Impact Of External Debt On Economy
External debt, in the context of national economies, refers to the amount of money borrowed by a country from foreign entities. The impact of external debt on an economy can be profound and multifaceted, influencing various aspects such as economic growth, development, and stability. While moderate levels of external debt can stimulate economic growth by providing necessary funds for investments in infrastructure, technology, and human capital, excessive debt burdens can lead to serious repercussions. High levels of external debt can strain a nation’s finances, diverting resources away from crucial public services such as healthcare and education towards debt servicing. Moreover, heavy reliance on external borrowing may expose a country to fluctuations in global interest rates and exchange rates, increasing vulnerability to financial crises and economic shocks. Additionally, elevated debt levels can erode investor confidence, hinder access to international capital markets, and constrain future borrowing capacity. Therefore, prudent debt management strategies, including responsible borrowing, efficient allocation of borrowed funds, and transparent fiscal policies, are essential to mitigate the adverse effects of external debt and foster sustainable economic development.
This work evolved out of the zeal to provide an immense understanding of the Nigeria economic of debt. The broad objective of this study was to evaluate the impact of external debt on the development of the Nigeria economy within the life-span of 1985-2011.The models in this study was used to evaluate the developmental relationship between the independent variables and the dependent variables. The data were sourced from the Federal office of statistics, CBN statistical bulletin 2011, and international monetary fund (IMF). The ordinary least square method (OLS) was employed in the cause of study. Also, the Augmented Dickey Fuller test (ADF) revealed that the variables are reliable for forecasting while the use of OLS was most appropriate for the study in terms of goodness of fit and significance of regression coefficient. The outcome of the analysis revealed that increase in external debt positively affects the economic development of Nigeria while increase in external debt services positively affects economic development in Nigeria. Thus; conclusion was made that external debt rises rapidly because loans were secured for dubious projects and private pockets rather investing the loan in productive ventures by increasing exports. And by recommendation, government should incur external fund for developmental projects and as well monitor effectively the use of external funds so as to ensure the development of Nigeria economy.
Title page
Approval page
Dedication
Acknowledgement
Table of content
Abstract
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the study
1.2 Statement of problem
1.3 Objectives of the study
1.4 Statement of hypothesis
1.5 Significance of study
1.6 Scope of study
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 Theoretical Frame Work
2.2 Empirical Evidence
2.3. Summary of the previous empirical findings
2.4. Limitations of previous study
CHAPTER THREE
3.0 REASERCH METHODOLOGY
3.1. Introduction
3.2. Sources of data
3.3. Data Analysis Technique
3.4. Model specification
CHAPTER FOUR
4.0 DATA PRESENTATION AND ANALYSIS
4.1. Presentation of Result
4.2. Analysis of the Result
4.3. Evaluation Methods
4.4 Hypothesis Testing
CHAPTER FIVE;
5.0 SUMMARY, CONCLUSION AND RECOMMENDATION
5.1. Summary of Findings
5.2. Conclusion
5.3 Recommendations
Bibliography
Appendix
1.1 BACKGROUND OF STUDY
Most economic development literature described the 1950‘s and 1960‘s as ―Golden Years‖, which marked the rate of development in developing countries whose development at the period was just high and internally generated. Also, the less developed countries (LDCs) increased their investment with little or no reliance on external resources (Daily Sun; 2007).
On the contrary, most of the development experienced in 70‘s was ―debt led‖. This was a result that these countries maintain persistent current account deficits, which led to the borrowing from the international money and capital market to finance projects. Based on this premise, external borrowing has always been resorted to because of the shortfall between domestic savings, seeking external funds to bridge gaps is not desirable which is so because external debts acts as a major constraints to capital formation in developing nations.
