NALYSIS OF EXTERNAL DEBT AND ECONOMIC GROWTH IN NIGERIA
CHAPTER ONE INTRODUCTION BACKGROUND OF STUDY
Every country in the world aim at achieving economic growth and development. However, this is only possible if a country has adequate resources. In developing countries, especially those in sub Sahara Africa, the resources to finance the optimal level of economic growth and development are in short supply. This is as a result of the economies ploughed with problems of low domestic savings, low tax revenues, low productivity and meager foreign exchange earnings. Basically, for these reasons, many developing countries yearning for economic growth inevitably resort to external financing to bridge the gap between their savings and investments. In the process of obtaining finance from abroad, a country may consider several options: grants, foreign investment and loans (concessional and non – concessional) in that order. However, mix of these capital in – flow in varying proportion could be obtained depending on the socio – economic and political situation in a country.
Nigeria like most developing countries borrowed from external sources mainly for investment purposes. The country’s external debt was sustainable up to mid 1970’s. From the late 1970’s because of poor macro – economic management and declining prices of crude oil, the country’s external debt began its upward movement. Thus from an external debt of US $ 557.74 million in 1975. Nigeria debt peaked at US $33.1 billion in 1990 before declining to US $27.1 billion in 1997 and rose to US $ 28.8 billion in 1998. However, one of the greatest problems facing African countries basically classified as the amount of their external indebtedness. The external debt problem is becoming more and more for many reasons. This problem of increasing rate of the external debt is threatening the development programmes embarked upon by these countries: thereby retarding their economic growth and development. The reason being that the size of the debt relative to size of the economy’s GNP is enormous. Also, the current system of debt management has a serious macro – economic impact on an economy’s output: as such, there is an urgent need to reduce Africa’s total outstanding debt service payments as well as accumulating of arrears on payments.
In 1986, the Federal Government introduced the Structural Adjustment Programme (SAP) to address the problem of structural imbalance in the economy and create an atmosphere for the achievement of macro – economic stability. It is obvious that one of the integral part of the SAP is to reduce Nigeria huge debt. It is a fact that if the enormous amount spent on debt service payment could be reduced greatly, the country will be able to finance a large volume of domestic investment which would enhance growth and development. The problem of the rising external debt of the less developed countries (LDCs) is giving nightmares not only to the debtor nations that is worrying about how to earn enough foreign exchange to at least service their huge external debts but also to the creditors that are worried about the tendency of the debts becoming bad and irrecoverable.
To most debtors nations, the adage “ to go a borrowing is to go assorrowing” is a biting truism. This is not to say that the researcher is against borrowing either internally or externally. In fact, from the on set, the researcher strongly believes that external funds if judiciously utilized will go a long way to help solve or at least alleviate the problems of gross under – development confronting most of the LDCs. Getting out of the “debt trap” is now the major concern of both the creditors and the debt nations. The debtors should not be made to bear the burden of miscalculation of botgh the creditors ( who were reckless in the approach to lending during this peak of the “ petro dollar boom” for being too short sighted as not to see the strings and traps attached to the loans.Perhaps, the above cannot be more representative of the Nigeria situation which is likened to an extravagant person who is hosting his friends and associates to an all exercise – paid, no holds barred party, which after the parting found himself unable to settle even a fraction of the bill and all the guest gone, not even a person to be seen to offer moral succor to the lavish host. This vividly describes the Nigeria external debt problem. Having wasted all the borrowed funds and having nothing to show for it, Nigeria is woken up to unending knocks of the creditors.
Unfortunately, ability to pay is close to zero. This is becomes more pathetic when it can be seen that Nigeria is now called upon to pay when the economy is in a depressed mood. More so, the borrowed funds are embarked on ill conceived projects which are equally badly implemented. However, the new international economic order sets out as one of it’s objectives to secure favourable conditions for the transfer of resources to developing countries and to ensure that a country’ resources are fully utilizes for the development of the country concerned. Thus, Nigeria resorted to external borrowing early in her history so as to quicken the pace of economic development. The issue of Nigeria’s external debt generated much public concern at the beginning of 1980. Actually, Nigeria’s external indebtedness started during the colonial days. The last of colonial borrowing was the World Bank (IBRD) loan of 1958 used to finance Nigeria Railway Corporation extension to Bornu under the guarantee of the United Kingdom Government ( Felagan 2014). It is believed that debt is generated by the gap between domestic savings and investment, and export earning which increases in absolute terms over time. As the gap widens and the debts accumulates, interest charges also accumulate and a country must borrow more to maintain constant flow of net imports and to refinance maturing debt obligations. Nevertheless, external borrowing became a conscious public policy when in 1960, the Government promissory notes ordinance was enacted for the purpose of raising authorized loans.
Under the ordinance, a sinking fund was also established for redeeming loans raised. In 1962, the external loans Act was enacted by parliament which provided for the raising of the loan outside Nigeria. Under the Act, external loans were to be used for the purpose of development program and for making loans to regional government. In 1970, after the civil war “ The External Loan Rehabilitation, Reconstruction and Development” decree was promulgated. The decree authorized Federal Commission to raise loans outside Nigeria for amount not above N1 billion. The loan is for rehabilitation, reconstruction and development programme for making loans to state government. These various regulations on external loans became the policy guidelines not only in magnitude but also in the direction.
Nigeria’s debt crisis could also be traced to the misdirect economic policies pursued since the buoyancy of the oil market which resulted in an outright neglect of the non – oil sector of the economy especially agriculture. Owing to this neglect of other sectors in the economy, the oil sector provided over 905 of the government national revenue, so fluctuations that occurred in the oil market in 1978 and 1980s distorted the projected revenue estimates of the federal government. Hence, the government had to borrow to fill the gaps created by the fluctuation and also meets the increasing expenditures. Thus, Nigeria’s debt as recorded by the Central Bank of Nigeria in 1978 was N1, 265.7 million or US $2.2 billion;N8819.4 million or US $ 13.1 billion in 1982 and N133,956.2 million in 1988. More so, the total outstanding external debt of Nigeria went up to N240, 033.6 million in 1989 in addition, it is said that the debt keeps rising yearly ( defying Newton’s law of gravity) as Nigeria was owning N648,813 million as at 1994 and N3,097,383.8 million as at 2000.
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