THE EFFECT OF EXTERNAL DEBT ON THE NIGERIA ECONOMY


THE EFFECT OF EXTERNAL DEBT ON THE NIGERIA ECONOMY

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ABSTRACT

This study is meant to examine the effect of external debt on gross domestic product using econometric analysis. The research revealed that Nigeria’s external debt has contributed immensely to the gross domestic product. This has affected investment on the domestic productivity and hence invariably affected the economic growth and development. Due to the macroeconomics distortion in the economic growth and development like the problem of unemployment, inflation, balance of payment disequilibrium and a lot of others. The researcher gave recommendation in view of the research finding such as (1) The need for the improvement of domestic social transformation to pave way for a social self-reliant economy by developing science and technology. (2) Government should de-emphasis export led growth based on foreign exchange earning from primary product. (3) Government should embark on policy measure to ensure full employment. (4) Mobilization of human and materials resources to achieve the objective of sustain growth towards externally source fund are channeled into productively activities

Chapter one

Introduction

1.1 Background of the Study

The accumulation of external debt is common phenomenon of the third world countries at the stage of economic development where the supply domestic savings is low, current account payment deficit are high and imports of capital are needed to augment domestic resources.

Early 1970’s, the external debt of developing countries was relatively small and primarily an official phenomenon, the majority of creditors being Foreign Governments and International Financial Institutions such as IMF, the World Bank and Regional Development Bank.

However, during the late 70’s and early 80’s Commercial Banks began, playing a large role in International Lending by recycling surplus OPEC “Petrodollars” and Issuing general purpose loans to less developed countries to provide balance of payment support and expansion of export sectors.

While foreign borrowing can be highly beneficial providing the resources necessary to promote economic growth and development it has its cost. In recent years these costs have greatly out weighed the benefits for many developing nation. The main cost associated with the accumulation of a large external debt is “Debt Servicing”. Debt Servicing is the payment of liquidation of the principal and accumulated interest, it is a contractually fixed exchange on domestic real income and savings as the debt grows or as interest rates rise, debt service payment must be made with foreign exchange, in order words, debt service obligation can be met only through export earnings.

However, should the composition of Import changed or should the composition of export change or should interest rates rise significantly causing ballooning of debt service payment or should export earnings diminish debt servicing difficulties are likely to arise. This has been the experience of most of the heavily indebted third world nations.

In order to solve the problem, several external debt-financing options were adopted under the Structural Adjustment Program (SAP) in 1986. Since the introduction of this program, Nigerians have been plunged into one hardship after another ranging from the devaluation of the naira through Second Tie Foreign Exchange Market (SFEM) now Foreign Exchange Market (FEM) to the rising prices of Commodities inflation etc. SAP as an economic restructuring program is capable of alleviating the country’s debt trap is a miracle Nigerian’s were waiting to see.

Specifically as part of the programmatic approach to reduce the burden of external debt, the following measures have been adopted in recent years.

They include embargo on new loans, limit on debt service payment debt restructuring and debt conversion

1.2 Statement of the problem

The ultimate aim of any well co-coordinated and articulated economic policy is to achieve a sustained economic growth and development. However, a proper understanding of what development is , well enable a policy maker to formulate appropriate policies for the acceleration of economic development. In order words, the nature of the development policy of a country will depend on how policy makers of that country perceive development.

The insistence of the need of external assistance obscures the necessity for the people of poor countries themselves to develop the facilities attitudes and institutions which are required if these societies are to achieve sustained substantial material process. In deed, these insistences are external aids help to perpetuate the ideals and attitude wide spread in these countries which are damaging the economic progress.

The rapid growing foreign debt, its consequent payment problem and lack of appropriate debt management has plummeted the country into a turbulent economic crisis characteristics of chronic balance of payment problem, foreign exchange sequence, scarcity of essential items (including raw materials and spare parts) which led to the closure of many factories, with intermitted retrenchment of workers, high rate unemployment and under employment, run away inflation.

External loans therefore cannot be seen as spelling doom for but could be a blessing to the debtor nation. The basic problem is how these loans are utilized for development purposes

Embarking on unproductive ventures for instance led to waste of resources, and of course, poor economic performance

The debt problem seem to have defined solution despite the substantial part of the country’s external debt been rescheduled over a long periods. The rescheduling is not even a satisfactory measure because such decision is like postponing the day of reckoning. The economic gains that ate made now will be crowded when the debt is due for payment.

As a matter of fact, these external imbalances in the economy were not caused only by foreign debt alone, rather other problem like dwindling oil revenue and mismanagement of the economy by nefarious activities of the politicians of the second republic also contributed in their own way. These were exactly what motivated the researcher to embark on this study, to x-ray the contributions (effects) of external indebtedness to these imbalances in the economy.

1.3 Objective of the Study

The study into this area of Pubic Finance was stimulated by the researcher’s interest in the world debt crisis, which was generated by the huge foreign debt owed to the creditor national and the developing countries – Argentina, Brazil Chile, Mexico, Turkey, Cote D’ ivory etc.

Nigeria being the part and parcel of developing economy also has her own share of problem. The economy has drifted from economic situation to another; these have hampered economic growth and overall development and prompted all kinds of hardship in the economy.

OUR AIM IS TO IDENTIFY

(a) Source, size and nature of Nigeria’s external debt.

(b) The implication ( impact) of debt burden on the economy

(c) Debt management options (government approach) towards solving the problem and its effectiveness.

(d) A lasting solution to the debt crisis

It is there hoped that this project will provide the public with a better knowledge on the nation’s foreign debt problem and will act as reference point for effective management of foreign debt both now and in future.

1.4 Research Hypothesis

This study will be guide by the following hypothesis. Null hypothesis

Ho: ß0 = O

There is no significant relationship between Gross domestic product and External debt

Alternative hypothesis

N1 = ß 1 = O

There is significant relationship between gross domestic product and External debt.

1.5 Scope of the Study

The scope of the study covers a period of 20 years (1989 – 2009). It is hope that the result of this study will be relevant to serve the purpose for which it was intended, which is to serve as advisory to both government of the private sector in terms of borrowing.

1.6. Limitation of the Study

This study is basically restricted to the effect of external debt on the Nigeria economy.

The research was not able to gather all the necessary materials from all the secondary sources needed for the study due to unforeseen circumstances resulting from time and financial constraints.

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