CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF THE STUDY

The beginning of the existing market for government borrowing in Nigeria is the financial reforms introduced by the colonial government in 1958. These reforms saw to the creation of the central bank of Nigeria (CBN) and the creation of marketable public securities to finance fiscal deficit. (Adepoju 2007). The central bank of Nigeria ordinance (1958, paragraph 35) says banks shall be entrusted with the issue and management of federal government laws publicly issued in Nigeria upon such terms and conditions as may be agreed within in the federal government and the bank. However, whether or not external debt would be beneficial to the borrowing nation depends on whether the borrowed money is used in the productive segments of the economy or for consumption. (Adepoju 2007).

According to Adepoju  (2007).  State that   debt financed investment need to be productive and well managed enough to earn a rate of return higher than the cost of debt servicing.

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. The debt, if properly utilized, is expected to help the debtor country’s economies (Hameed 2008) by producing a multiplier effect which leads to increased employment, adequate infrastructural base, a larger export market, improved exchange rate’ and favorable terms of trade. But, this has never been the .case in Nigeria and several other sub-Saharan African Countries (SSA) where it has been misused (Aluko and Arowolo, 2010). Apart from the fact that external debt had been badly expended in these countries, the management of the debt by way of service payment, which is usually in foreign exchange, has also affected their macroeconomic’ performance (Aluko and Arowolo, 2010; Serieux and Yiagadeesen, 2001).

External debt is a major source of public receipts and financing. Capital accumulation in any economy (Adepoju 2007). It is a medium used by countries to bridge their deficits and carry out economic projects that are able to increase the standard of living of the citizenry and promote sustainable growth and development. Hameed, Ashraf and Chaudary, (2008) stated that external borrowing ought to accelerate economic growth especially when domestic financing is inadequate. External debt also improves total factor productivity through an increase in output which in turn enhances Gross Domestic product (GDP) growth of a nation.

Prior to the $18 billion debt cancellation granted to Nigeria in 2005 by the Paris Club, the country had external debt of close to $40billion with over $30 billion of the amount being owed to Paris Club alone (Semenitari, 2005). The history of Nigeria’s huge debts can hardly be separated from its decades of misrule and the continued recklessness of its rulers. Nigeria’s debt stock in 1971 was $1 billion (Semenitari, 2005). By 1991, it had risen to $33.4 billion, and rather than decrease, it has been on the increase, particularly with the insurmountable regime of debt servicing and the insatiable desire of political leaders to obtain loans for the execution of dubious projects (Semenitari, 2005).

Before the debt cancellation deal, Nigeria was to pay a whopping sum of $4.9 billion every year on debt servicing (Aluko and Arowolo, 2010). It would have been impossible to achieve exchange rate stability or any meaningful growth under such indebtedness. The effect of the Paris Club debt cancellation was immediately observed in the sequential reduction of the exchange rate of Nigeria vis-a-vis the Dollar from 130.6 Naira in 2005 to128.2       Naira in 2006, and then 120.9 in 2007 (CBN, 2009). Although the growth rate of the economy has been inconsistent in the post-debt relief period as it plunged from 6.5% in 2005 to 6% in 2006 and then increased to 6.5% in 2007 (CBN, 2008), it could have been worse if the debt had not been cancelled.(Aluko and Arowolo, 2010).

It is widely recognized in the international community that excessive foreign indebtedness in most developing countries is a major impediment to their economic growth and stability (Audu, 2004; Mutasa, 2003). Developing countries like Nigeria have often contracted large amount of external debts that has led to the mounting of trade debt arrears at highly concessional interest rates. Gohar and Butt, (2012) opined that accumulated debt service payments create a lot of problems for countries especially the .developing nations reason being that a debt is actually serviced for more than the amount it was acquired and this slows down the growth process in such nations. The inability of the Nigerian economy to meet its debt service payments obligations has resulted in debt overhang or debt service burden that has militated against her growth and development (Audu, 2004).

Available statistics show that the external debt stock of Nigeria has been on the increase after the debt cancellation in 2005. The country’s external debt outstanding increased from $3,545 million in 2006 to $3,654 million in 2007, and then to $3,720 million and $3,947 in 2008 and 2009 respectively (CBN, 2009). It is therefore imperative to examine the effect of external debt of the country on ‘ her economy for us to appreciate the need to avoid being back in the group of highly indebted nations.

