ABSTRACT
The issue of linkage between external sector financing and economic growth has attracted wide debate within the context of domestic and international economies. Earlier studies have found that the inability of the developing countries to direct resources to productive use has been a disincentive to domestic capital formation resulting in repudiation to loan repayment, slow pace of economic growth, unfavourable credit terms and foreign exchange variations. Most of the studies however failed to align the contributions of each source of external financing to economic growth and also failed to use the human factor index or the standard of living as a major economic growth determinant. Against this backdrop, the study sought to assess the effect of increase in external debt on economic growth; examine the effect of loans from each of the external debt sources on economic growth; examine the effect of external debt services on per capita GDP; analyze the effect of external debt service outlets to each of the creditors on the nation’s GDP and to examine the impact of external debt stock on the standard of living of the average Nigerian. Five models were formulated in line with the five hypotheses. Variables employed alongside the models include: (1) Aggregated external debt stock and economic growth, (2) Disaggregated external debt stock and economic growth; (3) Aggregated Eternal Debt Services and Economic Growth (4) Disaggregated External Debt Services and Economic Growth and (5) Standard of living and External Debt. The study adopted ex-post-facto research design and secondary data used were sourced from CBN Statistical Bulletin, Debt Management Office and CBN Annual Report, covering 30-year time series period (1981-2010). Descriptive statistics (means, standard deviation, etc) was employed and Augumented Dicker-Fuller (ADF) analysis for unit root tests was conducted. The Johanssen Co integration test was performed to establish the nature of co integration in the models. Ordinary Least Square (OLS) regression technique was used to test the hypotheses at 5% level of significance. The results indicated that (1) Aggregate external debt stock in Nigeria does not have significant positive effect on economic growth; (2) External debt stock borrowed from the various creditors has significant effect on economic growth in Nigeria; (3) External debt services paid out over the years have insignificant and negative effect on economic growth in Nigeria; (4) Effect of external debt services to the various creditors on economic growth in Nigeria is insignificant; and (5) External debt has a negative and significant effect on the standard of living in Nigeria. The study concludes that as a developing country, Nigeria should make judicious use of all loans (borrowed) and should also enter into other forms of bilateral relationships that could reduce her foreign exchange risk and balance of payment disequilibrium. The study recommends that Nigeria’s external debt policies should be reviewed regularly; the debt service obligations should be properly aligned with the debt stock and that external debt management policies should be made to deepen the economy and also avoid the debt overhang syndrome that characterized Nigeria’s debt management initiatives before her final exit from the Paris Club. In contributing to knowledge, the study adopted modified versions of Malik (2010); Levine and Renart (1992); Karagol (2007); Adesola (2009); Uzochukwu (2011); and Fosu (2007). The study also contributed in terms of geography to knowledge by providing evidence in respect of a developing country, Nigeria.
TABLE OF CONTENTS
PAGES
Cover Page i
Title Page ii
Declaration iii
Approval Page iv
Dedication v
Acknowledgements vi
Abstract vii
Table of Contents viii
List of Tables x
List of Figures xi
List of Appendices xii
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of the Problem 4
1.3 Objectives of the Study 5
1.4 Research Questions 6
1.5 Research Hypotheses 6
1.6 Scope of the Research 7
1.7 Significance of the Study 7
References 9
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Theoretical Review 13
2.2 Empirical Review 61
2.3 Summary of Review 70
References 72
CHPATER THREE: METHODOLOGY
3.1 Research Design 80
3.2 Nature and Sources of Data 80
3.3 Specification of Models 80
3.4 Description of Research Variables 84
3.5 Further Tests 86
References 87
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Presentation and interpretation of Data 90
4.2 Statistical properties of variables 108
4.3 Test of hypotheses 115
4.4 Implications of Results 123
4.5 Contribution to knowledge 128
References 130
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 132
5.2 Conclusion 133
5.3 Recommendations 133
Bibliography 136
Appendices 149
LIST OF TABLES
Table 2.1 Total Public Debt Outstanding by Original Maturity 2003-2010 (US$) 14
Table 2.2 External Debt Stock by Economic Sectors 16
Table 2.3 External Debt Service Threshold for selected years 19
Table 2.4 Nigeria’s External Debt Outstanding 24
Table 2.5 External Debt Stock of States as at 31st December 2010 26
Table 2.6 Nigeria’s External Debt Stock by major Institutions 30
Table 2.7 External Debt Services by Creditor Composition 34
Table 2.8 Outstanding External Debt to Paris Club 44
Table 4.1 Effect of Increase in External Debt on Economic Growth 91
Table 4.2 Descriptive Analysis of the Effect of Increase in External Debt on Economic Growth 93
Table 4.3 Effect of Loans from each of the External Debt Sources 95
Table 4.4 Descriptive analysis of the effect of loans from various sources 97
