A CRITICAL EXAMINATION OF THE EFFECT OF INCREASING EXTERNAL DEBT OBLIGATIONS ON THE NIGERIAN ECONOMY

CHAPTER ONE

INTRODUCTION

AN OVERVIEW OF NIGERIA’S EXTERNAL DEBT

The management of Nigeria's external debt has posed a significant macroeconomic challenge, particularly since the early 1980s. Over the course of numerous years, the nation's debt has continued to increase despite the Government's persistent efforts to handle and reduce its detrimental impact on the economy. These efforts encompass a wide range of actions, including refinancing and restructuring agreements, debt conversion programmes, and the intentional allocation of significant resources to debt servicing. The authorities are particularly concerned about the significant debt burden in relation to the country's capacity to service that debt (Ogunlana, 2005).

Before 1978, Nigeria's external debt was relatively low, amounting to approximately $3.1 billion and accounting for only 6.2 percent of GDP. Nevertheless, in 1977/1978, Nigeria faced a temporary decrease in oil revenues. To address this, they secured a substantial loan of $1.0 billion from the International Capital Market (ICM). The loan had grace and repayment periods of three and eight years, respectively, and carried a relatively high interest rate (LIBOR + 1.0 percent). This was in contrast to the existing debts, which mostly came from multilateral and concessional sources and had longer maturity periods and more favourable repayment terms. During its peak in mid-1989, LIBOR reached a staggering 13.0 percent. The second Jumbo loan of $750 million was obtained in 1978/1979, following the previous loan.

During the period between 1979/1980, there was a significant increase in the global oil market, leading to a positive impact on Nigeria's foreign exchange inflow. The implementation of new economic policies and the adoption of measures to combat deflation led to a significant influx of imported goods and services, resulting in a rapid depletion of reserves. Soon after, the global oil market experienced a significant surplus, causing a decline in the price of crude oil and severely impacting the Nigerian economy.

The belief that the oil glut would be short-lived led both the states and the Federal Government to pursue external borrowing. They blatantly violated Decree 30 of 1978, which set the limit for external borrowing at N5.0 billion US ($8.3 billion), and recklessly engaged in extensive external borrowing from the ICM to fund various projects. In addition, the significant influx of imports and the careless distribution of import licences without considering the available reserves and ability to pay, led to a substantial accumulation of trade arrears for both insured and uninsured trade credits (Ogunlana, 2005).

Truly, Nigeria only came to fully realise the extent of its debt problem in 1982, when creditors declined to provide any further credit. This prompted the nation to pursue assistance through refinancing of the trade arrears. The initial exercise took place in 1983, encompassing exceptional letters of credit as of July 13th, 1983, totaling $2.1 billion. In 1988, the terms of Promissory Notes issued for trade credits were renegotiated, resulting in a total value of $4.8 billion for the notes issued.

As a result, the amount of external debt increased significantly, reaching $9.0 billion in 1980, $17.8 billion in 1983, and $25.6 billion in 1986. The amount of debt had increased to $35.9 billion by the end of 2004, despite previous repayments and efforts to limit external borrowing. Various strategies, such as debt conversion and buy-back, were implemented to manage the debt.

These developments significantly transformed the structure and nature of Nigeria's external debt, shifting it from predominantly concessional sources with long repayment periods to shorter or medium-term loans with more demanding repayment terms. The amount and proportion of the Paris Club debt steadily rose over the years, reaching $5.8 billion or 33.5% in 1984, $21.7 billion or 66.5% in 1995, and $30.8 billion or 85.8% in 2004. Contrary to popular belief, the percentage of multilateral debt and private debt (promissory notes and London Club Banks) has consistently decreased over the years. In 1984, the total amount was $11.5 billion or 66.5 percent, but by 2004, it had dropped significantly to just $5.1 billion or 14.2 percent.

The government's intentional approach to curbing additional borrowing, even from concessional sources, and their commitment to adhering to the repayment terms of multilateral loans, along with the agreement on London Club debt that nearly resolved the issue entirely, have contributed to the decrease in the overall debt owed to these sources. However, the terms and conditions of debt rescheduling with the Paris Club presented challenging conditions that not only made repayment difficult, but also caused the debt owed to this source to rapidly increase over the years. Paris Club debts consist of official bilateral debt and export credit that were guaranteed by various Export Credit Agencies (Abrego and Ross, 2001).

1.1 BACKGROUND OF THE STUDY

Investment in infrastructure is widely acknowledged as a vital catalyst for economic development. However, numerous developing nations, including Nigeria, fall behind in terms of the essential economic infrastructure's quality and quantity. In order to address this gap, Developing countries have two options at their disposal: they can either source funds through taxation or choose to borrow. Therefore, in this situation, taxation is seen as a possible means of funding to address emergencies (Ono & Uchida, 2018). However, due to the distortionary effects on economic growth caused by taxation, policymakers are less inclined to support it (Barro, 1979). Thus, public debt becomes the sole viable choice for financing government expenditures and other development projects in situations where the country faces a shortage of funds. This argument is based on the Ricardian invariance theorem, which suggests that taxation can have negative effects on the public by raising the cost of living and diminishing people's purchasing power (Barro, 1979). As Soludo (2003) explains, countries often take on debt for two main reasons: to support increased investment or consumption, and to avoid strict budget limitations. Developing countries depend on international borrowing to fund special projects, infrastructure, and make up for necessary revenue that cannot be generated through taxation.

