It is therefore imperative to examine the effect of external debt of the country on her economy for us to appreciate the need to avoid being back in the group of highly indebted nations.

In the 1980, the management of the external debt became major responsibility of the Central Bank of Nigeria (CBN). This necessitated the establishment (setting up) of a Department in collaboration with Federal Ministry of Finance to the management of external debt. Although, the debt management strategies and measures varied from time to time since the early 1980s when the external debt became pronounced. The following measures were used by the Government as guidelines to external borrowing.

  • State Government, Parastatals, Private sectors borrowing receive adequate approval from the Federal Government so as to ensure that the borrowing conforms to the national objectives.
  • Projects to be financed with external loan should be supported with feasibility studies which include loan acquisition, deployment and retirement schedule.
  • State Governments and other agencies with borrowed funds should service their debts through the foreign exchange market and duly inform the Federal Ministry of Finance for record purposes. Any default will attract deduction (in Nigeria equivalents) at source before the release of statutory allocations.
  • Private sector, industries that are export – oriented are expected to service their debt from their export earnings while others should utilize the Foreign Exchange Market facilities for debt servicing.

The major challenge faced by the debt management office is ensuring that a reasonable level of resources are earmarked for debt servicing to avoid the risk of default and to maintain conducive relations for debt relief negotiations with the creditors. Also, the DMO faces the challenge of ensuring that budget resources are release in time to effect debt service payment since much of Nigerian’s debt stock build – up was accounted for by the capitalization of interest arrears and penalties for default. Debt service payments to the World Bank are due every 15 days while ADB (African Development Bank) service payments occur frequently.

The Federal Government in year 2001 established a semi-autonomous Debt Management Office (DMO) under the Presidency. Adepoju et al (2007) opined that the creation of DMO consolidated the debt management functions in a single agency, ensuring proper coordination of the country’s debt recording and management activities, including debt service forecast, debt service repayments, and advising on debt negotiation as well as new borrowings.

1.2 Statement of the Problem

The huge external debt stock and debt service payments of African countries and Nigeria in particular prevented the countries from embarking on larger volume of domestic investment, which would have enhanced growth and development (Clements, etal. 2003). External debt became a burden to most African countries because contracted loans were not optimally deployed, therefore returns on investments were not adequate to meet maturing obligations and did not leave a favourable balance to support domestic economic growth. So, African economies have not performed well because the necessary macro-economic adjustment has remained elusive for most of the countries in the continent.

Furthermore some state government in Nigeria resorted to imprudent borrowings from external sources. This was to finance all sorts of projects of doubtful viability. Sooner than expected, the debt problem was marked to have started in the 1980‘s.

In Nigeria, the debt situation poses a big problem because the more debt we accumulate, the higher the debt services payment and less resource. This in turn reduces savings for investment purposes. Such a situation portrays an imminent danger for the present and future of the country (Siddique, et all, 2015). This study therefore tends to focus on the effect of external debt and balance of payment on Nigeria’s economic growth and also provides lasting solution to external debt problems.


1.3 Research Questions

The following research questions would be considered in the course the study:

  1. To what extent did external debt effect the Nigerian economic growth?
  2. To what extent has Balance of Payment affected the Nigerian economy?
  3. To what extent has External Debt Service Payments affected the Nigerian economy?


1.4 Objectives of the Study

The general objective is to examine the effect of external debt and balance of payments on economic growth of Nigerian.

The specific objectives are to:

  • empirically investigate the effect of external debt on the economic growth of Nigeria;
  • to determine the effect of Balance of payment on economic growth of Nigeria; and
  • to determine the effect of External Debt Service Payments on economic growth of Nigeria.


1.5 Statement of Hypothesis

The following hypotheses were tested in this study:

Hypothesis I

Ho: The external debt does not have statistically significant effect on the economic growth of Nigeria.

Hypothesis II

Ho: Balance of payment does not have statically significant effect on economic growth of Nigeria.

Hypothesis III

Ho: External Debt Service Payments does not have statically significant effect on 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 may also serve as a yardstick for further research and documentation on Nigeria’s external debt crisis.


1.7 Scope of the Study

The study covered the analysis of external debt procurement, Balance of Payment and debt service of Nigeria from 1980 to 2014, and the effect on the growth of Nigerian economy.


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