Table 4.5 Effect of increase in External Debt Services on economic growth 99
Table 4.6 Descriptive analysis of the effect of increase in External Debt Services 100
Table 4.7 Effect of Debt Servicing to each of the External Debt Service Outlet 103
Table 4.8 Descriptive Analysis of the Effect of Debt Servicing to each of the External Debt Service Outlets 104
Table 4.9 Impact of External Debt Stock on the Standard of Living of an Average Nigerian 106
Table 4.10 Descriptive analysis of Impact of External Debt Stock on the Standard of Living 107
Table 4.11 Summary of Statistics of Variables Applied in the Regression Analysis 109
Table 4.12 ADF Unit Root test for stationarity (with constant, no trend) 110
Table 4.13 ADF Unit Root test for stationarity (with constant, trend) 111
Table 4.14 Johansen Univariate Cointegration Test for Aggregated External Debt Stock and Economic Growth Nexus Model 112
Table 4.15 Johansen Multivariate Cointegration Test for the Disaggregated External Debt Stock and Economic Growth Nexus Model 112
Table 4.16 Johansen Univariate Cointegration Test for Aggregated External Debt Services and Economic Growth Nexus Model 113
Table 4.17 Johansen Multivariate Cointegration Test for the Disaggregated External Debt Services and Economic Growth Nexus Model 114
Table 4.18 Johansen Multivariate Cointegration Test for the Standard of Living and External Debt Nexus 114
Table 4.19 Univariate OLS Test on the effect of Aggregated External Debt Stock on Economic Growth 116
Table 4.20 Multivariate OLS Test on the effect of Disaggregated External Debt Stock on Economic Growth 118
Table 4.21 Univariate OLS Test on the effect of Aggregated External Debt Services on Economic Growth 119
Table 4.22 Multivariate OLS Test on the effect of Disaggregated External Debt Services on Economic Growth 120
Table 4.23 Multivariate OLS Test on effect of External Debt on Standard Of Living in Nigeria 122
LIST OF FIGURES
Figure 4.1 Trend analysis of the movement in GDP and external debt stock 94
Figure 4.2 Trend analysis of the growth rate in GDP and external debt stock 94
Figure 4.3 Trend analysis of the movement in GDP and sources of external Debt stock 98
Figure 4.4 Trend analysis of the movement in GDP and external debt services 101
Figure 4.5 Trend analysis of the growth in GDP and external debt services 102
Figure 4.6 Trend analysis of the movement in GDP and external debt service Outlet 105
Figure 4.7 Trend analysis of the growth rate in per capita income, external debt Per capital, exchange and inflation rate 108
LIST OF APPENDICES
Appendix i External debt services by creditor composition 149
Appendix ii External debt stock by currency composition 149
Appendix iii Comparative economic indicators of selected countries in the world 150
Appendix iv Nigeria’s External debt stock by major institutions151
Appendix v Cases of Lack of Planning in Loan Management that contributed to Nigeria’s External Debt Burden 152
Appendix vi Index of GDP and other related variables 153
Appendix vii List of World Bank active projects in Nigeria 155
Appendix viii African Development Bank programmes in Nigeria 156
Appendix ix ADB Group public and Private Sector operations 162
Appendix x ADF Unit root test 16
Appendix xi Johansen Multivariate test for cointegration 183
Appendix xii Ordinary Least Square (OLS) Regression Analysis 192
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
According to
Claudio (2004:4), “the history of developing nations reveal that they have been
subjected to repeated economic crises with serious consequences for their long
term growth prospects and that the links of these crises to the external
sectors performance including the problem of external debt and its
sustainability have attracted prolonged debate”. Nations have various reasons
for contracting external debt with other nations and borrowing by countries
occurs as a result of their inability to generate enough domestic savings to
carry out productive activities (Ezeabasili, et.al., 2011). In Nigeria for
instance, external debt is secured and channeled to serve as balance of payment
support, project tied loans, budget deficit financing, meeting some
developmental goals of the various levels of government, embarking on
infrastructural development etc. Osinubi, et.al. (2006) observes that the need
for government to finance its deficit budget leads to incurrence of external
debt. Ezeabasili (2006), Adam (2007) and Anyanwu (1997) are of the opinion that
countries borrow to supplement their domestic savings and allow the affected
countries to carry out productive activities and if the borrowed funds are
channeled to productive investments and the investments enjoy macroeconomic
stability, they will be able not only to accelerate their economic growth but
also to settle their debt obligations comfortably (Hameed, et. al., 2008).
Other studies that have found relationship between debt and growth include
Cohen (1995), Borenszteim (1990), Elbadawi, et.al. (1997), Patilo, et.al.
(2002), Adeyemi (1996) and Indermit, et.al. (2005). The first external loan
contracted in Nigeria was US $28 million in 1958. As a measure to curtail the
rising debt profile, the federal government in 1978 promulgated Act No 30 of
the same year limiting Federal government external loan to N5 billion. In the same year, a jumbo loan of US $1 billion was
raised from the international capital market. Thereafter, the spate of
borrowing increased with the entry of state governments into external loan
contractual obligations coupled with fall from oil revenue (Adesola, 2009).