External debt refers to the amount of money a country owes to lenders outside its borders. These lenders can include commercial banks, governments, or international financial institutions. Typically, the loans need to be repaid in the same currency in which they were borrowed, along with any applicable interest. In order to acquire the necessary currency, the borrowing country has the option to sell and export goods to the lending country (Kenton, 2021). The reason for external debt is that countries, particularly developing ones, have insufficient internal financial resources, which necessitates the need for foreign aid. The dual-gap analysis presents a framework that highlights the interplay between investment and the development of a nation. It emphasises that relying solely on domestic savings for investment is not enough to guarantee development (Oloyede, 2002). The significance of external debt on the growth process of a nation cannot be overstated, as it should enhance economic growth particularly when domestic financial resources are insufficient and need to be complemented with funds from overseas. External debt plays a significant role in contributing to public receipts. External debt should not be seen as a hindrance to economic growth. For countries with low income, borrowing from foreign institutions becomes a necessary choice as it allows them to access financing that would otherwise be difficult to obtain domestically, with competitive rates and flexible repayment periods.

1.2 STATEMENT OF THE PROBLEM

Insufficient foresight in financial planning can result in an overwhelming debt load and substantial interest payments, ultimately causing detrimental consequences for the economy. For nations grappling with an inadequate economic framework, the burden of substantial public debt poses a pressing concern as it has the potential to breed instability and hinder economic expansion. Investors often view high debt-to-GDP ratios as worrisome, as they can potentially impact the stock market and hinder long-term productive investment and employment. As per Olufemi's (2020) findings, the numbers are being discussed extensively in various news articles and broadcasts. Experts have been discussing the outcomes - the consistently high rates of unemployment and inflation, low GDP per capita, limited investment in infrastructure, which all contribute to a rise in youth restiveness and crime, increased incidents of violent deaths, lower living standards, financial instability, and an overall sense of despair. These are the adverse outcomes of a nation teetering on the edge of financial collapse as a result of an insatiable desire for loans and reckless utilisation of them. Nigeria is currently ranked among the Sub-Saharan African countries facing significant economic challenges, including a slow GDP growth rate, limited export growth, declining income per capita, and a rising poverty level. Furthermore, the country is compelled to seek additional borrowing due to the declining global prices of its primary exports, such as crude oil, and the devastating impact of the global pandemic, COVID-19. Nigeria's debt burden in 2006 significantly decreased as a result of the debt relief provided by the Paris Club of creditors in 2005. This relief was aimed at freeing up resources for investment and promoting faster economic growth. Regrettably, 15 years later, the country finds itself in an even larger debt crisis. Over the past decade, Nigeria's budgetary process has been marred by the alarming accumulation of debt and the skyrocketing cost of debt servicing. The economy is burdened with significant government debt and debt service costs, which consume a large portion of government revenue. This limits the fiscal space available for government to invest in critical infrastructure that supports private investment and sustains growth. Consequently, this study seeks to provide answers to the following questions:

1. How has external debt impacted on the economic growth of the Nigerian economy?
2. How has Nigeria’s external debt influenced Investments in the Nigerian economy?
3. To what extent has the external debt impacted the Nigerian Government’s fiscal policies.

1.3 OBJECTIVES OF THE STUDY

The implications of external debt liability on the economy of a nation, has been analyzed and evaluated in Journals, magazine, seminars, symposia, commentaries and dailies. In carrying out this study, the researcher hopes to achieve the following key objectives:

1. To ascertain the impact of external debt liability on the Gross Domestic Product in Nigeria.
2. To determine how Nigeria’s external debt liability has influenced the inflow of Foreign Direct Investment into the Nigerian economy.
3. To determine the extent by which external debt liability has impacted the Nigerian Government’s capital Expenditure profile.

1.4 RESEARCH QUESTIONS

As a basis upon which this study is conducted, the following research questions are   relevant.

1. How has the external debt liability impacted on the Gross Domestic Product in Nigeria ?
2. How has the Nigerian external debt liability profile influenced the inflow of Foreign Direct Investment into the Nigerian economy?
3. To what extent has the external debt profile impacted the Nigerian Government’s capital Expenditure profile?

1.5 HYPOTHESIS

These are the following hypothesis of the study:

Hypothesis 1

Ho:  There is no significant relationship between external debt and Gross Domestic Product.

H1:  There is a significant relationship between external debt and Gross Domestic Product.

Hypothesis 2

Ho:  There is no significant relationship between external debt and Foreign Direct Investment.

H1:  There is a significant relationship between external debt and Foreign Direct Investment.

Hypothesis 3

Ho:  There is no significant relationship between external debt and Government Capital Expenditure.

H1:  There is a significant relationship between external debt and Government Capital Expenditure.