1.1 BACKGROUND TO THE STUDY
Nigeria and indeed almost all the African countries are now facing an unprecedented debt crisis never known in the history of the continent. „He who owes must pay‟, could well be a true dictum. But it is also no less true that it is only a debtor who is alive that could be forced to pay his debt. In other words, the heavily indebted poverty ridden nations, especially those in developing Africa must survive the scourge of disease, starvation and ignorance if buoyant creditor nations and institutions of the West are indeed serious about getting back their money.
The rationale for raising external loan has always been to bridge the domestic resource gap in order to accelerate economic development. This is because nations just like individuals need loans to augment domestic resources. Consequently, Nigeria decides to borrow in order to finance specific projects. However, the big questions have been, why can‟t the borrowed funds be used to finance economically viable project? Why is it that Nigeria cannot generate enough foreign exchange with which to repay the externally borrowed funds? Is the management of Nigeria‟s external debt efficient and effective? Have the heavy burden of Nigeria‟s external debt any effect on the Nigeria economy? And above all; „why is it that the debt conversion committee (DCC) has not been able to come up with more permanent solutions to the nation‟s debt problem?
According to Phillips (2007), External Debt is the amount of money owed by the
government to individuals, governments, and institutions resident outside Nigeria‟‟. But when it is owed to individuals or institutions resident within Nigeria, then it is an internal Debt. Consequently, in the words of Ahmed (2008), former Governor of the central bank of Nigeria (CBN), „„External Debt Management is a conscious and carefully, deployment and retirement of loans acquired either for development purpose or supports the balance of payments. It incorporate estimates of foreign exchange earnings, source of finance, the project returns from the investment and the repayment schedule, it also include an assessment of the country‟s capacity to service existing debts and adjustment of the desirability of contracting further loans.
The Central Bank of Nigeria (CBN), in conjunction with the Federal Ministry of Finance manages the nation‟s external or public debts. It is necessary to note that in an attempt to get out of debts, the Debt Conversion Committee (DCC) was set up under the External Debt Management department which was established in July, 2004 to implement Nigeria‟s Debt conversion programme. Basically, debt conversion involves the Exchanges of external debt for domestic debt or equity. The objective of a debt conversion programme to a debtor country is to reduce the stock of its debt while simultaneously promoting the inflow of additional foreign capital to stimulate economic growth and recovery.
Furthermore, Phillips (2007) stated that, „„the Paris Club represents the official government creditors. This includes the United States of American (USA), the United Kingdom (UK), Germany, France and Canada. The London Club of creditors on the other hand represents the commercial banks spread all over the world. Both the Paris Club and the London Club of creditors are among the major sources of Nigeria‟s external debts. Other sources of debt include the multilateral creditors such as the World Bank, International Monetary Fund (IMF), African development Bank (ADB) and the European investment Bank (EIB); promissory notes holders (creditors in respect of refinanced debts; and other bilateral creditors. The International Capital Market (ICM) is where Nigeria made her first major borrowing of US$1 Billion, referred to as the „„Jumbo Loan‟‟ which was contracted in 1978. The London inter-bank offer rate (LIBOR) is one of the official interest rate used during negotiations.
The debt problem has, for decades, remained a recurrent and discordant note in the
discourse on the crisis and contradictions of Nigeria‟s development. This is, however, not
entirely surprising given its magnitude and the consequences for Nigeria. The collective
debt burden of the country represents a massive betrayal of Nigeria‟s huge resource
base, both human and material, and the failure of policy measures targeted at the
management of those resources. To be sure, hopes and expectations were high in 1960, when
Nigeria attained political independence. Nigerian new leaders believed that, given the abundance
of human and natural endowment at their disposal, they were bound to make steady progress in
the direction of sustainable democratic governance and development. But as it turned out, these
hopes have been dashed by years of military dictatorship and external complicity (Omotola and
The debtproblem of Nigeria has reached a frightening dimension that it threatens to cripple socio-economic and political development in Nigeria, if not urgently addressed. In Nigeria, the debt continues to gather strength and to make matter worst, the interests payable on these debts are not being serviced as at when due. It has been difficult to reschedule these debts to give Nigeria some respite to enable it put its acts together. It would seem that with the level of the debt profile of Nigeria, it is condemned to remain under-developed (Akhakpe, 2007). This has been of profound impact on the economy. Not only do debt service payments consume a huge chunk of foreign exchange earnings, they also act to depress investment and lower the rate of economic growth, due to debt overhang effect, leading to extreme poverty. As the crisis deepens, there has been a heightened Nationalistic struggle for debt cancellation from creditors, particularly from the Paris Club (Okonjo-Iweala, Soludo and Muhtar, 2003; Ajayi, 2003).
Nigeria is a typical example of an African state that suffers under the crushing weight of a debt overhang, which means that the country currently has a huge external debt that constitute a significant proportion of the GDP (Babawale, 2007). He noted further that from a figure of $17.37 billion in 1983, Nigeria‟s external debt rose speedily to $18.904billion in 1985; $33.730 billion in 1991 and $32.58 in 1995. The debt stock declined marginally to $28.733billion in 1998, while the total debt of Nigeria in 2002 was put at $31 billion. According to Debt Management Office Abuja, the position of Nigeria‟s external debt as at end of December 2009 was USD 3.947billion. Out of the amount, the federal government owes $2.093 billion while state governments owe $1.85 billion (Okonjo-Iweala, 2003)
From the former Minister of Finance exposes, one can see that Nigeria has two major categories of external creditors. Namely, they are official creditors and Private creditors. Her official creditors are: International Fund for Agricultural Development (IFAD), African Development Fund (ADF), European Development Fund (EDF), International Bank for Reconstruction and Development (IBRD), African Development Bank (ADB), Economic Community of West African States (ECOWAS) Fund, and European Investment Bank.
