An Analysis of External Debt and Economic Growth In Nigeria

An Analysis of External Debt and Economic Growth In Nigeria

To many nations and individuals, borrowing may pave way to greatness but some (those unable to manage debt) it may lead to impoverishment and great sorrows. This chapter of study is an attempt to present a review of some of the relevant literature on the subject of this study. It examines the views already expressed by eminent scholars mostly economists, bankers, financial analysts and even politicians on the subject matter.

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External debts have thus become the central problems of less developed countries like Nigeria .The issue of Nigeria ‘s external debt had not generated much public concern prior to 1980 .It was at the beginning of 1980s that it became a topical issue of discussion among populace.

In order to make a meaningful research, not just to repeat what had been done by others, a researcher must make a clear distinction between his work and that of the existing literature. In this regard, it is noted that most of the existing literature contains data obtained between 1960 and 1998. The present work will include data obtained between 1960 to 2004. This will help any generalization that may arise from the study .

Also there  are many aspects  of external  debt that have not been given any attention  by authors of current literature  of Nigeria’s external debt .Such areas are the factors  affecting debt servicing capacity of nations so as to limit debt burden and the measures adopted so far by the federal government of  Nigeria to solve debt problems.

DEFINITION OF EXTERNAL DEBT AND ECONOMIC  GROWTH

External debt refers to unpaid portion of external  financial sources required for developmental purposes and balance of payment s support which could not be repaid  when they fell due. The act of borrowing creates  debts according to Oyejide   et al (1985 )  refers to the resources of money in use in an organization which is not contributed  by its owners and does not in any way belong to them. Therefore,  when a government borrows the debts is a public debt. External debts  are incurred by government  through borrowing in the international  market like IMF, World bank  etc.

Sometimes there may be a shortfall in government revenue when revenue derived from various sources are not sufficient  to defray the total expenditure of government  commitment .When this happens , government runs into deficit spending .Deficit spending refers  tom the situation whereby government  expenditure  exceeds its  receipts  during a given financial  year. The government  incurs debts  by spending more than it raised in revenue. These debts is called national or public debts which is defined as the cumulative  total of various government  indebtedness at any given moment. From the definition , one will note that  government accumulates debts by running into deficit .Although  government could still avoid deficit by selling  all its assets  and printing more more money but government rarely does any of the above, instead government like to use deficit spending which runs  her  into debt which could be domestic or external or both. If  the debt is constituted mostly by domestic debt, this may lead to too much hazard because  it is money owed to the citizens of the country but when it is mostly external it constitutes a serious burden because it is debt owned to foreigners. According to Yasipe (1984): 12 there are classification of debt, which are reproductive debt and dead weight debt. Reproductive debt he says is debt which occur when a loan is obtained to enable the nation to purchase some sort of asset e.g  money borrowed for acquiring factories ,electricity, refineries etc.

Dead weight debts are debts incurred by government for unproductive ventures such as financing wars  and expenses on current expenditure.

External debts are made up of different  types. The  type of external  debt reflected the purpose for which the debt was incurred. Some of these are;

TRADE ARREARS –   This arises when  a country trades with other countries  and is unable  to pay either  or wholly , for the goods and services  supplied . For example  in the early 1980s accumulation of trade arrears accounting to US $9.8 BILLION BETWEEN  1983- 1988 was a result of Nigeria’s inability to settle her import bills.

BALANCE OF PAYMENT SUPPORT LOANS  – The overall economic transactions  between a country and the rest of the world classified into current ,financial and capital accounts constitute the balance3 of payment  position  which may be favorable when it is surplus or unfavorable when it is a deficit. However a persistent unfavorable balance of payments may inform government ‘s decision  to seek for balance of payment support loan.

PROJECT –TIED LOANS – Investments which have good potential and prospects  of accelerating economic growth and development  may lead government  into contracting project tied loans. As implied, this type of debt  which is for the execution of a particular project is supposed to be self – liquidating.

LOANS FOR SOCIO –ECONOMIC NEEDS – The provision of the socio –economic needs of the people such as infrastructure ,health education and other social amenities may necessitate  borrowing by government  to finance them.

