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TOPIC : THE EFFECT OF EXTERNAL DEBT ON ECONOMIC
GROWTH OF NIGERIA (2010Q1– 2015Q4) (Also Available
for 1980–2013, and 1990-2013, and 2001-2013)
OF THE STUDY
It is generally expected that developing countries,
facing a scarcity of capital, will acquire external
debt to supplement domestic saving (Pattillo et al,
2002; Safdari and Mehrizi, 2011; Monogbe, 2016). 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 abroad as long as the capital thus acquired produces
a rate of return that is higher than the cost of the
foreign borrowing. In that event, the borrowing country
is increasing capacity and expanding output with the
aid of foreign savings.
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,
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 (Apeh and Okoh, 2014). 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 (Udoka and Ogege, 2012; Apeh and Okoh,
According to Muhammad and Fayyaz, (2015) external debts
affect the economy in both ways explaining that where
efficient use of external debts can bring economic prosperity
to a nation, their inefficient use can cause severe
damages as well. External debt became a burden to African
countries because contracted loans were not optimally
deployed (Iya, et al. 2013), 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.
It is no exaggeration to claim that Nigeria’s
huge external debt burden was one of the hard knots
of the Structural Adjustment Programme (SAP) introduced
in 1986 by the Babangida administration though Ogunmuyiwa
(2011) argues that the period 1985 through 1993 when
the country embarked on Structural Adjustment Programme
(SAP) only coincided with a period when external debt
was at its peak. The high level of debt service payment
prevented the country from embarking on larger volume
of domestic investment, which would have enhanced growth
and development (Darma, 2014; Clements et al, 2003).
With the recent debt forgiveness granted to Nigeria,
one would expect the economic process of the country
to be increased.
However, given the number of years, since Nigeria had
been independent and the substantial debt its had incurred,
coupled with the existing institutions, one can claim
that the entire spectrum of the economy has not been
sufficiently active, especially when compared with the
economy of similar or lesser aged developing countries.
The main interest of this study then is to investigate
the effect of external debt on the economic growth of
OF THE STUDY
The study will focus on the following objectives:
(i) To examine the external debt trend of Nigeria;
(ii) To investigate empirically the effect of external
debt on the growth process of the country;
(iii) To explore the impact of the debt cancellation
on the Nigerian economic growth;
(iv) To investigate the politics of the debt forgiveness
and the possible effect on Nigerian economy.
OF THE STUDY
The significance of this study are as follows:
(i) The study would provide an econometric basis upon
which to examine the effect of external debt on Nigeria’s
(ii) It would provide an objective view to the relevance
of the debt cancellation to Nigerian economy.
The following research questions would be considered
in the course the study:
1. What has been the pattern of Nigeria’s external
debt in the past?
2. To what extent did external debt impact on the Nigerian
3. Does the debt cancellation have any impact on the
economic growth of the country?
4. What are the politics behind the debt forgiveness
and how would it affect the Nigerian economy?
H0: That the external debt stock did not affect the
economic growth of Nigeria.
Ha: That the external debt stock affected the economic
growth of Nigeria.
H0: That the external service payment did not impact
on the economic growth of Nigeria.
Ha: That the external service payment impacted on the
economic growth of Nigeria.
SCOPE OF THE STUDY
The scope of this study shall cover the external debt
trend of Nigeria over the years to date. However, the
main focus of this study is an x-ray of the effects
of external 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 external debt on the economic growth
of Nigeria is restricted to the period from first quarter
of 2010 to fourth quarter of 2015. This restriction
is unavoidable because of the rebasing of economic data
from 1990 to 2010 and the need to focus on the recent
development in the Nigeria external debt profile.
From the literature, the channels through which indebtedness
works against growth are identified as: current stock
of external debt as a ratio of GDP, which may stimulate
growth; past debt accumulation, which captures the debt
overhang and therefore deters growth; and debt service
ratio to capture the crowding out effects. Debt service
payments reduce export earnings and other resources
and therefore retard growth. According to Elbadawi et
al (1996), these debt burden indicators also affect
growth indirectly through their impact on public sector
expenditures. As economic conditions worsen, governments
find themselves with fewer resources and public expenditure
is cut. Part of this expenditure destined for social
programs has severe effects on the very poor.
