EXTERNAL DEBT AND PUBLIC SECTOR INVESTMENTS IN NIGERIA
This study is sets out to examine the impact of external debt on public sector investment in Nigerian economy. It specifically seeks to ascertain the effect as the data for analysis were sourced from the CBN Statistical Bulletin with several issues during the period 1980-2011. The study employed co-integration techniques to test the relationship between external debt and public investment in Nigerian economy. The finding shows that there is a positive relationship between debt stock (external debt) and public investment, meaning that an increase in debt stock will lead to increase in capital expenditure and public investment in turns. The study also reveals a negative relationship between debt servicing and public investment, which means as debt servicing reduces public investment rises. Based on the above finding, it was recommended that Nigeria must be concerned about the absorptive capacity of the economy before embarking on more external debt acquisition. And the portfolio of debt must be diversified in terms of sources and types to avoid concentrations of debt service imperatives.
TABLE OF CONTENTS
1.1 Background to the Study
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Hypotheses of the Study
1.5 Scope of the Study
1.6 Significance of the Study
1.7 Limitations of the Study
1.8 Organization of the Study
2.1 Theoretical Framework
2.1.2 Threshold Theory
2.1.3 Profligacy Theory
2.2 Conceptual Issues on Public Debt
2.3 Empirical Literature Review
3.2 Model specification
3.3 Sources data
PRESENTATION AND ANALYSIS OF RESULTS
4.1 Presentation of Result
4.2 Analysis of Result
4.3 Discussion of Result
SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1 Summary of finding
1.1 BACKGROUND TO THE STUDY
Borrowing by countries occurs as a result of their inability to generate enough domestic savings to carry out productive activities. Such external borrowings by countries are meant to supplement the domestic savings and allow such countries to carry out productive activities (Ezeabasili, 2006). A country can also borrow, in the short-term, from external sources to finance current account deficits arising from external disturbances in order to shore up external reserves position and strengthen external liquidity position in the future. Gana (2002) posits that foreign borrowing is desirable and necessary to accelerate economic growth, provided they are channeled to increase the productive capacity of the economy and promote economic growth and development.
Events in the past few years have led to increasing concerns about the possibly adverse consequences of the substantial accumulation of debt by Sub-Saharan African countries. The experiences of countries like Mexico and Argentina, with debt overhang in the early 1980s have heightened this fear. Fears are often expressed that excessive external debt burdens will threaten financial stability with adverse consequences for the real economy, or that increases in debt will create political pressures that will make acceleration of inflation inevitable (Summers, 1986). The view persists however, that the build-up in debt, particularly in the developing economies, could imperil the stability of the financial system, according to some analysts. They argue that the heavy debt burdens have reduced the ability of financial institutions, borrowers and the economy at large to withstand recessions and other types of adversity.
Debt is a contract, and the holder is obliged to fulfill the stated obligations along with accruing interest. Because of his obligation, the risk of compounded and penal charges arising from debt-service defaults, and the income effect of debt service on economic growth, policy makers have been enjoined to thoroughly evaluate each tranche of external borrowing in order to mitigate the associated risks. The criteria for evaluating external borrowing include necessity, value cost, tenor, source as well as the impact of the additional borrowing on the subsisting portfolio of debts. Also, informed priority ordering in applying the loan to projects, programmes and sectors that present higher prospects of income-generation, capacity building and multiplier effect have been variously advocated (NCEMA, 2002). However, most developing countries in Sub-Saharan Africa (SSA) have been trapped by hasty and distress borrowing which they are often unable to service. Worse still, they need to borrow more, and the inability to service existing obligation has often been caused by deteriorating world prices of their primary exports.
Nigeria, as a mono-product economy, found itself in this position in the 1980s when her external debt positioned worsened. As a result of this, Nigeria was unable to generate sufficient revenue from the sale of her crude oil to service the debt owed international creditors. However, various strategies were tried in mitigating the effects of the huge debt overhang. These include internal embargoes and limits on new loans, rescheduling, restructuring, debt servicing and plea for debt forgiveness. These strategies did not appear effective and the economy failed to achieve the desired rate of economic growth (DMO, 2004). Thus, the rapid growth of external debt stock and debt service payments became clogs on the wheel of national economic growth effort (Ezeabasili, 2006).
1.2 STATEMENT OF THE PROBLEM
Between 1958 and 2004, Nigeria’s external indebtedness rose from US$28million to over US$35billion.
External debt as a percentage of the GDP was 100% in 1990, 66% in 2000 and 75.6% in 2004. However, some studies have attempted to investigate the relationship between external debt and public investment. These studies include those of (Ajayi, 1991; Adam, 2004; Green and Villeneva, 1991; Savvides, Kumar and Maclambo, 1996; Deshpande, 1997; Iyoha, 1999). However, most of these studies were done in environments different from that of Nigeria. Again, the time frames considered in these studies were short, and, the results from them are conflicting. These shortcomings have somehow contributed to the knowledge gap in the literature, thus the study intend to investigate the relationship between external debt and public investment in Nigeria and give answers to the following questions;
1. What is the relationship between public investment and external debt in Nigeria?
2. What is the relationship between public investment and debt service payment in Nigeria?
3. What is the relationship between public investment and balance of trade in Nigeria?
4. What is the relationship between public investment and foreign reserve in Nigeria?
5. What is the relationship between public investment and gross domestic product in Nigeria?
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to investigate the impact of external debt on public investment in Nigeria. The specific objectives are as follows;
1. To investigate the relationship between public investment and external debt in Nigeria
2. To investigate the relationship between public investment and debt payment service in Nigeria
3. To investigate the relationship between public investment and balance of trade in Nigeria
4. To investigate the relationship between public investment and foreign reserve in Nigeria
5. To investigate the relationship between public investment and gross domestic product in Nigeria
1.4 HYPOTHESES OF THE STUDY
1. There is no significant positive relationship between public investment and external debt in Nigeria
2. There is no significant positive relationship between public investment and debt payment service in Nigeria
3. There is no significant positive relationship between public investment and balance of trade in Nigeria
4. There is no significant positive relationship between public investment and foreign reserve in Nigeria
5. There is no significant positive relationship between public investment and gross domestic product in Nigeria.
1.5 SCOPE OF THE STUDY
The scope of this study covers the external debt trend and public investment proxy by federal government capital expenditure in Nigeria over the years. However, the main focus of this study is to x-ray the effects of external debt on the public investments in Nigerian economy. It needs be emphasized that the empirical investigation of the effect of external debt on public investment in Nigeria is restricted to the period between 1980 and 2011, with respect to variables such as public investment as proxy by capital expenditure, external debt stock, debt payment service, balance of trade, foreign reserve and gross domestic product.
1.6 SIGNIFICANCE OF THE STUDY
This study becomes very significant to fill the knowledge gap, particularly in a developing country like Nigeria to establish the factors that shape public investment and provide a baseline necessary for acquiring external debt and the effective utilization of such debt for economic growth.