1.2 STATEMENT OF THE PROBLEM

Nigeria like most highly indebted poor countries (Uganda, Namibia, Algeria, Code I’Voire, Mozambieetc) has low economic growth and low per-capita income, with domestic savings insufficient to meet developmental and other national goals. Nigerian exports were primarily primary commodities with export earnings too small to finance imports which are mostly capital .intensive (Manufactured) goods which are comparably more expensive (Siddique, Selvanathan and Selvanathan, 2015). Compounding the problem is Nigeria’s drift to mono economy with the discovery of oil. The oil sector generates about 95% of foreign exchange earnings and about 80 percent of budgetary revenue. The inability to diversify her revenue sources coupled with corruption and mismanagement compels Nigeria to have inadequate fund for growth and developmental projects such as roads, electricity pipe borne water and so on.

The huge external debt stock and debt service payments of African countries and Nigeria in particular prevented the countries from embarking on larger volume of domestic investment, which would have enhanced growth and development (Clements, 2003). External debt became a burden to most African countries because contracted loans were not optimally deployed, therefore returns on investments were not adequate to meet maturing obligations and did not leave a favorable balance to support domestic economic growth. So, African economies have not performed well because the necessary macro-economic adjustment has remained elusive for most of the countries in the continent. Hence the need for this study.

1.3PURPOSE OF THE STUDY

The main objective of the study is to examine the relationship between external debt and economic growth in Nigeria. The specific objectives are as follows:

To ascertain the impact of external debt on Gross Domestic Product (GDP) in Nigeria. To evaluate the effect of external debt servicing on Gross domestic Product in Nigeria. To establish the impact of exchange rate on Gross Domestic Product in Nigeria. To investigate the relationship between external debts and economic growth of Nigeria.

1.4RESEARCH QUESTIONS

Does external debt have any impact on Gross Domestic Product in Nigeria? Does external debt servicing have any effect on Gross Domestic Product in Nigeria Economy?

iii.   To what extent does exchange rate impact on Gross Domestic Product in Nigeria?

Is there any relationship between external debt and economic growth in Nigeria?

1.5 RESEARCH HYPOTHESES

The study was guided by the following hypotheses:

H01: External debt has no significant impact on Gross domestic product in Nigeria.

HI1: External debt has significant impact on Gross domestic product in Nigeria.

H02: External debt servicing has no significant effect on Gross Domestic Product in Nigeria

HI2: External debt servicing has significant effect on Gross Domestic Product in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

This study is focused on providing alternative measures to tackling external debt management problems. It will also serve as a tool in revamping government policies towards loan procurement and debt-servicing in Nigeria. This work may also serve as a yardstick for further research and documentation on Nigeria’s external debt crisis.

This study’ also seek to investigate the direct impact of external debt burden on economic growth in Nigeria by finding a long run and causal relationship between external debt and economic growth. This study is significant as its findings will. Provide a basis which will aid policy makers in proffering polices aimed at managing the debt crisis situation in Nigeria.

1.7 SCOPE OF THE STUDY

The study seeks to analyze Nigeria’s external debt and its impact on economic growth. In order to fully capture its effect on the economy, a thorough empirical investigation will be conducted with data covering a period of 11 years i.e. 2005-2016.

1.8 LIMITATION OF THE STUDY

The major challenge in this project is the inability to get enough information or data. This is because of the nature of the research which has been stated above. Also, the time available was not enough for a comprehensive research work however, within the limit time available, all efforts were made to gather so much data and information as required.

Time: The time allocate for the research work was not enough to allow adequate research work and comparisons.

Accessibility: One of the major problems encountered was the difficulty with which the area of study was gotten.

Finance: The success of any academic exercise depends so much on the availability of money. In this study, finance was a major constrain in any case, that was not allowed to hinder the effectiveness of the work.

1.8DEFINITION OF TERMS

Debt burden: It is simply the economic hardship which public debt imposes on her populace.

Debt management: It is establishment of the conditions of issue and redemption of public security.

Debt: Money that one person or entity owes or is required to pay to another, generally as a result of a loan or other financial transaction.

Economy: A country’s system of using it resource to produce wealth, or the relationship between production, trade and supply of money in a particular country or region.

External Debt: It is the portion of a country’s debt that is acquired from foreign sources such as foreign corporations, government or financial institutions.