A CRIRICAL INVESTIGATION OF THE IMPLICATIONS EXTERNAL DEBTS ON THE ECONOMY OF NIGERIA

A CRIRICAL INVESTIGATION OF THE IMPLICATIONS EXTERNAL DEBTS ON THE ECONOMY OF NIGERIA

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BACKGROUND OF THE STUDY

Although infrastructure investment is widely seen as a critical engine of economic growth, many developing nations, including Nigeria, fall behind in terms of the quality and quantity of critical economic infrastructure. Developing countries have two alternatives for filling this gap: raise revenue through taxation or borrow. As a result, in this scenario, taxes is viewed as a potential source of revenue to support crises as stated by Ono et al in 2018. However, because taxes has a negative impact on economic growth, it is less popular among policymakers according to Barro (1979). As a result, when the country lacks finances, public debt is the sole viable alternative for financing government spending and other economic projects. This argument is based on the Ricardian invariance theorem, which states that taxes imposes an excessive burden on the public by increasing the cost of living and diminishing people's buying power as opined by Barro in 1979. Soludo in 2003 was of the opinion that countries borrow for two primary reasons: macroeconomic reasons to fund increased investment or consumption, and to avoid harsh budget constraints. International borrowing is used by developing nations to fund specific projects, infrastructure, and to compensate for revenue that cannot be acquired from taxation (http://www.datallytics.com/).

The part of a country's debt that is borrowed from foreign lenders, such as commercial banks, governments, or international financial institutions, is referred to as external debt (http://www.datallytics.com/). These loans, including interest, are normally required to be repaid in the currency in which the loan was issued. The borrowing country may sell and export items to the lending country in order to generate the required cash as stated by Kenton in 2021. The motivation for external debt stems from the reality that governments, particularly developing ones, lack adequate internal financial resources, necessitating the need for outside help. The dual-gap approach gives a framework for demonstrating that a nation's development is a function of investment, and that such investment, which requires domestic savings, is insufficient to assure that progress occurs according to Oloyede in 2002. External debt is critical to a country's growth process since it should boost economic progress, especially when local financial resources are insufficient and must be supplemented with cash from outside. External debt is a significant source of government revenue. External debt buildup should not be seen as sluggish economic progress. Borrowing from foreign institutions is a critical option for low-income nations in particular since it provides money that would otherwise be unavailable at competitive rates and flexible payback terms.

1.2 STATEMENT OF THE PROBLEM

Excess borrowings without proper investment planning can result in a hefty debt load and interest payments, which can have a number of negative repercussions on the economy. High public debt in countries with a bad economic structure is also a key concern, since it may lead to instability and low economic growth (Ejigayehu, 2013). High debt-to-GDP ratios are also a source of concern for investors, since they can have a negative impact on the stock market and, in the long term, limit productive investment and employment (http://www.datallytics.com/). The statistics are being bandied around in news stories and programs (Adejuwon, James & Soneye 2010). Analysts have been warning about the consequences: persistently low unemployment and inflation rates, low GDP per capita, low spending on building, maintaining, and expanding available infrastructure, all culminating in youth restiveness and crime, extreme rates of violent deaths, lower living standards, financial uncertainty, and a general sense of hopelessness. These are the negative repercussions of a country on the verge of bankruptcy as a result of an uncontrollable thirst for loans and irresponsible usage of those debts (Clements, Bhattarcharya & Nguyen 2003). Nigeria is now classified among Sub-Saharan Africa's severely indebted countries, with slowed GDP growth, slowed export growth, rapidly declining income per capita, and rising poverty (Clements, Bhattarcharya & Nguyen 2003). Worse, the government needs to borrow additional money due to the deterioration of the world pricing of its key exports – crude oil – as well as the devastation caused by the worldwide epidemic, COVID 19. Nigeria's debt relief from the Paris Club of creditors in 2005, spurred mostly by the need to free up resources for investment and quicker economic growth, resulted in a major reduction in the country's debt load in 2006 (Ejigayehu, 2013). Unfortunately, 15 years later, the government has relapsed into a deeper financial catastrophe. Successive governments have been amassing debt at an alarming rate, while debt payment costs have skyrocketed, becoming a thorny issue in Nigeria's financial process in the previous decade (Ejigayehu, 2013). As a result, the economy is overburdened with high government debt and debt servicing expenses, which take a substantial percentage of government limited revenue, reducing fiscal flexibility for government to invest in key infrastructure that supports private investment and sustains growth.

1.3 OBJECTIVES OF THE STUDY

In carrying out this study, the researcher hopes to achieve the following key objectives:

1. To investigate the impact of external debt on the Gross Domestic Product in Nigeria.
2. To examine how Nigeria’s external debt has influenced the inflow of Foreign Direct Investment into the Nigerian economy.
3. To examine the extent by which external debt has impacted the Nigerian Government’s capital Expenditure profile.