Economic growth on the other hand, may be defined in terms of the total physical output or real income of   an economy. Also it could be referred to as an increase in real output or per capital output of an economy. The definition correctly recognizes that the standard  of living of the people in any  economy is best  measured in terms of real output  per person. The  standard of living  could decline  in an economy y if the population increased  at a faster  rate than the volume of the real  output. It is therefore steady process by which the productive capacity  of the economy is increased  over time  to bring about rising level of national income. Economic growth must be maintained if a nation is to improve the standard of living of the people.

Economic growth is therefore defined and measured in two ways. Specially, economic growth may be defined as follows; –

As the increase in real GNP which occur over period of time.

As the increases in real GNP or NNP per capital which occurs over time.

Economic growth by either definition is usually calculated in terms of annual percentage rate of growth. For example if real GNP of Nigeria was #200billion last year and #210b this year, we can calculate the rate of growth by subtracting last year’s GNP from this year’s GNP (# 210b – # 200b) = 1 /20 or 5%.

From this point, one can observe that economic growth  usually refers to the quantitative increase  in the total or per capita out put  of goods  and services in an economy whereas  development  implies a positive change in the socio ,institutional  and other structural relationship within which growth takes place. For  growth to take place ,that is for future  output to be greater  than the present  output, it is necessary to increase  the existing level of productive capacity  i.e  the available stock of capital  goods. But this can happen  only if part of current output is withheld  from present consumption (i.e saved ) and used to add to the existing stock of capital  goods is what is called investment .We can see therefore that growth  is not possible without  the savings investment process.

CAUSES OF EXTERNAL DEBT CRISIS IN NIGERIA;

Numerous factors contributed to the increased size of Nigeria’s external debts crisis. According to CBN briefs 1998 series, the major factors include the rapid  growth of public expenditure , particularly expenditure on capital projects,  borrowing from the international community  at non concessional interest  rates, decline in oil earning s for the late 1970’s and the emergency of trade arrears. As a developing economy, characterized by a low productive base, the supply of goods and services is augmented with imports under the circumstance s, there was substantial growth in imports. Nigeria import bills rose from #756.4m in 1970 to # 845.7b in 1997.Owing mainly to the depreciation of the naira   during the period. The inability to settle import bills led to the rapid build of trade arrears in the early 1980s as foreign exchange earnings declined substantially during the period. Also, Nigeria’s debt problem is rooted partly in the collapse of international oil price in 1981 and the persistent softening of the international oil market since then and also partly in domestic policy lapses. The policies pursued in 1970s and early 1980s led to structural changes  which made the economy vulnerable to external shocks. Rural –urban  migration which  intensified in the wake of the oil boom as well as inappropriate pricing and exchange rate policies had taken their toll on the e agricultural sector with the result  that the sector s  contribution to GDP shrank from 53% in 1965 to about 40% in the mid 1970s and not more than 20% in 1980.Defective structure of incentive paved the way for an industrial sector that was heavily dependent on imported inputs with  very low value added. Consequently, the economy became progressively dependent on crude oil accounting for over 22% of GDP, 81% of Government revenue and about 96% of the export earning at the beginning of 1980s, not quite long ,the economy  maladjusted as it were and characterized  by distortion in price cost relations ,import oriented national expenditure  and production and a grossly over valued exchange  rate, could not cope with a prolonged period of depression in oil prices

The oil price collapse in 1981 can thus be said to have compounded the problems of an economy that had its flexibility and led to serious external payments problems.

Another cause of external debt problem was that  some  pro pect-tied loans were contracted  without consideration for economic viability. In addition ,these were short term loans sourced mainly from foreign private markets  to execute projects of  long gestation problems. By 1986 , short and medium term loans constituted about 85% of the  total debt stock. The above development  resulted in the bunding of debt services thus compounding the debt situation.

In order words ,according to Arele  ( 1988 ) this can be attributed  largely  to too  poor  economic  management  in the debtor countries . This is for the fact that contracted loans  were wasted on inefficient public enterprises, while over regulation did not provide  the favorable environment for orderly economic growth of the indebted countries.