Clements et al, (2003) examined the channels through
which external debt affects growth in low-income countries.
Their results suggest that the substantial reduction
in the stock of external debt projected for highly indebted
poor countries (HIPCs) would directly increase per capita
income growth by about 1 percentage point per annum.
They noted that reductions in external debt service
could also provide an indirect boost to growth through
their effects on public investment. They argued that
If half of all debt-service relief were channeled for
such purposes without increasing the budget deficit,
then growth could accelerate in some HIPCs by an additional
0.5 percentage point per annum.
Borensztein (1990) found that debt overhang had an adverse
effect on private investment in Phillipines. The effect
was strongest when private debt rather than total debt
was used as a measure of the debt overhang. Iyoha (1996)
found similar results for SSA countries. He concluded
that heavy debt burden acts to reduce investment through
both the debt overhang and the ‘crowding out’
Elbadawi et al, (1996) also confirmed a debt overhang
effect on economic growth using cross-section regression
for 99 developing countries spanning SSA, Latin America,
Asia and Middle East. They identified three direct channels
in which indebtedness in Sub-Sahara Africa works against
growth: current debt inflows as a ratio of GDP (which
should stimulate growth), past debt accumulation (capturing
debt overhang) and debt service ratio. The fourth indirect
channel works through the impacts of the above channels
on public sector expenditures. They found that debt
accumulation deters growth while debt stock spurs growth.
Their results also showed that the debt burden has led
to fiscal distress as manifested by severely compressed
Ajayi and Oke (2012) investigation of the effect of
external debt burden on economic growth and development
of Nigeria using regression analysis of OLS showed that
external debt burden had an adverse effect on the nation
income and per capital income of the nation. They observed
that the magnitude of the external debt outstanding
mounted pressure on the economy since the eruption of
the oil crisis in 1981 due to the rapid accumulation
of trade arrears from 1982 the debt problem had been
traced to the fall in the crude oil prices, collapse
in commodity prices and the protracted softening of
the world market since 1981 with the resultant decline
in foreign exchange earnings and pressure on the balance
Sulaiman and Azeez (2012) examine the effect of external
debt on the economic growth of Nigeria using econometric
techniques of Ordinary Least Square(OLS), Augmented
Dickey-Fuller (ADF) Unit Root test, Johansen Co-integration
test and Error Correction Method (ECM) and found that
external debt has contributed positively to the Nigerian
economy. Oke and Sulaiman (2012) also examine the impact
of external debt on the level of economic growth and
the volume of investment in Nigeria and found that the
current external debt ratio of GDP stimulates growth
in the short term, but the Private Investment which
is measure of real and tangible development shows a
Monogbe (2016) investigated intergeneration effect of
foreign debt on the performance of Nigeria economy with
secondary data spanning from 1981 to 2014. The results
show that external debt has positive and significant
relationship with economic growth. According to Monogbe,
this relationship suggests that using external debt
for infrastructural, production and manufacturing project
will stimulate economic activities, and hence promote
Onyekwelu et al. (2014) adopted Linear Regression and
Analysis of Variance (ANOVA) to examine External Debts
Management Strategies in developing economies and its
implications on some key economic indices using Nigeria
as a case study. The linear regression showed that there
is a positive and significant relationship between the
size of External Debts and Gross Domestic Product (GDP),
Capital Expenditure, External Reserves and Exports.
However, the Analysis of Variance (ANOVA) reveals a
negative correlation between External Debts and the
variables studied. Onyekwelu et al. (2014) attribute
this anomaly to mismanagement of credit facilities,
unfavourable loan terms characterized by capitalization/compounding
of interests, weak economic base, poorly coordinated
statistics on loans and overdependence on foreign aids
Based on the assertion that debt, whichever type or
form, is a major problem militating against African
development stride, Osuji and Ozurumba (2013) investigate
the impact of external debt financing on economic growth
in Nigeria with data covering 1969 to 2011. The VEC
model estimate shows that London debt financing possessed
positive impact on economic growth while Paris debt,
Multilateral and Promissory note were negatively related
to economic growth in Nigeria.
