THE MULTIPLIER EFFECT OF EXTERNAL DEBT RELIEF ON THE NIGERIAN ECONOMY: A CASE STUDY OF THE PARIS CLUB DEBT RELIEF
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THE MULTIPLIER
EFFECT OF EXTERNAL
DEBT RELIEF ON
THE NIGERIAN ECONOMY:
A CASE STUDY
OF THE PARIS CLUB DEBT RELIEF
TABLE OF CONTENTS
Title Page i
Certification ii
Dedication iii
Acknowledgment iv
Table of Contents v
Abstract vi
CHAPTER
ONE: INTRODUCTION
1.1 Introduction 1
1.2 Statement
of the problem 3
1.3 Objective
of the study 4
1.4 Research
questions 4
1.5 Hypothesis 4
1.6 Significance
of study 5
1.7 Scope
of study 5
1.8 Organization
of the study 6
1.9 Definition
of terms 6
CHAPTER TWO: THEORETICAL BACKGROUND AND LITERATURE
REVIEW
2.1 Introduction 9
2.2 Background 9
2.3 Sources
of Nigeria external debt 12
2.4 Analysis
of debt burden economic indications 13
2.5 Causes
of Nigeria’s external debt 14
2.6 Why
Nigeria deserves debt relief 15
2.7 Nigeria
exit from the Paris club 17
2.8 Naples
terms 19
2.9 Why
the deal was possible 20
2.10 Nigeria
gain from the debt relief 23
CHAPTER
THREE: METHODOLOGY
3.1 Introduction 27
3.2 Research
design 27
3.3 Data
collection method 28
3.4 Model
specification 28
3.5 Data
analysis technique 29
CHAPTER
FOUR: DATA PRESENTATION
4.1 Introduction 30
4.2 Data
presentation 30
4.3 Primary
data presentation 30
4.2.1 The dependent variable 31
4.2.2 The independent variable 32
4.3.1 Evaluation of registration
result 32
4.4 Results
of tested hypotheses 34
CHAPTER FIVE: DISCUSSION, CONCLUSION AND
RECOMMENDATION
5.1 Introduction 36
5.2 Discussion of Findings 36
5.3 Conclusion 37
5.4 Recommendation 38
Reference
Appendix
ABSTRACT
This research
work examined the multiplier effect of external debt relief on the Nigeria
economy. Nigeria government usually borrows money to finance its various
projects and programmes whenever its revenue falls short of its expenditure. As
a result, Nigeria has contracted a number of debts from external creditors
without achieving their desired objectives. In order to remedy this unpleasant
situation, various strategies were adopted which includes embargo on new loans,
limit on debt services and debt concessions. However, Nigeria public debts have
been increasing and large proportion of her GDP devoted to debt servicing
leading to depreciation of the naira with it multiplying effects characterized
by unemployment, underdevelopment and massive poverty. The scenario was more frustrating
given the fact that the 1.7 billion USD paid by Nigeria to creditors in 2004
was more than the annual budget for social services sector put together. This
study strategies, is to look into various reactions of external debts to
Nigeria economic and possible remedies through debt relief would help
strengthen the Nigeria Economic development of her citizenry by reducing
poverty and revitalize the depressed sector of the economy.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The
existence of a large public debt places considerable responsibility on the
national government. It therefore, becomes the responsibility of the government
to maintain its debt in an economically rational fashion. The government
usually borrows money to finance its various projects and programmes whenever
its revenue falls short of its expenditure. The money borrowed by the
government forms the public or national debt (Gbosi, 1996). According to
Ewubare (2006), the public debt is internal when it is owned to people and firm
within the country or the contrary, it is called external debt when it is owned
to foreign lenders. In the second case, when the debt matures, payments have to
be made in foreign currencies. In this research, however, we shall focus on the
external components of Nigeria’s public debt.
Over
the years, Nigeria has contracted a number of debt obligations from external
and internal sources. Prominent among the external sources are the Paris Club
of creditors, London Club of Creditors, Multilateral Creditors. As (Gbosi,
2005) observed in recent years, however, the external component of Nigeria’s
pubic debt has been rising steadily. Several methods are used in financing
Nigeria’s external debt. They include debt rescheduling, debt conversion and
debt liquidation. Debt financing simply means a continuous and carefully
planned schedule of the acquisition, development and settlement of external
loans. Such loans are usually contracted either for development programmes or
to support the balance of payments. Available evidence shows that the various
techniques adopted in managing Nigeria’s external debt have not achieved their
desired objectives. This is because, since the late 1980’s Nigeria has been
experiencing a high external debt profile.
In
order to remedy this unpleasant situation, other techniques have been used in
managing Nigeria’s external debt in recent years. These new strategies include
embargo on new loans, limit on debt services payments and debt concessions.
