TABLE OF CONTENTS
Title Page…………………………………………………………………………….i
Approval Page………………………………………………………………………..ii
Dedication……………………………………………………………………………iii
Acknowledgement……………………………………………………………………iv
Table of Contents…………………………………………………………………….v
Abstract………………………………………………………………………………vii
CHAPTER 1: INTRODUCTION
1.1: Background of the Study………………………………………………..1
1.2: Statement of the Problem………………………………………………..3
1.3: Objectives of the Study…………………………………………………4
1.4: Statement of Hypothesis………………………………………………..4
1.5: Significance of the Study……………………………………………….4
1.6: Scope and Limitations of the Study…………………………………….5
REFERENCES………………………………………………………………6
CHAPTER 2: LITERATURE REVIEW
2.1: History of Nigeria’s Debt Crisis…………………………………………8
2.2: External Debt Management in Nigeria…………………………………..10
2.3: Opinions on External Debt Management of Nigeria…………………….16
2.4: Impact of External Debt on Economic Growth…………………………….18
2.5: Limitations of Previous Studies………………………………………….20
REFERENCES………………………………………………………………..22
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CHAPTER 3: RESEARCH METHODOLOGY
3.1 Research Methodology………………………………………………….24
3.2: Model Specification…………………………………………………….24
3.3: Analytical Techniques…………………………………………………..25
3.4: Data Required and Sources……………………………………………..28
CHAPTER 4: DATA PRESENTATION AND ANALYSIS
4.1: Presentation and Analysis of Results……………………………………29
4.2: Evaluation and Interpretation of Results…………………………………34
4.3: Evaluation of Research Hypothesis………………………………………37
CHAPTER 5: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1: Summary of Findings……………………………………………………38
5.2: Conclusion……………………………………………………………….39
5.3: Recommendations……………………………………………………….39
BIBLIOGRAPHY…………………………………………………………………..41
APPENDIX 1
APPENDIX 2
APPENDIX 3
APPENDIX 4
APPENDIX 5
APPENDIX 6
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ABSTRACT
This work evolved out of the need to provide an in-depth understanding of the economics
of debt in Nigeria. This study aims at analysing the effectiveness of external debt on
economic growth within a span of 1981-2010. The broad objective of this work is
specified to evaluate the impact of external debt stock and debt servicing on economic
growth. In all, the models were to show the growth relationship between the independent
variables-inflation rate, exchange rate, interest rate, government expenditure, external
debt stock and external debt service and the dependent variable-gross domestic product
(GDP). The data were collected from CBN Statistical Bulletin 2010 and the Debt
Management Office (DMO) quarterly report. The Engle & Grenger Cointegration and
Ordinary Least Square (OLS) were employed in the cause of this study. The Augmented
Dickey Fuller test (ADF) shows that the variables are stationary and reliable for
forecasting. The choice of OLS is most appropriate for the study in terms of goodness of
fit and significance of regression coefficients. The result of the analyses showed that
rising external debt stock inhibits the pace of economic growth of Nigeria by increasing
the cost of its servicing beyond the debt sustainability limit while external debt servicing
was found not to impair economic growth.
Summary and policy recommendations were presented in line with our stated objectives
and facts then conclusions were made. It was found that external debt stock rises rapidly
due to accrued compound interest and loans were secured for dubious projects. Part of the
policy recommendations were that Nigeria should increase its export base by investing
borrowed funds in productive ventures and she should also seek fixed interest payment,
varying amortization schemes and multi-year rescheduling.
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CHAPTER ONE
INTRODUCTION
1.0 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 to 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
9
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, 2005a). 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, 2005a).
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, 2005a).
Before the debt cancellation deal, Nigeria was to pay a whopping sum of $4.9
billion every year on debt servicing (Aluko and Arowolo, 2010). It would have been
impossible to achieve exchange rate stability or any meaningful growth under such
indebtedness. The effect of the Paris Club debt cancellation was immediately observed in
the sequential reduction of the exchange rate of Nigeria vis-à-vis the Dollar from 130.6
Naira in 2005 to 128.2 Naira in 2006, and then 120.9 in 2007 (CBN, 2009). Although the
growth rate of the economy has been inconsistent in the post-debt relief period as it
plunged from 6.5% in 2005 to 6% in 2006 and then increased to 6.5% in 2007 (CBN,
2008), it could have been worse if the debt had not been cancelled.
10
However, the benefits of the debt cancellation, which was expected to manifest
after couple of years, was wiped up in 2009 by the global financial and economic crisis,
which was precipitated in August 2007 by the collapse of the sub-prime lending market
in the United States. The effect of the crisis on Nigeria’s exchange rate was phenomenal
as the Naira exchange rate vis-à-vis the Dollar rose astronomically from about N120/$ 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.
1.1 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
11
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. The main interest of this study then is to empirically investigate the effect of
external debt on the economic growth of Nigeria.
1.2 OBJECTIVES OF THE STUDY
The study will focus on the following objectives:
(i) Empirically investigate the effect of external debt on the growth process of the
country;
(ii) To determine the impact of external debt service payment on economic
growth of Nigeria.
1.3 STATEMENT OF HYPOTHESIS
HYPOTHESIS I
The following hypotheses are tested in this study:
Ho: That the external debt stock does not have impact on the economicgrowth
of Nigeria.
HYPOTHESIS II
Ho: That the external debt service payment does not have an impact on
economic growth of Nigeria.
1.4 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.
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1.5 SCOPE AND LIMITATIONS OF THE STUDY
The scope of this study shall cover the external debt trend of Nigeria over the
years to date. The general overview of the debt cancellation shall be taken with certain
issues raised and discussed.However, the empirical investigation of the effect of external
debt on the economic growth of Nigeria shall be restricted to 1981 and 2010. This
restriction is unavoidable because of the non-availability of some data
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