CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
It is generally expected that developing countries, facing a scarcity of capital, will incure debt to supplement domestic saving (Pattillo et al, 2002; Safdari and Mehrizi, 2011). The rate at which they borrow abroad - the “sustainable” level of foreign borrowing - depends on the links among foreign and domestic saving, investment, and economic growth. The main lesson of the standard “growth with debt” literature is that a country should borrow as long as the capital thus acquired produces a rate of return that is higher than the cost of the borrowing. In that event, the borrowing country is increasing capacity and expanding output with the aid of the debt thus, making the debt productive and justifiable.
In theory, it is possible to calculate the sustainable level of foreign borrowing, based, for example, on the terms, maturity, and availability of foreign capital. In practice, however, the task is nearly impossible, since such information is not readily available. Thus, various ratios, such as that of debt to exports, debt service to exports, and debt to GDP (or GNP), have become standard measures of sustainability. Even though it is difficult to determine the sustainable level of such ratios, their chief practical value is to warn of potentially explosive growth in the stock of foreign debt. If additional foreign borrowing increases the debt-service burden more than it increases the country’s capacity to carry that burden, the situation must be reversed by expanding exports. If it is not, and conditions do not change, more borrowing will be needed to make payments, and external debt will grow faster than the country’s capacity to service it.
Countries in sub-Saharan Africa have generally adopted a development strategy that relies heavily on foreign financing from both official and private sources (Ajayi and Oke, 2012). Unfortunately, this has meant that for many countries in the region the stock of external debt has built up over recent decades to a level that is widely viewed as unsustainable. From a trivial debt stock of $1billion in 1971, Nigeria had towards the end of 2005 incurred close to $40 billion debt with over $30 billion of the amount owed to the Paris Club alone. Although Nigeria’s debt was more than the total of those of the 18 other poor countries (14 of them African countries) classified as Heavily Indebted Poor Countries (HIPCs), it had been a herculean task convincing the creditors that debt cancellation was the most desirable option. Prior to Nigeria’s $18 billion debt cancellation deal, these 18 other poor countries i.e. Benin Republic, Bolivia, Burkina- Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia had secured a 100 percent debt cancellation totaling $40 billion (Semenitari, 2005).
The debt burden on less developed countries can be traced to the early 1980’s after the oil price increase of the 1970’s (Ezike and Mojekwu, 2011). It was the product of reactions by the international community to “oil price shocks”. One of the legacies of African countries from the crisis has been an increasing debt burden, which constituted a major constraint to growth and development. Osuji and Ozurumba (2013) revealed that between the period of 1950-1960, Nigeria had a magnificent growth in its economy due to her huge investment in agriculture which was a major source of revenue for the country; this brought about reduction in both internal and external debt. However, in the eighties Nigeria’s external debt rapidly escalated as a result of declining oil export earnings.
Public debt became a burden to African countries because contracted loans were not optimally deployed, therefore returns on investments were not adequate to meet maturing obligations and also hindering economic growth (Erhieyovwe and Onovwoakpoma, 2013). African economies have not performed well, partly because of the increased outflow of resources to service debt obligations and partly because the necessary macro-economic adjustment has remained elusive for most of the countries in the continent.
1.2 Statement of the Problem
The management of Nigeria’s 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 programmes 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.
The main interest of this study is then to investigate the effect of public debt on the economic growth of Nigeria.
1.3 Research Questions
For the purpose of this study, the following research questions would be considered in the course the study:
· What has been the pattern of Nigeria’s external debt in the past?
· To what extent did external debt impact on the Nigerian economic growth?
· Does the debt cancellation have any impact on the economic growth of the country?
· What are the politics behind the debt forgiveness and how would it affect the Nigerian economy?
These and many more are the questions which this research study will seek to provide answers to.
1.4 Objectives of the Study
The study will focus on the following objectives:
· To examine the public debt trend of Nigeria with special emphasis on the external debt;
· To investigate empirically the effect of public debt on the growth process of the country;
· To explore the impact of the debt cancellation on the Nigerian economic growth;
· To investigate the politics of the debt forgiveness and the possible effect on Nigerian economy;
· To examine the effect of debt service on the growth of Nigerian economy.
1.5 Research Hypothesis
The following hypotheses will be subjected to testing in order to draw logical conclusions:
Hypothesis I
Ho: That the public debt stocks have no positive impact on the economic growth of Nigeria.
Hi: That the public debt stocks have positive impact on the economic growth of Nigeria.
Hypothesis II
Ho: That the budget deficit financing has not been beneficial to the growth of the Nigerian economy
Hi: That the budget deficit financing has been beneficial to the growth of the Nigerian economy
1.6 Scope of the Study
The scope of this study shall cover the public debt trend of Nigeria over the years to date. However, the main focus of this study is an x-ray of the effects of public debt on the growth of Nigerian economy as measured by the Gross Domestic Product. The general overview of the 2005 debt cancellation shall also be examined with certain issues raised and discussed.
It needs be emphasized that the empirical investigation of the effect of public debt on the economic growth of Nigeria is restricted to the period between 1980 and 2014. This restriction is unavoidable because of the need to focus on the recent development in the Nigeria public debt profile.
1.7 Significance of the Study
The significance of this study are as follows:
· The study would provide an econometric basis upon which to examine the effect of external debt on Nigeria’s economic growth.
· It would provide an objective view to the relevance of the debt cancellation to Nigerian economy.
· It will serve as a secondary source of data for other researchers of the same or similar study.
· The study will also contribute to the existing body of knowledge as well as widen the horizon of the researcher.
1.8 Limitations of the Study
The major challenge in this project is the inability to get enough secondary sources of data . This is because of the nature of the research which has been stated above.
Also, research on a topic like this requires enough time for a comprehensive research work but with the time limit available, it will not be possible to gather so much data and information as required. Despite this limitations, the researcher took adequate pain to do justice to this research.
1.9 Operational Definition of Terms
In order for the understandability of this study to be enhanced, it is imperative to define certain terms. Some of which are:
· Public Debt: This is the borrowings of government which can be internal or external. In other words, it is the aggregate of domestic and foreign debt.
· External Debt: This is simply defined as the borrowings from foreign lenders. It is usually denominated in foreign currency.
· Internal Debt: This is regarded as debts obtained from local citizens or institutions.
· Debt Management: It is a multi-facet concept that involves debt strategy, debt contraction, recording, monitoring and servicing
· Growth: This is defined as an increase in the Gross Domestic Product or per capital income of a country.
· Budget Deficit: This is a situation where the estimated expenditure exceeds the estimated revenue.
· IMF: International Monetary Fund.
· IBRD: International Bank for Reconstruction and Development.
· UNCTAD: The United Nations Conference on Trade and Development.
· OECD: Organisation for Economic Co-operation and Development.
· DMO: Debt Management Office.
· MOFI: Ministry of Finance Incorporated.
· ICM: International Capital Market.
· DSK- Debt Stock
· HIPC- Heavily Indebted Poor Countries
.