In most cases, debt accumulates because of the servicing, requirements and the principal itself. Considering the above, external debt becomes a self-perpetuating mechanism of poverty aggression, over exploitation
and a constraint on development in developing countries (NakatamianhHerca; 2007). However like most developing countries of the world; Nigeria relies substantially on external funds for financing its development projects, e.g. Iron and steel mills, roads, electricity generation, plants etc. such external funding usually takes the form of external loans. In the early years of political independence(i.e. 1960 through 1975), the size of such loans was small, the rate of interest concessionary, the maturitywas long-term and the source was usually multilateral in nature. For instance, Nigeria‘s external debt in 1960 was about $150million, however, beginning in the year 1978, the situation changed. Nigeria, at the lure of the international financial institutions started to borrow huge sums from private sources at a floating rates and with shorter term maturities (Business New; 2009).
In 1978 ―JomboLoan‖alone which is borrowed from the international capital market (ICM) was estimated to sum of $1billion which represented over 100% of Nigerians Gross Domestic Product (GDP) for that year. The situation precipitated a debt-crisis that progressively worsened overtime. However, it follows that debt is an integral part of all economies; developed, developing or undeveloped. (Bannock Baxter and Rees, 1972). By 1986, Nigeria had to adopt a
WorldBank/International Monetary Fund (IMF) sponsored Structural Adjustment Programme (SAP), with a view to revamping the economy and making the country better-able to service her debt.
Furthermore some state government resorted to imprudent borrowings from external source. 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 fact, the external debt escalatedfrom #8,8194million in 1982 through to #10,577.7millionin 1985. In 1987, it was #100,787.6million. it further moved up to #328,051million and #633,144.4million between 1991 and 1993 respectively. By 1995 and 1996, Nigeria had an outstanding debt of #716,865.6millionand #617,329.0million respectively (CBN statistical bulletin, 2004). In Nigeria, the debtsituation is really a big problem because these debts mount are accumulated annually and we find that 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. This study therefore tends to focus on the impact of external debt on Nigeria economy and also provides lasting solution to external debt problems.
1.2 STATEMENT OF PROBLEM
Nigeria which was a net lender to organisations like IBRD, IMF, Paris Club etc. is today one of the highly indebted countries to these organisations. External debt when effectively and efficiently utilized is meant to provide some investments. The returns from these investments will be used in the settlement of the debt. But in Nigeria, the reverse is the case. The debt is incurred to service and enrich the private pockets of our leaders,on behalf of the entire citizenry(Vanguard; 2004). Consequently upon this, debt servicing has become one of the most consuming elements of Nigeria‘s annual earnings. The Nigeria‘s unfavourable balance of payment (BOP) istoday a function of some variables amongst which external borrowing is rated the most influential factor. The BOP problem in turn leads to high rate of inflation, import and dependence. Nigeria‘s external debt has no doubt put pressure on the economic recovery and growth of the country. This research has actual impact of the external debt on the economy of Nigeria.
The trend of external debt shows the state of the economy considering the external debt. Thus, it shows whether the external debt of the Nigerian economy is increasing or decreasing. As at 1990 to 1992, the external debt amounted to 82.3% and from 1993 to 1995, it decreased
significantly by 13.2% while from 1996 to 1998, it further decreased by 2.5%. As at 1999 to 2001, the Nigeria external debt was insignificant. But as at 2002 to 2004 there was a significant increase on the Nigeria external debt by24.3%, while from 2005 to 2007 the external debt was insignificant. But 2008 to 2010 showed an increase in the Nigeria external debt by 39.9%.
1.3 OBJECTIVES OF THE STUDY
The objectives of the study are;
i. To determine the impact of external debt on the Nigeria economy.
ii. To determine the effect of external debt services on the Nigeria economy.
1.4 STATEMENT OF HYPOTHESIS
This study is guided by the following hypothesis.
H0: there is no significant effect of external debt services on the Nigeria economy.
H1: there is significant effect of external debt on the Nigeria economy.
