THE ECONOMIC IMPLICATION OF INCREASING EXTERNAL DEBT LIABILITY IN NIGERIA

THE ECONOMIC IMPLICATION OF INCREASING EXTERNAL DEBT LIABILITY IN NIGERIA

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A HISTORICAL PERSPECTIVE OF NIGERIA’S EXTERNAL DEBT

The management of Nigeria’s external debt has been a major macroeconomic problem especially since the early 1980s. For many years now, the country’s debt has been growing in spite of the efforts being made by the Government to manage and minimize its crushing effects on the nation’s economy. Such efforts range from the various refinancing and restructuring agreements to debt conversion programme and the deliberate allocation of substantial resources towards servicing the debt. Of particular concern to the authorities, is the heavy debt burden it imposes when compared with the country’s debt service capacity (Ogunlana, 2005).

Prior to 1978, the level of Nigeria’s external debt was very low, standing at about $3.1 billion and represented barely 6.2 percent of GDP. However, by 1977/1978 when Nigeria experienced a temporary decline in oil receipts, the first Jumbo loan of $1.0 billion was raised from the International Capital Market (ICM) with grace and repayment periods of three and eight years, respectively, and a relatively high rate of interest, (LIBOR + 1.0 percent) compared with the existing debts that were largely from the multilateral and concessional sources with long maturity period and other more generous terms of repayment. At the peak in mid – 1989, LIBOR was 13.0 per cent. That loan was followed by the second Jumbo loan of $750 million in 1978/1979.

Between 1979/1980, there was an up-turn in the global oil market which improved Nigeria’s foreign exchange inflow. The relaxation of economic policy measures and the adoption of deflationary measures prompted massive importation of goods and services which brought about rapid depletion of reserves. Shortly thereafter, the global oil market witnessed serious glut which brought down the price of crude oil with the attendant devastating impact on the Nigerian economy.

The thinking that the oil glut would be short-lived prompted both the states and the Federal Government to engage in external borrowing. They flagrantly breached Decree 30 of 1978 which fixed the limit of external borrowing at N5.0 billion US ($8.3 billion) and embarked on imprudent and massive external borrowing from the ICM to finance all sorts of projects. Moreover, the massive importation which prevailed and the indiscriminate issuance of import license with total disregard to the level of reserves and capacity to pay, resulted in massive build up of trade arrears for both insured and uninsured trade credits (Ogunlana, 2005).

Indeed, the reality and the magnitude of Nigeria’s debt problem did not dawn on the country until 1982 when creditors refused to open new lines of credit. This led the country to seek relief in the form of refinancing of the trade arrears. The first of such exercise was in 1983 covering outstanding letters of credit as at 13th July, 1983 for $2.1 billion. By 1988, the terms of Promissory Notes issued for trade credits were renegotiated and the total value of notes issued aggregated to $4.8 billion.

Consequently the level of external debt rose rapidly from $9.0 billion in 1980 to $17.8 billion and $25.6 billion in 1983 and 1986 respectively. The level of debt had since risen to $35.9 billion by the end of 2004 despite all the repayments, deliberate policy of drastic curtailing of further external borrowing and the various debt management strategies adopted, including debt conversion and buy-back.

These developments completely altered the structure and character of Nigeria’s external debt from largely concessional sources of long maturity to short/medium with tough repayment terms. Of the total debt outstanding, the value and share of the Paris Club debt increased progressively from $5.8 billion or 33.5 per cent in 1984 to $21.7billion or 66.5 per cent and $30.8 billion or 85.8 per cent in 1995 and 2004 respectively. On the contrary, the share of multilateral debt as well as private debt (promissory notes and London Club Banks) have declined persistently over the years from a total of $11.5 billion or 66.5 per cent in 1984 to barely $5.1 billion or 14.2 per cent in 2004.

The deliberate policy of the government to limit further borrowing, including from concessional sources, the strict compliance with the repayment terms of multilateral loans as well as the deal regarding London Club debt which almost provided total solution to such debt, accounted for the declining trend in the stock of debt owed to these sources. On the other hand, the conditions and terms of debt rescheduling with the Paris Club imposed difficult conditions which did not only make repayment difficult, and extremely tight, but made the debt owned to this source to grow rapidly over the years. Paris Club debts are official bilateral debt and export credit which were guaranteed by various Export Credit Agencies (Abrego and  Ross, 2001).

