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A CRITICAL
ANALYSIS OF NIGERIA’S FOREIGN DEBT MANAGEMENT 1986-2006
ABSTRACT
This research work is geared
towards examining the impact of external debt management on the Nigeria,
economy, with the main aim of finding the level of impact which would enable us
proffer solution to the problems affecting the gross domestic product (GDP) the
variable in the Nigeria economy. Secondary data obtained from the central bank
of Nigeria (CBN) statistical bulletin, annual report, economic and financial
review, the federal office statistics etc. were used for data analysis. The
study regressed external debt (EDET) government consumption expenditure (PCE)
on the gross domestic product (GDP). The empirical result shows that only
government consumption expenditure and investment have significant impact on
the Nigeria gross domestic product (GDP). While external debt and private
consumption expenditure does not have significant impact on the gross domestic
product (GDP). Economics restructuring, proper monitoring of economic problem
stiff control monitoring of the contracting of loan by government and government
parastatals and investment of borrowed fund into tradable goods or productive
ventures are among the policies recommended toward the maintenance of
favourable gross domestic product (GDP).
TABLE OF CONTENTS
Title Page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
Table of Contents vi
CHAPTER
ONE
1.0 Introduction 1
1.1 Background of the study 2
1.2 Statement of the problem 10
1.3 Aims and objectives of the study 11
1.4 The research questions 11
1.5 Statement of hypothesis 12
1.6 Significance of the study 12
1.7 Limitation of the study 13
CHAPTER
TWO: LITERATURE REVIEW
2.1 Introduction 14
2.2 Foreign debt management in Nigeria 16
2.3 Conclusion 23
CHAPTER
THREE: METHODOLOGY
3.1 Research design 24
3.2 Modeling approach 24
3.3 Specification of model 25
3.4 Definition of variables 26
3.5 assumption of the error team U 27
3.6 Nature and sources of data collection 28
3.7 Method of data analysis 28
3.8 Re-statement of hypotheses 29
3.9 Testing of the hypotheses 30
CHAPTER FOUR: DATA ANALYSIS AND
PRESENTATION OF RESULT
4.1 Presentation of data 31
4.2 Presentation of result 32
4.3 Economic priory criteria 33
4.4 Diagnostic test for the model 34
4.4.1 The determination
(R2) 35
4.4.2 Test of auto
correlation (DW) 36
4.4.3 The F test 36
4.4.4 Hypotheses testing 37
4.5 hypotheses on external debt and private
consumption
Expenditure 37
4.5.1 Hypotheses on government consumption
expenditure and
investment 39
4.5.2 Evaluation of
working hypotheses 40
CHAPTER FIVE: SUMMARY
RECOMMENDATION AND CONCLUSION
5.1 Summary 42
5.2 Recommendations 45
5.2.1 For Policy 45
5.2.2 For further
study 51
5.3 Conclusion 51
References
CHAPTER ONE
1.0 INTRODUCTION
Like
every developing country, Nigeria has had caused to borrow to finance
investment in order to stimulate growth and development. Ordinarily such
investment should be financed from national savings but this is hardly the case
in developing countries like Nigeria. This is due to the large gap between
national savings and investment requirements. Consequently, the country had to
resort to borrow from external sources to finance the savings investment gap.
Nigeria
external debt profits show that the external indebtedness back to
pre-independence period. However, the question of debt was small until 1978.
The debts incurred before 1978 were mainly long- term loans from official
sources such as the World Bank and the country’s major trading partress. The
debts did not exert much on soft terms. Moreover the country and abundant
revenue receipts from oil especially during the oil boom of 1973-1976. However,
the fall in oil price and hence oil receipts in the later years mostly (80’s)
forced the country to raise the first jumbo loan of more than 81.6 billion from
the international capital market.
However,
for the purpose of this study we shall examine the Nigerians foreign debt
management for the period ranging from 1986 to 2006.
1.1 BACKGROUND OF THE STUDY
Every
country in the world aims at achieving economic growth and development.
However, this can be possible if a country has adequate resources. In the
developing countries of the world, especially those in the sub-Sahara Africa
resources to finance the optional level of economic growth and development are
relatively short supply. This is so, based on the fact that their economics are
played with problems of low domestic savings; low tax Revenue, low productivity
of technological back wardness, meager by a vicious circle of poverty. Basic on
the aforementioned reasons, many developing countries yearning for economic
growth between resort to external borrowing in order to bridge the gaps between
saving and investment. Apart from resorting to borrowing, several other options
in the form of resorting to borrowing, several and loans many be considered,
depending on the socio-economic and political situation in the country. Nigeria
like most of the developing countries of the world resorted to borrowing from
external sources mainly for investment purpose. To this end the external loan
of 1962 was enacted and was later amended in 1065 to broaden the end use of
external loan. This legislation and their subsequent amendments provided the
above act only the federal government could narrow form. However, much state
government successfully negotiated for foreign loan and subsequently obtained
federal government guarantee.