These official lists of international funders are Nigeria's multilateral creditors. In the bilateral league are the Paris Club Creditors and Non-Paris Club Creditors. Also, Nigeria is indebted to Private Creditors which consist of Promissory Note Holders and The London
Club Group. Initially, Nigeria borrowed concessionally only from the World Bank, a
multilateral institution. This explains why in 1960 when Britain - Nigeria's colonial masters handed over power to Nigeria, she had only incurred external debts of N82.4m (OkonjoIweala, 2003).
Some scholars have looked at the fact that the crisis in Nigeria would have been surmounted if it were self imposed. But the incorporation of Nigeria‟s economy into the international capitalist order has blocked the transition from underdevelopment to development. Another perspective argued that in understanding the debt burden is to look at the role of colonialism and its contemporary manifestation, neo-colonialism. According to Adesina (2007), colonialism is said to have “undermined the capacity of Nigerian economy to evolve viable economic structures”. For, instance, while today‟s capitalist countries were able to triumph over under-development, the debt crisis in Nigeria has been such that it has assumed a tumultuous dimension. No wonder, Omotola and Saliu, (2009), Obadan, (2004) and Onimode, (2006) observed that; Over the years, Nigeria have had debt sustainability problems. This explains why it has not been able to exit from the debt trap, necessitating the resort to debt rescheduling and relief measures. A number of initiatives have been taken, especially by the creditor nations and agencies in response to Nigeria‟s debt crisis. Several other measures have been proposed to manage Nigeria‟s debt crisis. Some were designed to promote a regime of lower interest rates for poor countries undertaking adjustment programmes; others emphasize the need for a high degree of concessionary rescheduling and a fundamental restructuring of the entire stock of the Paris Club debt.
Beyond these, however, Nigeria has also attempted to restructure her debt through a process of selling foreign debts at reduced prices in the secondary market. It has also exploited opportunities for debt-equity swaps whereby foreign debts are exchanged at reduced price in the secondary market for local equities or shares in the same enterprises, for purposes of environment, science and development.
1.2 Statement of the Research Problem
Generally, the indebtedness of the country becomes a problem when the burden of servicing the debt becomes so heavy and unbearable that it imposes intolerable constraints on the economy and on the development efforts of the authorities.
The causes of Nigeria‟s external debt problems are related to the nature of her economy – this has to do with the country‟s over-dependent on foreign goods as against locally produced goods; economic policies pursued or put in place by successive governments – not only did government and its agencies continue to borrow indiscriminately from abroad and suing short were not adequately monitored; exogenous factors which are beyond the control of the government itself which include the value of foreign currencies against the Naira and shorter payment period; all of which combined together to influence the macro-economic factors thereby holding the growth rate to a level too low for sustained development.
1.3 The Objective of the Study
The intention of this study will be to evaluate the Nigerian debt problem and solution used by the Federal Government of Nigeria to manage the nation‟s external and internal debt. The objectives of the study will be to:
i. Highlight the debt problems and solutions in Nigeria.
ii. Ascertain the efficiency and effectiveness of the solutions to the debt problems in by Nigeria.
iii. Ascertain whether the solutions to the debt problems have improved the economic environment in order to attract foreign investment.
iv. Ascertain whether the solutions to the debt problems serve as additional incentive to the repatriation of flight capital.
1.4 Scope of the Study
The study will concentrate on certain periods (to be added later) to ensure effective coverage of the research objectives. The work is an assessment of Nigeria‟s debt problem and solution as adopted by the Oyo State Ministry of Finance. It examines the problems and solutions of the debt profile of Nigeria, with a view to improving on them or possibly suggests new
techniques which might be helpful in solving the external and internal debt problem. Therefore, the research is focused on the debt management techniques in Nigeria, with emphasis on the efforts of Oyo state ministry of Finance.
1.3 Research Questions
A research work of this magnitude and nature is based on certain research questions. The following research questions are therefore generated.
1. Is there any system of determining the debt problems and solutions in Nigeria?
2. What are the various debt problems and solutions in Nigeria?
3. How effective and efficient is Nigeria‟s solutions to debt problems?
4. Have the solutions to the Nigeria‟s debt problems lessened the debt burden?
1.6. Relevance of the Study
This research would serve as an intellectual source or data bank for further researchers, economists, business administrators, government and regulatory bodies as well as other stakeholders in the financial sector on ways of reducing the debt problem of the country. Maintaining a reasonable level of debt profile would enhance economic growth, sustain our developmental capacity.
Therefore the findings of this research will be an additional knowledge to the body of knowledge in the field of management especially business administration. It is important to assess the impact of Nigeria‟s debt burden and solution on the basis that this project intends to shape the policy makers on the debt management acumen and to give them the way forward from debt encumbrances in Nigeria. It intends to also assess the effect of debt reduction on the society in general.
1.6. Definitions of Terms.