1.1 BACKGROUND OF THE STUDY

Infrastructural investment is widely recognised as a crucial driver of economic development, however, many developing countries, Nigeria inclusive, lag behind in the quality and quantity of crucial economic infrastructure. To meet this gap, two options are available to Developing countries: source for the funds through taxation or borrow. Hence, in this case, taxation is regarded as one of the potential source of funds to finance emergencies (Ono & Uchida, 2018). However, since taxation creates distortionary effects on economic growth, it is less popular among the policymakers (Barro, 1979). Therefore, public debt is the only feasible option to finance government expenditures and other development projects when the country lacks funds. This argument is following the Ricardian invariance theorem, in which taxation gives excess burden to the public by increasing the cost of living and reducing the purchasing power of people (Barro, 1979). According to Soludo (2003), countries borrow for two broad categories; macroeconomic reasons to either finance higher investment or higher consumption and to circumvent hard budget constraint. Developing countries rely on international borrowing to finance special projects, infrastructure and to compensate for needed revenue which cannot be obtained through taxation.

External debt is the portion of a country's debt that is borrowed from foreign lenders, including commercial banks, governments, or international financial institutions. These loans, including interest, must usually be paid in the currency in which the loan was made. To earn the needed currency, the borrowing country may sell and export goods to the lending country (Kenton, 2021). The motive behind external debt is due to the fact that countries, especially the developing ones, lack sufficient internal financial resources and this brings about the need for foreign aid. The dual-gap analysis provides the framework which shows that the development of a nation is a function of investment and that such investment which require domestic savings is not sufficient to ensure that development take place (Oloyede, 2002). The importance of external debt on the growth process of a nation cannot be overemphasized, as it ought to accelerate economic growth especially when domestic financial resources are inadequate and need to be supplemented with funds abroad. External debt is a major source of public receipts. The accumulation of external debt should not signify slow economic growth. For countries with low income, in particular, borrowing from foreign institutions is a necessary choice since it will provide financing that it would otherwise not be able to obtain at competitive rates and flexible periods of repayment internally.

1.2 STATEMENT OF THE PROBLEM

Excess borrowings without appropriate planning for investment may lead to heavy debt burden and interest payment, which in turn may create several undesirable effects for the economy. Countries with poor economic structure, high public debt is also a critical issue since it can create uncertainty and low economic growth. High debt-to-GDP ratios are also considered a concern for investors, as they can have a negative effect on the stock market and reduces productive investment and employment in the long-run. According to Olufemi (2020), the figures are being thrown around in news articles and broadcasts. Analysts have been telling of its consequences – the repeatedly depressing rates of unemployment and inflation, low GDP per capita, lean spending on building, maintenance and expansion of available infrastructure, all culminating in a youth restiveness and crime, extreme incidences of violent deaths, poorer standards of living, financial uncertainties and a general state of hopelessness. These are the negative consequences of a country on the brink of bankruptcy due to an unhinged appetite for loans and irresponsible use of same. Nigeria is currently ranked among Sub-Saharan Africa heavily indebted countries with a stunted GDP growth rate, retarded export growth rate, a fast dwindling income per capita and an increasing poverty level. Worse still, the country needs to borrow more because of the deteriorating world prices of her primary exports – crude oil and the ravanging effect of the global pandemic, COVID 19. Nigeria’s 2005 debt relief provided by the Paris Club of creditors motivated largely by the need to free-up resources for investment and faster economic growth led to a significant decline in the country’s debt burden in 2006. Unfortunately, 15 years after, the country is back in bigger debt crisis. Successive governments have been accumulating debt at an alarming rate while debt servicing cost has again increased astronomically to become a sour point in Nigeria’s budgetary process in the last decade. The economy is, therefore, over-burdened with massive government debt and debt service costs that consume a large proportion of government scarce revenue, narrowing down the fiscal space for government to invest in critical infrastructure that supports private investment and sustain growth.

Consequently, this study seeks to provide answers to the following questions:

1. How has external debt impacted on the economic growth of the Nigerian economy?
2. How has Nigeria’s external debt influenced Investments in the Nigerian economy?
3. To what extent has the external debt impacted the Nigerian Government’s fiscal policies.

1.3 OBJECTIVES OF THE STUDY

The implications of external debt liability on the economy of a nation, has been analyzed and evaluated in Journals, magazine, seminars, symposia, commentaries and dailies. In carrying out this study, the researcher hopes to achieve the following key objectives:

1. To ascertain the impact of external debt liability on the Gross Domestic Product in Nigeria.
2. To determine how Nigeria’s external debt liability has influenced the inflow of Foreign Direct Investment into the Nigerian economy.
3. To determine the extent by which external debt liability 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 liability impacted on the Gross Domestic Product in Nigeria ?
2. How has the Nigerian external debt liability 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 HYPOTHESIS

These are the following hypothesis of the study:

Hypothesis 1

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

H1:  There is a significant relationship between external debt and Gross Domestic Product.

Hypothesis 2

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

H1:  There is a significant relationship between external debt and Foreign Direct Investment.

Hypothesis 3

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

H1:  There is a significant relationship between external debt and Government Capital Expenditure.

1.6 SIGNIFICANCE OF THE STUDY

A study on the economic 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

1.  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 OPERATIONAL 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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