Nigeria’s
foreign debt was sustainable up to mid-1970. Infact for the first two decades
of Nigeria’s political independence public debt did not really present any serious
problem because the country adopted a caution borrowing policy the debts
invented before 1978 were mainly long-term loan from official sources, such as
the international bank for reconstruction and development (IBRD) i.e. the World
Bank, The International Monetary Fund (IMF), the major Western Trading Partners
(Paris Club and the International Capital Market). The debts did not exert much
burden on the burden on the loan were generally low, with grace period ranging
from the three to ten years and repayment period of between ten and forty
years.
More
so, Nigeria hard abundant revenues receipt from oil sales especially during the
oil boom of 1970. With the advent of oil boom (1973-1976) agriculture which was
the main source of foreign exchange before the discovery of oil was thus
neglected, leaving the country with a mono-cultural revenue base. Also with the
oil price wishing to an unprecedented among of $40.00 percent barrel, the
nation that the economy was buoyant was created.
Consequently,
the deflationary measures put in place in 1978 were released. A consumption
pattern that favored imported goods emerged. Nigeria because an import-oriented
country. The import substitution industrialization strategy, this was being
adopted them also depend leaving on important raw materials and machinery.
There was thus, indiscrimination and excess importation activities which was
also characterized by sharp corrupt practice.
However,
the oil was short-lived and collapsed on the early 1980s. The Nigeria economy
immediately suffered considerable strains and stress. The production and
consumption pattern that emerged in the era of the oil born could not be
sustained in the face of a declining foreign earning in the 1980. Rather than
address the problems of declining exchange revenue both the federal government
and state government of the republic breached decree 30 of 1978 which fixed the
maximum external loan of the country at 5 billion, and embarked on an imprudent
and massive external borrowing particularly from the international viabilities
Government priorities were clearly to press ahead with development spending of
all sort (production of non-tradable goods).
Just
like in the years of the oil boom, government expenditure were more on what
columnist cell the “non-tradable” sector of the economy such as construction
and markets and products are not traded on world market and are therefore, not
a sources of foreign exchange revenue. Thus, with the above scenario, no
adequate provisions on how such debts are to be service or rapid. Hence with
the short fall in export earnings and increase in interest payment, there was a
rapid increase in Nigeria’s foreign debt burden that by 1986 her creditors were
already worried about her credit worthiness. Given the condition, Nigeria like
most other LDC, classified by the World Bank among the severally in debted low
income countries (Silics) since 1992.
The
first Jumbo of $1.0 billion was short sort in 1998 most of the medium and long
term project financial by thus loan did not yield any revenue commenced.
Pressure soon mometed on the various sectors of government finances loading to
low external reserves and deficits in the balance of payment. The economy was
thus, characterized by high rate of unemployment high interest rate, low per
capital income, while spread distortions, and imbalance in the economy highly
vulnerable to external shocks balance of payment crises price instability. The
debt problems soon escalated with an external debt of $55.774 million in 1997
and 1971 before declining to $27.088 million in 1997 and then rose to $28.774
million in 2000 it rose again in July 2002 when Nigeria reached a one year debt
consolidation period agreement when the club her debt stock stood at us $22.416
billion. In July 200D also Nigeria paid back about US $1.457bilion over a year
debt consolidation period agreement with the pans club.
The
in 2001 when Nigerian total external debt stock of US$28.347 billion as at
December 31, 2001, consisted significantly of arrears of principal interest, as
well as late interest, which have being consolidated to four the current
principal balance. So, one could observed the exacerbating effect not only of
principal and interest changed on defaulted debt service payment. Because between
1985 and 2001 Nigeria has spent over US $32 billion in servicing external debt.
However,
Nigeria in 2002 is in arrears to the member countries of the Paris club. Out of
over $2billion that was due for payment as amount for debt servicing in year
2002, Nigeria did not make any payment to the Paris club until December 24,
2002 and it only paid $70 million, which did not make any debt on the level of
indebtedness. However Nigeria countries to hold bilateral discussion with
Parish club remember.
Since
the suspension of the stand by arrangement with IMF in February 2002, Nigeria
is yet to formally reengage the IMF Nigeria’s temporary with drawal from
sources, to enable the government correct the problems that performance
demanded by IMF.
Nigeria
intends to assume formal relationship with the IMF after correcting the
distortions in its monetary systems.
As
reported the global development finance (a publication of the World Ban),
Nigeria debt servicing figures vis-à-vis country’s GDP is 162%.
For
now, the Nigeria government makes bold attempts to maintain a delicate balance
between its domestic responsibilities and its debt servicing/payment
obligations the uneasy friendship between Nigeria and their Brelton Wood
institution persists.
From
(2002-2006) particularly, the projected debt services though declining
progressively, still remains so high that even the lowest figure is as high as
US $2.4 billion (2006) while the highest is over US $3.0billion (2002).
