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The Effect
Of External Debt On The Nigeria Economy
ABSTRACT
This study
is meant to examine the effect of external debt on gross domestic product using
econometric analysis. The research revealed that Nigeria’s external debt has
contributed immensely to the gross domestic product. This has affected investment on the domestic
productivity and hence invariably affected the economic growth and
development. Due to the macroeconomics
distortion in the economic growth and development like the problem of
unemployment, inflation, balance of payment disequilibrium and a lot of others.
The researcher gave recommendation in view of the research finding such as
(1) The need for the improvement of
domestic social transformation to pave way for a social self-reliant economy by
developing science and technology. (2)
Government should de-emphasis export led growth based on foreign
exchange earning from primary product. (3) Government should embark on policy
measure to ensure full employment. (4)
Mobilization of human and materials resources to achieve the objective
of sustain growth towards externally source fund are channeled into
productively activities
Chapter one
Introduction
1.1 Background of the Study
The
accumulation of external debt is common phenomenon of the third world countries
at the stage of economic development where the supply domestic savings is low,
current account payment deficit are high and imports of capital are needed to
augment domestic resources.
Early 1970’s, the external debt of
developing countries was relatively small and primarily an official phenomenon,
the majority of creditors being Foreign Governments and International Financial
Institutions such as IMF, the World Bank and Regional Development Bank.
However, during the late 70’s and
early 80’s Commercial Banks began, playing a large role in International
Lending by recycling surplus OPEC “Petrodollars” and Issuing general purpose
loans to less developed countries to provide balance of payment support and
expansion of export sectors.
While foreign borrowing can be highly
beneficial providing the resources necessary to promote economic growth and
development it has its cost. In recent
years these costs have greatly out weighed the benefits for many developing
nation. The main cost associated with
the accumulation of a large external debt is “Debt Servicing”. Debt Servicing
is the payment of liquidation of the principal and accumulated interest, it is
a contractually fixed exchange on domestic real income and savings as the debt
grows or as interest rates rise, debt service payment must be made with foreign
exchange, in order words, debt service obligation can be met only through
export earnings.
However, should the composition of
Import changed or should the composition of export change or should interest
rates rise significantly causing ballooning of debt service payment or should
export earnings diminish debt servicing difficulties are likely to arise. This has been the experience of most of the
heavily indebted third world nations.
In order to solve the problem,
several external debt-financing options were adopted under the Structural
Adjustment Program (SAP) in 1986. Since
the introduction of this program, Nigerians have been plunged into one hardship
after another ranging from the devaluation of the naira through Second Tie
Foreign Exchange Market (SFEM) now Foreign Exchange Market (FEM) to the rising
prices of Commodities inflation etc. SAP as an economic restructuring program
is capable of alleviating the country’s debt trap is a miracle Nigerian’s were
waiting to see.
Specifically as part of the
programmatic approach to reduce the burden of external debt, the following
measures have been adopted in recent years.
They include
embargo on new loans, limit on debt service payment debt restructuring and debt
conversion
1.2 Statement of the problem
The ultimate
aim of any well co-coordinated and articulated economic policy is to achieve a
sustained economic growth and development.
However, a proper understanding of what development is , well enable a
policy maker to formulate appropriate policies for the acceleration of economic
development. In order words, the nature
of the development policy of a country will depend on how policy makers of that
country perceive development.
The
insistence of the need of external assistance obscures the necessity for the
people of poor countries themselves to develop the facilities attitudes and
institutions which are required if these societies are to achieve sustained
substantial material process. In deed,
these insistences are external aids help to perpetuate the ideals and attitude
wide spread in these countries which are damaging the economic progress.
The rapid
growing foreign debt, its consequent payment problem and lack of appropriate
debt management has plummeted the country into a turbulent economic crisis
characteristics of chronic balance of payment problem, foreign exchange
sequence, scarcity of essential items (including raw materials and spare parts)
which led to the closure of many factories, with intermitted retrenchment of
workers, high rate unemployment and under employment, run away inflation.
External
loans therefore cannot be seen as spelling doom for but could be a blessing to
the debtor nation. The basic problem is
how these loans are utilized for development purposes
Embarking on
unproductive ventures for instance led to waste of resources, and of course,
poor economic performance
The debt
problem seem to have defined solution despite the substantial part of the
country’s external debt been rescheduled over a long periods. The rescheduling is not even a satisfactory
measure because such decision is like postponing the day of reckoning. The economic gains that ate made now will be
crowded when the debt is due for payment.
As a matter
of fact, these external imbalances in the economy were not caused only by
foreign debt alone, rather other problem like dwindling oil revenue and
mismanagement of the economy by nefarious activities of the politicians of the
second republic also contributed in their own way. These were exactly what motivated the
researcher to embark on this study, to x-ray the contributions (effects) of
external indebtedness to these imbalances in the economy.
1.3 Objective of the Study
The study
into this area of Pubic Finance was stimulated by the researcher’s interest in
the world debt crisis, which was generated by the huge foreign debt owed to the
creditor national and the developing countries – Argentina, Brazil Chile,
Mexico, Turkey, Cote D’ ivory etc.
Nigeria
being the part and parcel of developing economy also has her own share of
problem. The economy has drifted from
economic situation to another; these have hampered economic growth and overall
development and prompted all kinds of hardship in the economy.
OUR AIM IS
TO IDENTIFY
(a) Source, size and nature of
Nigeria’s external debt.
(b) The implication ( impact) of debt
burden on the economy
(c) Debt management options
(government approach) towards solving the problem and its effectiveness.
(d) A lasting solution to the debt
crisis
It is there
hoped that this project will provide the public with a better knowledge on the
nation’s foreign debt problem and will act as reference point for effective
management of foreign debt both now and in future.
1.4 Research Hypothesis
This study
will be guide by the following hypothesis.
Null hypothesis
Ho: ß0 = O
There is no
significant relationship between Gross domestic product and External debt
Alternative
hypothesis
N1 = ß 1 = O
There is
significant relationship between gross domestic product and External debt.
1.5 Scope of the Study
The scope of the study covers a
period of 20 years (1989 – 2009). It is
hope that the result of this study will be relevant to serve the purpose for
which it was intended, which is to serve as advisory to both government of the
private sector in terms of borrowing.
1.6. Limitation of the Study
This study is basically restricted to
the effect of external debt on the Nigeria economy.
The research
was not able to gather all the necessary materials from all the secondary
sources needed for the study due to unforeseen circumstances resulting from
time and financial constraints.
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