1.5 SIGNIFICANCE OF THE STUDY
The study is important because it will help to know the amount of external debt of the country and proffer solutions on how to control the debt of the country based on the findings and recommendation of this work. It will stand to help the policy makers, governments, researchers and the students of related discipline. The research work will serve as a guide to policy makers to enable them in making and implementing appropriate laws that will guide the rate at which money is being borrowed from other countries and also negotiate the maturity period to limit the extent of external debt. This is implementing proper policies. This work will be relevant to government in the area of debt management. Thus; it will help the government to know the organisations and countries whose maturity period are longer and also charge rate of interest and then borrow from them so that the loan can be repayable as and when due. This will also benefit the researchers and the students of related discipline by serving as a reference material primarily geared towards expanding the boundaries of knowledge.
1.6 SCOPE OF THE STUDY
The study will focus on the Nigeria external debt and its impact on the economy. The study will cover the period of 1985-2011. This period is particularly pertinent for the study and the nation‘s economic history because it covers a period of deficit financing and budgeting as well as recessionary period involving sharp nose diving cum dwindling in general societal aggregate demand which emanated as a result of low level of savings in Nigeria economy which necessitated the undesirable macro-economic problems and economic distress and fluctuations which may come up inform of economic glut(dumping of unsold socks of goods due to lack of patronage by the consumer, i.e. low or no effective demand of the commodities or stock of the goods by consumers).
The period witnessed the introduction of multifarious types of policies (fiscal and monetary policies) and some programmes to bring the fluctuating Nigeria economy to normalcy sees to achieve economic growth and development which are the goals of macro-economic. In particular, the period witnessed the period of bank consolidation/recapitalization policy, deregulation, industrialization and open door policy. All these were designed to bring the sagging economy in equilibrium.
Impact Of External Debt On Economy:
External debt can have both positive and negative impacts on an economy, depending on how it is managed and utilized. Here are some of the key ways in which external debt can affect an economy:
Positive Impacts:
- Financing Development: External debt can provide a source of financing for important development projects such as infrastructure, education, healthcare, and industrialization. This can help stimulate economic growth and improve living standards.
- Smooth Consumption: Borrowing from foreign sources can help smooth consumption patterns by allowing a country to invest in projects that have long-term benefits, even if it doesn’t have the funds upfront.
- Currency Stabilization: External debt can be used to stabilize a country’s currency exchange rate. For instance, a country can borrow foreign currency to build up its foreign exchange reserves, which can help maintain stability in times of economic volatility.
- Technology Transfer: Access to external capital can also facilitate technology transfer, as foreign investors may bring in advanced technology and expertise to support domestic industries.
- Economic Diversification: Debt can be used to diversify an economy, reducing its reliance on a single sector. This diversification can make the economy more resilient to external shocks.
Negative Impacts:
- Debt Servicing Burden: One of the most significant negative impacts of external debt is the burden of debt servicing. When a country borrows, it must make regular interest and principal payments, which can divert a substantial portion of government revenues away from essential services and investments.
- Risk of Default: Excessive external debt increases the risk of default. Default can lead to severe economic and financial consequences, including a loss of access to international credit markets and a damaged reputation in the global financial community.
- Exchange Rate Risks: If a significant portion of external debt is denominated in foreign currency, it can expose the country to exchange rate risks. A depreciation of the domestic currency can make debt servicing more expensive.
- Crowding Out Domestic Investment: High levels of external debt can crowd out domestic investment. When governments allocate a large portion of their budgets to debt servicing, there may be less money available for crucial public investments and social programs.
- Loss of Economic Sovereignty: Excessive reliance on external debt can lead to a loss of economic sovereignty. Lenders may impose conditions or policy changes on borrowing countries, which can affect their economic policies and decision-making.
- Vulnerability to Global Economic Trends: Economies heavily reliant on external debt are vulnerable to changes in global economic conditions, including interest rate hikes and shifts in investor sentiment. Sudden changes can lead to financial crises.
In summary, the impact of external debt on an economy depends on various factors, including the level of debt, how it is managed, the terms of borrowing, and the purpose of borrowing. Prudent management and strategic use of external debt can support economic growth and development, but excessive and poorly managed debt can lead to financial instability and economic crises. It is crucial for governments to strike a balance between leveraging external financing for development and maintaining fiscal sustainability.