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THE IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH OF NIGERIA

  • Type:Project
  • Chapters:5
  • Pages:39
  • Methodology:Ordinary Least Squares
  • Reference:YES
  • Format:Microsoft Word
(Economics Project Topics & Materials)
THE IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH OF NIGERIA                                  
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND TO THE STUDY
Economic theory suggests that reasonable levels of borrowing by a developing country are likely to enhance its economic growth. When economic growth is enhanced (at least more than 5% growth rate) the economy’s poverty situation is likely to be affected positively (Ankom, 2003). In order to encourage growth, countries at early stages of development like Nigeria  borrow to augment what they have because of dominance of small stocks of capital hence they are likely to have investment opportunities with rates of return higher than that of their counterparts in developed economies.
    This becomes effective as long as borrowed funds and some internally ploughed back funds are properly utilized for productive investment, and do not suffer from macroeconomic instability, policies that distort economic incentives, or sizable adverse shocks. Growth therefore is likely to increase and allow for timely debt repayment. When this cycle is maintained for a period of time growth will affect per capita income positively which is a prerequisite for poverty reduction (Amakom, 2003). These predictions are known to hold even in theories based on the more realistic assumption that countries may not able to borrow freely because of the risk of debt  denial. Although, the implication still remains that large debt stocks lower growth by partly reducing investment with a resultant negative effect on poverty. But the incentive effects associated with debt stocks tend to reduce the benefits expected from policy reforms that would enhance efficiency and growth, such as trade liberalization and fiscal adjustment. When this happens the government will be less willing to incur current costs if it perceives that the future benefit in terms of  higher output will accrue partly to foreign lenders. Soludo (2003) opined that countries borrow for two broad categories: macroeconomic reasons (higher investment, higher consumption, education and health) or to finance transitory balance of payments deficits ( to lower nominal interest rates abroad, lack of domestic long-term credit, or to circumvent hard budget constraints). This implies that economy indulges in debt to boost economic growth and reduce poverty. He is also of the opinion once an initial stock of debt grows to a certain threshold, servicing them becomes a burden, and countries find themselves on the wrong side of the debt-baffer curve, with debt crowding out investment and growth. This seems to be the position of Nigeria today because investment, which will accordingly  result to high-speed growth with a positive effect on poverty, is moving sporadically in both positive and negative directions (Tajudeen, 2012).
    For the past two  decades, Nigeria has borrowed large amounts, often at highly concessional interest rates with the hope to put them on a faster route to development through higher investment, faster growth and poverty reduction, but on the contrast, economic growth and poverty situations are staggering at the back door amidst excess debt, albeit that was the initial intension. It is then obvious that the Nigerian indebtedness to help the economy in their pursuit towards debt.
    Debt is created by the act of borrowing. It is defined according to Oyejide (1985) as the resource or money used in an organization which is not contributed by its owner and does not in any other way belong to them. It is a liability represented by a financial instrument or other formal equivalent. In modern law, debt has no precise fixed meaning and may be regarded essentially as that which  one person legally owes to another or an obligation that is enforceable by legal action to make payment of money.
When  government borrows, the debt is a public debt. Public debts are either internal or external, incurred by the government through borrowing in the domestic and international markets so as to finance domestic investment. Udoka and Anyingang, (2010) asserted that debts are classified into two i.e. productive debt and dead weight debt. When a loan is obtained to enable the state or nation to purchase some sort of assets, the debt is said to be productive e.g. money borrowed finance wars and expenses on current expenditures are dead weight debts.
Udoka and Anyingang (2010) noted that when a country obtains a loan from abroad, it means that the country can import from abroad, goods and services to the value of the loan without at the same time having to export anything for exchange. When capital and interest have to be repaid, the same country will have to get the burden of  exporting goods and services without receiving any imports in exchange. Internal loans do not have the type of burden exchange of goods and services. These two types of debt however require that the borrowers’ future savings must cover the interest and principal payment (debt servicing).
1.2    STATEMENT OF THE PROBLEM
    External debt burden in Nigeria can be traced to so many factors in the past which caused the growth of the economy to decline along side its development. Between the period 1950-1960, Nigeria had a magnificent growth in on its economy due to her huge investment in agriculture which was a major source of revenue for the country. This brought about reduction in both internal and external debt. However, in the eighties, Nigeria’s external debt rapidly escalated as a result of declining oil export earnings.