1.4 RESEARCH QUESTIONS

As a basis upon which this study is conducted, the following research questions are   relevant.

1. How has the external debt impacted on the Gross Domestic Product in Nigeria ?
2. How has the Nigerian external debt profile influenced the inflow of Foreign Direct Investment into the Nigerian economy?
3. To what extent has the external debt profile impacted the Nigerian Government’s capital Expenditure profile?

1.5 RESEARCH HYPOTHESES

The study test the validity of the following null hypotheses:

Ho1:  There is no significant relationship between external debt and Gross Domestic Product.

Ho2:  There is no significant relationship between external debt and Foreign Direct Investment.

Ho3:  There is no significant relationship between external debt and Government Capital Expenditure.

1.6 SIGNIFICANCE OF THE STUDY

This study on the implications of external debts on the Nigeria economy will immensely benefit different stakeholders. This work would particularly be relevant to economic policy formulators, creditors, scholars and students in the following ways:

1. Economic Policy formulators: It will enable economic policy makers
2.  To identify the level of risk that are prevalent in the level of external loan to be obtained and how it should be properly utilised.

(b). To understand the correlation between external debts and economic development.

(c) To understand the extent to which external debts has influenced investment activities in the Nigerian economy.

(d) To evaluate the impact of external debt on fiscal policies in Nigeria.

(e) To recommended appropriate measure to cushion the effect of external debt burden.

(f) To reach conclusions and recommendations that would benefit economic and political  decision-makers in developing policies and strategies that contribute to improving the Nigerian economy.

2. Creditors: The study will enable those who grant external Loans to know the risk attendant in granting loans beyond certain threshold and how to assess the credit worthiness of Debtor Nations.

3. Scholars and Students: This study will add to the body of knowledge in the field of public debt and stimulate further research in this area.

1.7 SCOPE OF THE STUDY

This research focuses on external debt and the Nigerian economy, the extent of study will be limited to external debts portion of Nigeria’s public debt. The study will use real Gross Domestic Product as a proxy for economic development, Foreign Direct Investment as a proxy for Investments inflow and Government’s Capital Expenditure as a proxy for fiscal policy. It will cover statistical bulletins from CBN annual reports, the Debt Management Office (DMO) and other cognate publications from the internet. The researcher will use secondary data in eliciting information that will be used in the research work, and it will cover the period of 21 years of return to democracy in Nigeria i.e. from 1999 to 2020.

1.8 LIMITATIONS OF THE STUDY

Churchill (1990) maintains that finance, time and availability of materials are not just limitation of a research work, rather in the real sense it should mention what a research can do and cannot do. Some of the limitation to this study are:

1. Access to Data: Although Nigeria is a federation, only data relating to the Federal Government could be accessed. The researcher could not access some data relating to the States of the Federation and Local Government Areas.

2. Time: The span for the project was inadequate in view of the complexity involved in the research work, thereby reducing the period covered to only 21 years.

However, despite the above unavoidable constraints, it is believed that this study has the attributes of eliciting the impact of external debt on the Nigerian economy.

1.9 ORGANISATION OF THE STUDY

This study shall consist of five chapters:

Chapter one shall contain the Background of the study, statement of the problem, objective of the study, research questions, hypothesis, scope of the study, significance of the study, limitation of the study and definition of terms. 

Chapter two examines the works of other experts on the subject matter of external debt and its implication for the economy and it consists of conceptual and definitional issues, theoretical, empirical and methodological review and a summary of literature.

Chapter three shall highlight the research design adopted for the study, the techniques used in analyzing these data.

Chapter four shall contain the presentation and analysis of the data collection, a test of the hypothesis postulated in chapter one.

Chapter five which is the last chapter shall contain the discussion of the findings, conclusion drawn from the findings and recommendations based on the conclusion drawn.

1.10 DEFINITION OF TERMS

Principles and terminologies are subject to various interpretations depending on the context in which they are used. For the purpose of this study, the major operating terms are defined as follows:

1. External Debt: External debt is the portion of a country's debt that is borrowed from foreign lenders, including commercial banks, governments, or international financial institutions.
2. Economy / Economic: Means the wealth and resources of a country or region, especially in terms of production and consumption of goods and services, while economic is an organized way in which a state or nation allocates its resources and apportions goods and services in the national community.
3. GDP: means real Gross Domestic Product which is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year (expressed in base-year prices).
4. FDI: Foreign direct investment (FDI) is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest. Lasting interest differentiates FDI from foreign portfolio investments, where investors passively hold securities from a foreign country. A foreign direct investment can be made by obtaining a lasting interest or by expanding one’s business into a foreign country.
5. GOVERNMENT CAPITAL EXPENDITURE: Government Capital expenditure is the money spent by the government on the development of machinery, equipment, building, health facilities, education, etc. It also includes the expenditure incurred on acquiring fixed assets like land and investment by the government that gives profits or dividend in future.

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