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PROJECT TOPIC  : THE EFFECT OF EXTERNAL DEBT ON ECONOMIC GROWTH OF NIGERIA (1980– 2013) (Also Available for 1990-2013 and 2001-2013)

PROJECT PROPOSAL

BACKGROUND 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). 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, 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 (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, 2014).

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.

STATEMENT OF PROBLEM
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 Nigeria.

OBJECTIVES 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.

JUSTIFICATION/SIGNIFICANCE 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 economic growth.
(ii) It would provide an objective view to the relevance of the debt cancellation to Nigerian economy.

RESEARCH QUESTIONS
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 economic growth?
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?

STATEMENT OF HYPOTHESES
HYPOTHESIS I

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.

HYPOTHESIS II
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 between 1980 and 2013. This restriction is unavoidable because of the need to focus on the recent development in the Nigeria external debt profile.

BRIEF LITERATURE REVIEW
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’ effect.

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 budgets.

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 of payment.

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 decline.

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 among others.

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 out’ investment.

RESEARCH METHODOLOGY
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, inflation rate, interest rate and government expenditure 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.

ORGANISATION 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.

REFERENCES
Ajayi, L. B. and Oke, M. O. (2012) “Effect of External Debt on Economic Growth and Development of Nigeria”. International Journal of Business and Social Science. Vol. 3, no. 12 (Special Issue – June), pp. 297-304.
Apeh, A. S. and Okoh, A. S. (2014) “An Econometrics Analysis of the Impact of External Debt Crisis on Nigeria Economy (1986-2010)”. Journal of Economics and Sustainable Development. Vol. 5, no. 12, pp. 133-148.
Borensztein, E. (1990) “Debt overhang, debt reduction and investment: The case of the Phillippines”. International Monetary Fund working paper. No. WP/90/77, September.
Cohen, D. (1993) “Low investment and large LDC debt in the 1980s”. The American Economic Review. June 1993.
Clements, B.; Bhattacharya, R. and Nguyen, T. Q. (2003) “External Debt, Public Investment, and Growth in Low-Income Countries”. IMF Working Paper. No. WP/03/249, pp. 1-24.
Darma, N. A. (2014) “The Impact of Nigeria’s Debt Stock and its Servicing on Social Services Provision: 1980-2010”. Developing Country Studies. Vol. 4, no. 10, pp. 187-193.
Elbadawi, A. I.; Ndulu, J. B. and Ndung'u, N. (1996) “Debt overhang and economic growth in Sub-Saharan Africa”. A paper presented to the IMF/World Bank conference on External Financing for Low Income Countries in December.
Erhieyovwe, E. K. and Onovwoakpoma, O. D. (2013) “External Debt Burden and its Impact on Growth: An Assessment of Major Macro- Economic Variables in Nigeria”. Academic Journal of Interdisciplinary Studies. Vol. 2, no 2, pp. 143-153.
Ezeabasili, V. N.; Isu, H. O. and Mojekwu, J. N. (2011) Nigeria’s External Debt and Economic Growth: An Error Correction Approach. International Journal of Business and Management. Vol. 6, no. 5, pp. 156-170.
Ezike, J. E. and Mojekwu, J. N. (2011) “The Impact of External Debt on Macro-Economic Performance”. International Journal of Business and Management Tomorrow. Vol. 1, no. 2, pp. 1-12.
Iya, I. B.; Gabdo, Y. and Aminu, U. (2013) “An Empirical Investigation into the impact of External Debt on Economic Growth in Nigeria”. International Journal of Current Research. Vol. 5, Issue, 05, pp. 1065-1069.
Kanu, S. I.; Anyanwu, F. A. and Osuji, J. I. (2014) “The Impact of Disaggregated Components of External Debt on the Economic Development of Nigeria (1969-2011)”. Research Journal of Finance and Accounting. Vol. 5, no. 10, pp. 96-106.
Muhammad, U. D. and Fayyaz, A. (2015) “External Debts and Exchange Rates of Oil-Producing and Non-Oil Producing Nations: Evidence from Nigeria and Pakistan”. Journal of Advanced Management Science. Vol. 3, no. 1, pp. 8-12.
Ojo, M. O. (1996) “The power structure of international debt Management”. CBN Economic and Financial Review.
Oke, M. O. and Sulaiman, L. A. (2012) “External Debt, Economic Growth and Investment in Nigeria”. European Journal of Business and Management. Vol. 4, no. 11, pp. 67-75.
Ogunmuyiwa, M. S. (2011) “Does External Debt Promote Economic Growth in Nigeria?” Current Research Journal of Economic Theory. Vol. 3, no. 1, pp. 29-35.
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 Journal of Economics and Finance. Vol. 6, no. 8, pp. 137-152.
Osuji, C. C. and Ozurumba, B. A. (2013) “Impact of External Debt Financing on Economic Development in Nigeria”. Research Journal of Finance and Accounting. Vol. 4, no. 4, pp. 92-98.
Pattillo, C.; Poirson, H. and Ricci, L. (2002) “External 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.
Semenitari, I (2005). “The Road to debt Relief” in Tell No 29, July 18, P38.
Semenitari I (2005). ‘It was all God’s Doing” in Tell No. 29, July 18, P47.
Sulaiman, L. A. and Azeez, B. A. (2012) “Effect of External Debt on Economic Growth of Nigeria”. Journal of Economics and Sustainable Development. Vol. 3, no.8, pp. 71-79.
Udoka, C. O. and Ogege, S. (2012) “Public Debt and the Crisis of Development in Nigeria: Econometric Investigation”. Asian Journal of Finance and Accounting. Vol. 4, no. 2, pp. 231-243
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PROJECT PROPERTIES
Project Status
Available
Number of Chapters
5
Number of Pages
105
Number of Words
15,176
Number of References
63
Project Level
B.Sc.
Price
N10,000 (Non-Negotiable)
Abstract, Regression Data and Results are included
How to Pay for this Project . . . .CLICK HERE

Keywords: external debt management, nigerian economic growth, economic growth in nigeria, sources of economic growth, meaning of economic growth

 

 

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