Ezeabasili et al (2011) investigate the relationship
between Nigeria’s external debt and economic growth
between 1975 and 2006 applying econometric analyses.
The result of the error correction estimates revealed
that external debt has negative relationship with economic
growth in Nigeria. They stated that Nigeria must be
concerned about the absorptive capacity noting that
consideration about low debt to GDP, low debt service/GDP
capacity ratios should guide future debt negotiations.
Kanu et al. (2014) examine the impact of disaggregated
components of external debt on the economic development
of Nigeria for the period 1969 to 2011 using least square
regression analysis and unit root test. The findings
of the study show that in the short run, while multilateral
and miscellaneous sources of external debt had positive
significant relationships with economic development,
promissory notes maintained a significant negative relationship.
In the long run only the lagged value of GDP was found
to be positively significant. In other words, there
is no significant long run relationship between external
debts and the level of economic development in Nigeria.
Other sources of external debt that were hitherto significant
in the short run, turned out to be insignificant in
the long run. It was also ascertained that there exists
a causality relationship between external debts and
economic development in Nigeria.
Ojo (1996) affirms that it is no exaggeration to claim
that Nigeria’s huge external debt is one of the
hard knots of the Structural Adjustment Programme introduced
in 1986 to put the economy back on as sustainable path
of recovery. The corollary of this statement is that
if only the high level of this debt service payment
could be reduced significantly, Nigeria would be in
a position to finance larger volume of domestic investment,
which would enhance growth and development. But, more
often than not a debtor has only a limited room to manage
a debt crisis to advantage.
However, Cohen’s (1993) results on the correlation
between developing countries (LDCs) debt and investment
in the 1980s showed that the level of stock of debt
does not appear to have much power to explain the slowdown
of investment in developing countries during the 1980s.
It is the actual flows of net transfers that matter.
He found that the actual service of debt ‘crowded
Secondary data shall be the basis for this study. The
relevant data to be used would be sourced from the Central
Bank of Nigeria’s statistical reports, annual
reports and statement of accounts for the years under
review. The test of the hypotheses earlier stated would
be done at 5% level of significance and as such, the
generalization of the study findings would be limited
to this extent.
The econometric procedure that would be adopted to examine
the effect of external debt on the economic growth of
Nigeria shall be the Ordinary Least Square (OLS) method.
This econometric method would be used because it is
very reliable and widely used in researches. Two multiple
regression models shall be adopted to capture the effect
of external debt and the debt service payment on Nigerian
economic growth. The effect of other macro-economic
factors such as: exchange rate, and inflation rate would
also be considered. This would enable us to judge the
relevance of the debt cancellation. If the external
debt stock and the debt servicing payment had adverse
effect on the economy, then the debt cancellation would
contribute the growth of the economy.
OF THE STUDY
This study shall contain five chapters. The first chapter
shall contain the background of the study, the statement
of the research problem, the objectives of the study,
the research questions etc that would guide the study.
Chapter two would summarise the opinions of authorities
on the subject matter. Chapter three shall state the
methodology to be adopted in the study. Chapter four
shall focus on the presentation and interpretation of
the regression results. The last chapter - chapter five,
would present the summary of the findings, conclusion
and appropriate recommendations.
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and investment: The case of the Phillippines”.
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Cohen, D. (1993) “Low investment and large LDC
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Onyekwelu, U. L.; Okoye, E. and Ugwuanyi, U. B. (2014)
“External Debts Management Strategies in Developing
Economies: An Impact Assessment on Selected Economic
Indices of Nigeria (2002–2011)”. International
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Osuji, C. C. and Ozurumba, B. A. (2013) “Impact
of External Debt Financing on Economic Development in
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Debt and Growth”. IMF Working Paper.
No. WP/02/69, pp. 1-33
Safdari, M. and Mehrizi, M. A. (2011) “External
debt and economic growth in Iran”. Journal
of Economics and International Finance. Vol. 3,
No. 5, pp. 322-327.
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in Tell No 29, July 18, P38.
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of External Debt on Economic Growth of Nigeria”.
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Regression Data and Results are included
debt management, nigerian economic growth, economic
growth in nigeria, sources of economic growth, meaning
of economic growth
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