Fajana (1990) and Olukoshi, et.al. (1990), observe that although the windfall
from oil exports led to a considerable economic activities in Nigeria, it did
very little to create a solid economic foundation for the country. Muttalab
(1984) and Obi (2005) also observe that although the loans obtained by Nigeria
from the international financial market were ear marked for specific projects,
the disbursement was unrelated to the rate of progress of the projects on
ground suggesting that the fund may have been looted by few government
officials in collusion with or knowledge of the creditors.
The need to separate debt management from the Ministry of Finance gave rise to the creation of Debt Management Office in 2000 and the office was charged with the responsibility of managing both domestic and foreign debt in Nigeria. Again, in 2005 the government established a fiscal responsibility council and subsequently enacted a fiscal responsibility Act, 2005. These and other efforts were made to keep the nation’s debt stock at a sustainable level.
Claudio (2004)
has observed that external debt sustainability is consistent with the objective
to keep a debt level that promotes economic growth. Arrow, et.al. (2007)
observe that sustainable development is an economic programme along which
average well being of present and future generations taken together does not
decline over time. As Metwally and Tamaschke (1994) and Geiger (1990) observe,
capital inflows have significant impact on growth-debt relationship because
when there is a considerable level of inflow of capital, economic growth will
be accelerated thus less need for external borrowing. Ogunmuyiwa (2011) however
argues that causality does not exist between external debt and economic growth
as causation between debt and growth was found to be weak and insignificant in
Nigeria. Indermit and Brian (2005) posit
that large budget surplus is associated with rapid economic growth. Savvides
(1992), Edo (2002), Udoka, et.al. (2010) and Bullow, Rogoff (1990) are of the
opinion that debt overhang acts like a high tax margin on the country and could
provide disincentive to domestic capital formation. This virus inflicted the
Nigerian economy before her total exit from the strong hold of Paris and London
club of creditors. Shortly before the exit, her total external debt stock was N4.9 trillion in 2004 (CBN Statistical
Bulletin, 2009). In 2006, Nigeria external debt stock was $3.54 billion, in 2007
it rose marginally to $3.67 and in 2008, it further inched up to $3.72billion,
dropped slightly in 2009 to $3.62billion only to rise sharply to $8.43billion
in March 2010 (Mgboji, 2010). As at 30th September 2011, the
external debt stock stood at $5.63 billion made up of $3.316 billion owed by
federal government and $2.317 billion owed by the states (Onwuka, 2011). These
figures are alarming considering the fact that the country is expected to keep
a sustainable level of debt stock after her debt relief experience in 2005. As
Sacks (1989), Arslanalp and Henry (2004) argue, the problem faced by debt
relief countries is lack of good institutions and if the poor institutional
framework is not corrected, any new debt relief initiative would not achieve the
objective to promote economic growth.
It is worrisome to note that in spite of the relief package secured in 2005, the World Bank ranked Nigeria as the 87th most indebted country in the World and 139th for purchasing power parity per capita GDP and debt service ratio (ratio of debt service to export) of 1.10% as against the international threshold of 20% (World Bank Report 2010). These phenomena contrast with the expectations that the resources freed from Paris and London Club as well as further debt procured externally would add value to the economy through employment creation, promotion of quality health care delivery, increased capacity utilization, infrastructural development, reduction in inflation rate, enhanced export revenue, reduction in foreign exchange risk, all of which will translate to economic growth (Uzochukwu, 2011; Lora and Olivera, 2006).
As already observed, studies have been conducted on Nigeria external debt and economic growth nexus reflecting on related developments before and shortly after the debt relief. The findings revealed various degrees of interaction on the effect of aggregate external debt stock on gross domestic product but failed to relate these interactions (whether positive or negative) to the various sources of external debt to ascertain the extent to which each source of external borrowing contributes to economic growth in Nigeria. This information is necessary to enable the Debt Management Office (DMO) reappraise Nigeria’s bilateral relationship with her external creditors The timing and scope of the study also failed to accommodate data relating to recent developments, including the exit from both the Paris and London Club which drastically reduced the external debt stock owed by Nigeria. Also, one of the reasons for extending debt relief package to Nigeria was to free resources to improve the standard of living in Nigeria.
Bearing the above short comings in mind, this study is considered timely as it is designed to espouse on the need to disaggregate debt stock and debt services to the various creditors (Paris Club, multilateral, London Club and Bilateral creditors) to ascertain the contribution of each source to economic growth, a measure that would enable Nigeria reappraise both her bilateral trade and other associated forms of external relationship. It is also considered a necessity to accommodate data on the recent development in the management of Nigeria’s external debt and also to appreciate the need to use per capita income as a major control variable to demonstrate its response to changes in external debt per capita in recognition of the importance of human factor index as a measure of economic growth.