    Heavy external debt burden nevertheless may have been associated with disincentives to invest, which could have contributed to the relatively poor growth performance of Nigeria in the past. Other factors suspected to have contributed to the situation are  high inflation, persistent depreciation of exchange rate and huge fiscal deficit. In addition, it is expected that as debt obligations rise, the export earnings available to the domestic economy decrease since some of the export earnings are used to service and debt. This is turn might have indirect effect on government expenditures and therefore negatively affect economic growth (Ezike and Mojekwu, 2011).
    Deducing the above factors, it seems the debt overhang hypothesis which relates to high debt and debt servicing burden supports that the accumulated stock of debt acts as a tax on future income and discourages investment by the private sector. Hence, as low investment results in a low rate of capital accumulation consequently, it will lead to a low rate of growth. Ezike and Mojekwu (2011) asserted that one major issue suspected to have aggravated the Nigeria debt problem is that some of the debt service obligation were in the form of  contingent liabilities resulting from government guarantee of private sector trade transaction that had to be taken on board without adequate planning. Due to mismanagement, wide-scale corruption and default by private sector operators, obligations fell on the federal government as explicit contingent liabilities in those instances where it had guaranteed the loan. Loans for directly productive projects were usually contracted on commercial terms and then went to waste due to lack of monitoring and corruption. Given the foregoing, there is an urgent need to examine the impact of external debt burden on macroeconomic performance in Nigeria.
    The debt burden of a country inevitably imposes a number of constraints on  its growth prospects. There has been an increasing concern on the structure of external debt, debt service requirements and debt management. The prospect for resumption of voluntary lending and capital flows to the debt distressed less developed countries (LDCs) have been topical issue in the recent times. The debt burden of a country can be said to impose a lot of constraints on the economy by hindering its growth process and economic development.
    With the above perception, the research question are:
i.    What is the trend and structure of external debt in Nigeria?
ii.    What are Nigerian external debt management policies?
iii.    What is the performance of external debt policy in Nigeria over the years?
iv.    Is there a significant relationship between external debt and economic growth in Nigeria?
Answering these question will provide insights on the empirical relationship between external debt and output performance in Nigeria.
1.3    OBJECTIVES OF THE STUDY
    The objective of this study is to assess the impact of external debt on Nigeria economic growth. The specific objectives are:
i.    To examine the pattern of external debt in Nigeria
ii.    To empirically investigate the relationship between external debt and economic growth in Nigeria.
1.4    HYPOTHESIS
    In this study, we shall examine the following hypothesis that:
1.    Ho:    External debt services has no significant impact on Nigeria’s economic growth.        
Hi:    External debt services has a significant impact on Nigeria’s economic growth.     
2.    Ho:    Foreign Direct Investment has no significant influence on Nigeria’s economic growth.
Hi:    Foreign Direct Investment has a significant influence on Nigeria’s economic growth                  
3.    Ho:    Total government expenditure has no significant effect on Nigeria’s economic growth.                   
Ho:    Total government expenditure has a significant effect on Nigeria’s economic growth.                   
1.5    SIGNIFICANCE OF THE STUDY
    Foreign debt represents an important source of finance in most countries in sub Saharan (SSA), including Nigeria where it can supplement low savings, narrow export earnings and thin tax bases. In fact, foreign debt is considered to be a major supplement to government expenditure in Nigeria. Foreign debt if invested on productive venture, stimulates economic growth by supplementing domestic sources of finance such as savings, thus increasing the amount of investment and capital stock in the country. External debt also increases; investment in physical and human capital, capacity to import capital goods or technology and it is also associated with technology transfer that increases productivity of capital and promotes endogenous technical change.
    This study examined the performance of external debt on Nigeria’s economic growth. This study is expected to reveal the influence of external debt on Nigeria’s economic growth so that the monetary authority and government can manage it to stimulate economic growth.
    This study will serve as a reference material to other researchers and policy markers who have in mind to examine the impact of external debt on Nigeria’s economic output. Hence, this study therefore intends to throw more light on the operations of external debt management policies and their resultants effect on the performance of Nigerian economy.
1.6    SCOPE OF THE STUDY AND LIMITATIONS
    This study basically covers a period of 1980-2012. This study is limited to the impact of external debt on Nigeria’s economic growth. The major constraint of this study is the short time needed to complete this study and problem of inconsistency and inaccurate data.


THE IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH OF NIGERIA

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Details

Type Project
Department Economics
Project ID ECO0536
Price ₦3,000 ($9)
Chapters 5 Chapters
No of Pages 39 Pages
Methodology Ordinary Least Squares
Reference YES
Format Microsoft Word

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    Details

    Type Project
    Department Economics
    Project ID ECO0536
    Price ₦3,000 ($9)
    Chapters 5 Chapters
    No of Pages 39 Pages
    Methodology Ordinary Least Squares
    Reference YES
    Format Microsoft Word

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