According to Arele  (1998), Ojo (1989) said “Not only did government agencies borrow indiscriminately from abroad but the use of the loans was not adequately monitored, the consequences of this faculty external debt policy was the lack of regular income to service disbursed external loans”.

According to Ahmed (1989 ) “a major problem compounding the debt problem is  the changing fortune of the dollar in the international  foreign exchange  market. Any depreciation of the dollar in the international currency market automatically reflects is an increase in Nigeria ‘s debt stock while any depreciation reflects in a decrease in the debt stock.” In connection to this, upward movements in interest and exchange rate have affected the size of the external debt stock.

CONSEQUENCES OF NIGERIA’S EXTERNAL DEBT

Since we are so much indebted, we must have to service the debt through the payment of large interest and amortization charges to the body we borrowed the money from. The interest charge we pay is now so high and the impact on the economy is negative. Payment of such huge interest is depriving the Nigeria government of revenue that should be used for other services. Increasing debt service obligations in Nigeria therefore is constituting an impediment to the implementation of new development oriented projects because a proportion of new generated internally is set aside for servicing previous debts. The primary real bund on of Nigeria’s external debt is shifted to the future. The rate of investment tends to be low and unemployment rate high because of our huge external debts.

Furthermore, our reputation is tarnished and the developed nations are no longer confident with our economy nor us. This gave rise to reduction in the flow of foreign investment to Nigeria, which could have profound consequences for the economic development prospect of the nation. With the e oil glut and reduced revenue, it is expected that our external debt liabilities will increase, foreign exchange crisis will also increase and our economy will be unstable. Nigeria’s external debt crisis will lead to liquidity crisis and foreign exchange crisis .If it is not well managed; it could slow down the rate of economic development and growth in Nigeria.

THE NATURE OF ECONOMIC GROWTH IN NIGERIA

Kuzuet ( 1973) has defined a country ‘s economic growth as “ a long term rise in capacity to supply increasingly diverse economic goods to its population ,this growing  capacity based on advancing technology and the institutional  and ideological adjustments that it demands.” The  production of goods and services not possible without sustainable increase in technological advancement. In fact to realized the potential growth inherent in new technology, there is need to make some institutional ,attitudinal and ideological adjustments within the nations.

However, the nature of economic growth in Nigeria is generally poor. The standard of living in Nigeria is a tiny fraction of that  in an industrialized nation. Nigeria  as we know  is among the developing counties of the world  commonly characterized as the less developed countries (LDC).Writes used to speak of  backward  nations which naturally irritated the people of those land sin which Nigeria is one. To avoid offence, we use the expression “developing nation or less developed countries” (LDCs). What is meant by the terms?

A developing country is simply one with real per capital income that is low relative to the present day per capital incomes of such nations as Canada, USA, Japan and Western Europe. Optimistically, a developing country is one regarded as being capable of substantial improvement in its income level.

However the growth rate in Nigeria is very low because productivity is low, incomes are low and in turn low savings. This means low capital formation and hence productivity becomes low.

Nigeria cannot afford to devote very large proportion of its production to capital goods, since it is hard to provide sustenance for m massive production. The problem is intensified by the population growth of Nigeria as a result whatever saving and capital formulation does occur is barely sufficient to keep the capital and labour ratio from falling. According to the law of diminishing returns, this means that unless there is better technology, an increase in the quality of labour or improvement in the quality or quantity of other inputs per worker will not rise. Thus Nigeria  is caught in a viscous  circle of poverty .Being poor ,Nigeria has little ability or incentive to save .Furthermore, low income means  low level of demand. As a result, there are few available resources, on one hand and no strong incentive on the other hand for investment in real or human capital, labour productivity is therefore low. And since output per person is real income per person, it follows that per capital income is low; thus resulting to a very low standard of living, which is manifested quantitatively and qualitatively in the form of low income (poverty), inadequate housing, poor health, limited or no education, high date rate and infact mortality, low life expectancy and in many cases a general sense of malaise and helplessness.