Available data has shown that the external component on Nigeria’s public debt
has been increasing dramatically in recent year. At the end of December 2000,
Nigeria’s external debt stood at 28 billion U.S. Dollars. Further evidence has
shown that at the end of December 2004, it has raised to an unprecedented high
of 35.9billion U.S. Dollars (Debt Management Office, 2004).
Over
the years, Nigeria has devoted a large proportion of her GDP in servicing
external debt. This development will obviously lead to a drawing down on the
Nigeria’s external reserves thereby leading to a sharp depreciation of the
naira. This unpleasant development has further created a relatively unstable
macro-economic environment. in order to help Nigeria get out of the debt trap,
in July 2005, the Paris Club of Creditors granted Nigeria 18 billion U.S.
Dollars debt relief facility. It is interesting to note that Nigeria finally
paid all debts she owed to the Paris Club of Creditors in the first quarter of
2006. We hope the multiplier effect of the development will help to stabilize
the naira exchange rate and indeed economic growth in general hence the need
for the study.
1.2 STATEMENT OF PROBLEM
One
of the major features of developing nation is that of huge debt burden. This is
so because most developing nations are characterized by massive poverty, high
rate of unemployment, etc. to enable them combat these macroeconomic setbacks,
developing countries resort to borrowing.
In
Nigeria, external borrowing has become problematic where funds borrowed are not
productively applied in line with the requirement of appropriate external debt
management policies of the debtor countries. The resultant debt crisis has led
to a number of development including economic and monetary aggregates, high
inflation and continued depreciation of the exchange rate status.
However,
empirical evidence between debt overhang and economic developing exists, but
such evidence between debt relief and Nigeria’s economic growth is lacking,
hence the choice of this topic.
1.3 OBJECTIVE OF THE STUDY
The
main objective of the study is to examine the multiplier effects of debt relief
on the Nigerian economy specifically the following objectives will be
addressed:
i. To
evaluate the effects of foreign debt relief on the nation’s balance of payment.
ii. To
determine the effects of debt relief on the GDP
iii. To
determine strategies for increasing foreign exchange reserves through debt relief.
1.4 RESEARCH QUESTIONS
1. How
will foreign debt relief affect the nation’s balance of payment?
2. What are the effects of debt relief on GDP?
3. How would debt relief increase foreign
exchange reserve?
1.5 HYPOTHESIS
H01:
There is no significant relationship between foreign debt relief and economic
growth in Nigeria.
H02:
There is no significant relationship between foreign debt relief and balance of
payment in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
This
research will be of useful benefits to the federal government, state government
local government and parastatals that finance development projects through
external borrowing. The masses are not to be left out, as their welfare gain
will be improved.
The
funds, which are used in servicing debts, can now be channeled to the
much-needed investments in education, health, agriculture, security and
infrastructural developments. It will also allow for long-term debt
sustainability and support Nigeria’s economic development policy and her fight
against corruption.
1.7 SCOPE OF THE STUDY
This
research work will focus primarily on the impact of foreign debt relief on the
Nigeria economy by the Paris Club without necessarily looking at other issues
such as the repayment of the balance of twelve billion dollars it owes Paris
Club of Creditors and also the satisfaction of her agreement with the
International Monetary Fund, which is due to review Nigeria’s Empowerment and
Development strategies (NEEDS) projects.
It
is therefore suggested that in subsequent research, these issues be researched
upon.
1.8 ORGANIZATION OF THE STUDY
The
study basically is divided into five chapters. The first chapter looks at the
general introduction of the research study. It focused on the debt crisis faced
by Nigeria and the subsequent debt relief, given her by the Paris club. It also
includes the statement of problem, objectives, research questions, hypothesis,
significance of the study, scope of the study, definition of terms and
references are equally not left out.
Chapter
two gives us a general review of related literature and the theoretical
framework used in the study.
Chapter
three and four highlights the sources of data and the presentation and analysis
of data collected, which will be fully discussed.
Chapter
five will include summary, conclusion and appropriate recommendation.
1.9 DEFINITION OF TERMS
Foreign Debt
This
is the amount disbursed at a given time and outstanding contractual liabilities
of residents of a country to non-residents to repay principal with or without
interest. Gbosi (1996) defines foreign debts as a substantial charge on
aggregate foreign exchange receipt of a debtor country.
Debt Relief
This
is an agreement by the creditors of an indebted country to accept reduce or
postponed interest and redemption payments from debtors.
Economic Growth
This
is an increase in the total output of goods and services through increased
production.
Foreign Exchange
This
is the system of buying and selling foreign money. It also refers to money
obtained, especially by selling goods in a foreign country.
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