In
the debt service due in 2003 is of the equivalent of US $2.95 billion but
because we would be carrying areas and penalties amounting to US $1.96 billion
from 2002, the total requirement in 2003 amount to US $4.89 billion.
At
the end of 2004, Nigeria’s total foreign debt at a staggering US $36billion of
which 430billion was owned to the Paris club of creditor nation (principally
the G7 countries-Britain, USA France, German, Italy, Canada and Japan) and
$6,billion to multilateral creditors such as the IMF world bank and the African
development bank because interest on the debt and its servicing cost came to a
whopping (Pounds Sterling) 1billion a year, Nigeria felt it was economic to
reach an agreement with its creditors, on the margins of the Gleneagles G8 deal
with poor countries to reschedule its debt by paying part of it as a quid
proque for the cancelation of the other part.
In
2005 Nigeria’s external debt was an estimated US $37.5billion but at mid-year
Nigeria and a group of international creditors known as the Paris club agree to
eliminate all US $3.billion of the country’s bilateral debt. Under the
agreement Paris club would write off US $ 18billion of bilateral debt, and
Nigeria would pay the reminder. Non- bilateral debt owed to multilateral
development banks and commercial bank was not affected by the agreement. The
significance of this breakthrough is illustrated by the fact the prior to the agreement;
external and domestic debt combined constituted 70 percent of gross domestic
product (GDP).
In
November 2005 Abuja won Paris club approval for a debt relief deal that
eliminated $18billion of debt in exchange for $12billion in payment a total
package worth of $30billion of Nigeria’s total $37bilion external debt. The
deal requires Nigeria to be subject to stringent IMF review GDP rose strongly in
2006, based largely on increased oil exports and high global crude prices. While
in the year 2006 external debt became US $3.0billion.
1.2 STATEMENT OF THE PROBLEM
Nigeria’s
indebtness to her foreign creditors’ stems from the fact that return on investment
form borrowed external finance had not even covered debt servicing cost. The
availability of inadequate policy frame work for debt management has also led
to the accumulation of foreign debts that have proved excessive for the
country’s foreign debt problem did not down on her until 1982 left the foreign
credit. The resultant debt crises in 1986 left the country no choice but to
introduce her own version of the structural adjustment programme (SAP) as one
of the measure to abate the burden of foreign debts. The most recent move was
when President Olusegun Obasanjo requested the creditor countries to wave
Nigeria debt but was turned down. This emanated from the fact that the most
strategies employed to redeem the country from its foreign debt had failed.
However,
it is worthy to not that the under pining philosophy that underscores external
borrowing is the exist i.e. of savings investment gap in a domestic economy.
The assumption then is that foreign borrowing can bridge the gap between
domestic savings and investment and between exports and imports of goods and
services thus, improving economic growth and welfare by allowing for higher
domestic incomes, while meeting its savings capacity. The problems question to
ask it’s did the use of Nigeria’s external borrowing how acquired mentioned
conditions? The measuring rod has been how acquired loans were utilized by the
government with a view of ascertaining its potency as an engine economic
growth.
1.3 OBJECTIVE OF THE STUDY
The
objectives of this study are to determine how Nigeria’s external debts were
used as tools for economic growth.
To
identify the various factors that bedeviled the management of Nigeria’s
external debt.
And
to suggest ways through which the country could find her from the devastating
effects of this foreign debt quagmire.
1.4 THE RESEARCH QUESTION
The
aim of the research question in any project is to outline through question,
some basic intentions or assumption which when answered by defining in the
research work, will help in achieving the aim of the research work. The project
work will try to answer the following research question.
i. Why
has Nigeria external debt fall short of expected economic growth that resulted
to its inability to meet up with the debt servicing obligation?
ii. Does
external debt have impact on the Nigeria, GDP?
iii. What
is the level of impact on the external debt on Nigeria economic?
iv. How
can the input of external debt on the Nigeria economy be used to enhance
economic development?
1.5 STATEMENT OF HYPOTHESIS
This
project work will seek to evaluate the following hypothesis.
H01:
There
is no significant impact of external debt on the Nigeria GDP.
H02:
There is a significant impact of external debt on the Nigeria GDP.
1.6 SIGNIFICANCE OF THE STUDY
It
is a known fact the external borrowing has the potentials for economic growth
in any domestic economy. It that case, the study will underscore the need for
efficient debt management in Nigeria as an important pre-requisite for the
achievement and maintenance of the economic growth, that will justify the
motive behind borrowing, while providing a permanent solutions for other less
developed countries (LDCS) bedeviled by the debt quagmire.
17. LIMITATION OF THE STUDY
This
is to research covers the period between 1986 and 2006, the period of an
existence of several economic instability that characterized the Nigerian
economic under the military requires. However, the project will be limited by
non- availability of accurate date on the magnitude of Nigeria foreign debt
management analysis
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