More also, there is inadequate income distribution in Nigeria, which is to say that there is growing gap between the income of the rich and the poor people within the country. The problems between the rich and the poor people in Nigeria will determine the degree of poverty. The more unequal the distribution of income, goods and services, the greater the incidence of poverty. Also, the lower the average income level, the greater the incidence of poverty, thus this is an overview of the nature of Nigeria economic growth.

CONDITIONS FOR RAPID ECONOMIC GROWTH ON NIGERIA

Economic growth is defined in terms of an increase in a nations output of goods and services and measured by the gross domestic product (GDP).

Economic development encompasses growth, structural and institutional changes and the essential elements that make for a better quality in life such as education, health, nutrition and a better environment. Modern growth theory takes the view that capital, labour and entrepreneurship are essential for production to take place. However, economic growth is particularly the result of capital accumulation as it is generally accepted that more capital goods will be required if there is to be growth. If all gross investments are devoted to depreciation of capital thus merely keeping the existing capital stock intact, there will be no net investment and therefore no basis for economic growth with a given capital output ratio and a given perpetual maintained capital stock (zero net investment)        output would be constant too. Only in so far as there is a net addition to capital stock that there will be growth. The essential ingredient for growth is therefore net investment or the excess of gross investment over depreciation. For, it is net investment alone ( unless capital output ratio is changing) that can lead to economic growth.

Although capital accumulation is basis to growth, there are some other complementary factors directly linked with capital formation for growth to take place. These factors include favourable economic environment, adequacy of infrastructure, security and political stability.

The growth rate of the real gross domestic product (GDP) has been very low in the last five years. It stood at 4.7% in 1991 and declined steadily to a trough of 1.0% in 1994 but rose to 2.2% in 1995. The critical factors in the situation are quite many. In terms of capital formation, the Nigeria economy generates very low savings and investment ratio. For instance, between 1991 and 1995, the gross national savings and investment ratio were less than 20% of the GDP.

This pattern contrasts with the high savings and investments ratios of the order of 60 – 70% of the GDP. The low savings and investment ratio in Nigeria are due and partly to institutional factors and partly to inappriopriate macro – economic policy environment especially monetary credit and exchange rate policies. For more investment to take place, it is essential to influence the economic environment by adopting market – related strategies on interest and exchange rate management. Attractive real interest rates will increase the volume of domestic savings and support the increased investment capital required for higher output while appropriate exchange rate regime would attract the inflow of foreign capital and raise the overall level of investments.

For the purpose of enhancing growth of the agricultural and industrial sectors and raising productivity in the economy, an internal technology evolution would be required. Adoption of imported technology to suit local raw materials and production needs and encouragement of local fabrication of machinery and equipment are pre-requisite. Increase in agricultural out put would require introduction of  hybrid and improved variety of seeds and adaptation of less costly small scale irrigation technologies to minimize the high dependence on rain – fed farming. This should be accompanied by harmonization of various research findings and disseminating results to farmers and manufacturing units.

Greater efforts are required of the human resources in the process of technical progress. While educational facilities have improved generally over the years, labour productivity has been rather low in Nigeria and this arise mainly from inadequate technical skill and motivation of the work force. There is need for more attention to manpower development for the adoption of modern technology. Further more, welfare and incentives scheme should be worked out to enhance the moral, commitment and diligence of workers.

Supply of basic amenities is crucial for higher productivity and therefore, economic growth. However, the facilities: electricity, water, telephone and transportation mainly provided by government are currently inadequate to meet the needs of enterprises. Moreover, erratic supply of electricity and water as well as weak communication link contribute enormously to the escalating costs of doing business in Nigeria especially as business resort to private provision of the facilities. Basic amenities would need to be rehabilitated and expanded to reach many consumers while encouraging private sector participation where appropriate should enhance the efficiency of public utilities.

Transfer of foreign technology and investment capital are essential element of growth strategies, which is currently being competed for by developing countries. For Nigeria to benefit from such technological transfer and capital inflow, there is need for a more conducive socio – political environment.

STRUCTURE OF NIGERIA’S EXTERNAL DEBT

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