THE ANALYSIS OF EXTERNAL DEBT AND ECONOMIC DETECTION AND THE GROWTH IN NIGERIA

ABSTRACT:

 This research work was aimed at ascertaining the impact of external debt on economic growth in Nigeria. Ex-post facto research design was adopted for the study. While data on Gross Domestic Product  (GDP), External Debt Stock and  External  Debt Service Payment were obtained from World Bank International Debt Statistics, Exchange Rate data were collected from Central Bank of Nigeria Statistical Bulletin, 2013. The period of study was 1980-2013. Model was formulated and data were analyzed using Ordinary Least Square.

Diagnostic tests were conducted using Augmented Dick Fuller Unit Root Test, Co-integration

and  Error Correction  Model.  The  independent variable was  GDP, while the  explanatory

variables were External Debt Stock, External Debt Service Payment and Exchange Rate. We

discovered that External Debt had a positive relationship with Gross Domestic Product at short

run, but a negative relationship at long run. Also, while External Debt Service Payment had

negative relationship with Gross Domestic Product, Exchange Rate had a positive relationship

with it. The paper concluded that exchange rate fluctuation had positive impact on the Nigerian

economy while external debt stock and debt service payment had negative impact on the same

economy.  The study recommended amongst others, that Debt Management Office should set

mechanism in motion to  ensure that loans were utilized for  purposes for which they were

acquired as well as set a ceiling for borrowing for states and federal governments based on

well-defined criteria.  

KEYWORDS: External Debt, Gross Domestic Product, Exchange Rate, Debt Stock, External

Debt Service Payment

INTRODUCTION

Human wants are insatiable and the means or resources available for the satisfaction of wants

are limited  in their supply  (Olukunmi,  2007). In individual  and national  lives,  the above

assertion is true.  To meet national wants  amidst limited resources, nations might  resort to

borrowing. Borrowing creates debt. Debt is the aggregate of all claims against the government

held by the private sector of the economy or by foreigners, whether interest bearing or not less,

any claim held by the government against private sectors and foreigners (Oyejide, Soyede and

Kayode, 1985). Shortfall in domestic savings to finance productive activities compels nations

to borrow (Ezeabasili, 2006 and Momodu, 2012).

Debt could be from within a nation’s boarder (Internal) or from outside (External). External

debt may be defined as debt owed to non-residents repayable in terms of foreign currency, food

or service (World Bank, 2004). The effect of external debt on investment and economic growth

of a country has remained questionable for policy makers and academics alike. There has not

been consensus on the impact of external debt on economic growth. External debt may be used

to stimulate the economy but whenever a nation accumulates substantial debt, a reasonable

proportion of public expenditure and foreign exchange earnings will be absorbed by debt

servicing  and repayment  with heavy opportunity  costs (Albert,  Brain and  Palitha,  2005).

Excessive  external  debt  constitutes  obstacle to  sustainable economic  growth  and poverty

reduction (Maghyere and Hashemite, 2003; Sanusi, 2003 and Berensmann, 2004).

Those who argue that external debt has positive effect on the economy do that from the stand

point that external debt will increase capital inflow and when used for productive ventures,

accelerates  the  pace  of  economic  growth.    The  capital  inflow  may  be  associated  with

managerial know-how, technology, technical expertise as well as access to foreign market. The

above is in agreement with the views of the Keynesian Theory of capital accumulation as a

catalyst for economic growth. However, external debt may have negative impact on investment

through debt overhang and credit-rationing problem (Eduardo, 1989).

Debt overhang phenomenon is where substantial resources are used for debt servicing such that

it stifles economic growth. It becomes a tax on domestic production such that the amount spent

hampers  meaningful  economic  growth  activities  as  it  reduces  resources  available  to

government to implement growth oriented economic policies.

Statement of Problem

Nigeria like most highly indebted poor countries has low economic growth and low per capita

income, with domestic savings insufficient to meet developmental and other national goals.

Nigerian exports were primarily primary commodities with export earnings too small to finance

imports which are mostly capital intensive (Manufactured) goods which are comparably more

expensive  (Siddique,  Selvanathan  and  Selvanathan,  2015).  Compounding  the  problem  is

Nigeria’s drift to mono economy with the discovery of oil. The oil sector generates about 95%

of foreign exchange  earnings and about 80 percent of  budgetary revenue. The inability to

diversify her revenue sources coupled with corruption and mismanagement compels Nigeria to

have inadequate fund for growth and developmental projects such as roads, electricity pipe

borne water and so on.

The quest for economic growth and development compelled Nigeria to acquire external debt.

The first major external loan of US$28 million by Nigeria was acquired from World Bank in

1958 to finance railway construction. Ever since then, there has been accumulation of loans

aimed at various development projects without obvious results as expected.  As the amount of

loans increased, Debt Management Office (DMO) was established in October, 2000. Prior to

the establishment of DMO, Central Bank of Nigeria (CBN) was saddled with the responsibility

of management of national debts. At moment, DMO in collaboration with CBN and Federal

Ministry of Finance manage Nigeria’s debts.

Objectives of the Study

The  main  objective  of  the  study  is  to  determine  whether  external  debt  has  significant

relationship with economic growth in Nigerian. However, we specifically want to:

1. Ascertain the impact of external debt on Gross Domestic Product (GDP) in Nigeria.

2. Determine the effect of external debt servicing on Gross domestic Product in Nigeria.

3. Establish the impact of exchange rate on Gross Domestic Product in Nigeria.

Research Hypotheses

The study was guided by the following null hypotheses: 

Ho External debt has no significant impact on Gross domestic product in Nigeria. 

Ho External debt servicing has no significant effect on Gross Domestic Product in Nigeria

Ho Exchange rate has no significant impact on Gross Domestic Product in Nigeria.

 CONCLUSION

External debts are necessary to meet shortfall internal resources, and stimulate the economy.

However, it must be properly utilized to avoid serious consequences. Borrowing is not the most

important issue but the use to which the fund is deployed. This should be the most important

thing agitating the mind of any good accountant and Economist whenever external debt is

contemplated. It should be approached with caution, ensuring optimal utilization and higher

return than the interest (cost of fund). To sum, exchange rate fluctuation has positive impact

on the Nigerian economy while external debt stock and debt service payment have negative

impacts on the same economy.

RECOMMENDATIONS

The  study  made  the  following  recommendations,  which  are  aimed  at  ensuring  efficient

utilization of external debts in Nigeria.

1. Debt Management Office (DMO) should set mechanisms in motion to ensure that loans

are utilized for the purpose for which they were acquired. This could be achieved through

proper monitoring of the use to which the funds are put.

 2. DMO should set maximum limit of loans state and federal governments could be allowed

to acquire based on certain stipulated criteria.

3. Government should aggressively pursue the process of diversification of the economy.

This will result in buoyant and robust economy which will reduce the need for external

debt to the barest minimum. 

4. Anticorruption  agencies  like  Economic  and  Financial  Crimes  Commission  (EFCC),

Independent Corrupt Practices and other Related Offences Commission (ICPC) and Code

of Conduct Bureau should be made independent and the laws establishing them reviewed

by government to make them more functional and efficient. This will reduce the incidences

of misappropriation and embezzlement of funds from external debt.

Suggestion for Further Studies.

This includes: 

1. The impact of external debt on Economic Growth Indices in Nigeria.

2. The impact of External Debt Servicing on Capital Expenditure in Nigeria

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