AHAM
NZENWATA
1.
INTRODUCTION
Debt
is created by the act of borrowing. It is defined according to Oyejide et al
(1985) as the resource or money in use in an organization which is not
contributed by its owner and does not in any other way belong to them. It is a
liability represented by a financial instrument or other formal equivalent. In
modern law, debt has no precisely fixed meaning and may be regarded essentially
as that which one person legally own to another or an obligation that is
enforceable by legal action to make payment of money.
When
a government borrows, the debt is a public debt. Public debts either internal
or external are debts incurred by the government through borrowing in the
domestic and international markets so as to finance domestic investment. Debts
are classified into two i.e. reproductive debt and dead weight debt. When a
loan is obtained to enable the state or nation to purchase some sort of assets,
the debt is said to be reproductive e.g. Money borrowed for acquiring
factories, electricity refineries etc. However, debt undertaken to finance wars
and expenses on current expenditures are dead weight debts. When a country
obtains a loan from abroad, it means that the country can import from abroad
goods and services to the value of the loan without at the same time having to
export anything for exchange.
When
capital and interest have to be repaid, the same country will have to get the
burden of exporting goods and service without receiving any imports in
exchange. Internal loans do not have the type of burden exchange of goods and
services. These two types of debt, however, require that the borrowers’ future
savings must cover the interest and principal payment (Debt servicing).
Therefore, debt financed investment need to be productive and well managed
enough to earn a rate of return higher than the cost of debt servicing
Developing
countries in African e.g. Nigerian are characterized by inadequate internal
capital formation arising from the vicious circle of low productivity, low
income, and low savings. This scenario calls for technical, managerial and
financial support from abroad to bridge the resources gap. The accesses to
external finance strongly influence the economic development process of
nations. It is an important resources needed to support sustainable economic
growth. Ordinarily, economic growth should depend largely on domestic capital
formation and accumulation, but due to severe limitations it requires imports
of capital goods and complementary raw materials that are not domestically
available.
External
financial supports, when used productively accelerate the pace of economic
development. It will not only provide foreign capital but will also give
managerial know-how, technology, technical expertise as well as access to
foreign markets for the mobilization of a nation’s human and material resources
for development purposes. Specifically, loans can be used in areas such as
increasing agricultural production of goods for export, mineral exploration and
exploitation, industrialization, transport and communication, rural and urban
development, heath care services balance of payments, tourism, infrastructural
development etc (Anyanwu et al 1997). thus, in the present paper intend to
investigate how well Nigeria has utilized the external debt it acquired over
the years.
2.
REVIEW Of LITERATURE
In
international economics relations, external debt is the term that describes the
financial obligation that ties ones party (debtor country) to another (lender
country). It usually refers to incurred debt that is payable in currencies
other than that of the debtor country. In principle, external debt includes short-term debts, such as trade
debts which mature between one and two years or whose payment would be settled
within a fiscal year in which the transaction
is conducted.
External debt
may be incurred through a number of transactions such as trade, contractor finance,
supplies credit, private investment and public borrowing. Source of loan that make up external debt
include banks, international financial market (euro money and capital markets)
international organization e.g. IMF and the World Bank international loans and
multilateral private loans.
Foreign loans
are organized international credit negotiated between two countries, on terms
acceptable to them in today’s world, the lender countries are usually the
advanced industrialized countries of Europe, Asia (Japan) and North America
while the borrowing countries are the poor under developed countries of the thirds word in Africa, Asia and Latin
America, From the stand point of the latter, foreign loans are ostensibly for
development purposes or to facilitate
industrial progress ,or for improving the quality and quantity of food
production. The ultimate objective is to increase the standard of living of the
generality of the people (Nwoke, 1990).
There
have been numerous attempts to empirically assess the external debt – economic
growth link – the debt overhang and crowding out effects – mainly by using OLS.
Borensztein (1990) found that debt overhang had an adverse effect on private
investment in Philippines. The effect was strongest when private debt rather
than total debt was used as a measure of the debt overhang.
Iyoha
(1996) observed similar results for SSA countries. He concluded that heavy debt
burden acts to reduce investment through both the debt overhang and the
‘crowding out’ effect. Using data from Cameroon, Mbanga and Sikod (2001) found
that there exist a debt overhang and crowding out effects on private and public
investments respectively.
Elbadawi
et al (1996) confirmed a debt overhang effect on economic growth using cross- sectional
regression for 99 developing countries spanning SSA, Latin America, Asia and
Middle East. They identified three direct channels in which indebtedness in SSA
works against growth: current debt inflows as ratio of GDP (which should
stimulate growth), past debt accumulation (capturing debt overhang) and debt
service ratio. The fourth indirect channels on public sector expenditure.
Elbadawi, et al (1996) concluded that debt accumulation deters growth while
debt stock spurs growth. Their result also showed that the debt burden has led
to fiscal distress as manifested by severely compressed budgets.
Degefe
(1992) also discovered a negative effect of external debt on growth. Fosu
(1996) argued that debt can additionally influence economic growth via effect
on the productivity of investment. And even if debt service payments do not
reduce saving and investments significantly. They could still decrease output
growth directly by diminishing productivity as a result of the adverse changes
in investment mix. Ajayi (1991), Osei (1995) and Mbire & Atingi (1997) used
the simulation analysis to show the impact of the debt burden indicators on
economic growth under different scenarios.
Furthermore,
Elbadawi, et al (1996) opined that these debt burden indicators also affect
growth indirectly through their impact on public sector expenditures. As
economic condition worsens, government find themselves with fewer resources and
public expenditure is cut. Part of this expenditure destined for social
programs has several effects on the very poor. Most studies confirm debt
overhang/ crowding out effects. The only work that has shown favourable effect
of external debt is Crowdhurry (1994) for Bangladesh, Indonesia and South
Korea.
Were
(2001) using an error correction formulation, the estimation result showed a
debt overhang problem in both the growth and investment equation. This result
tally with result from similar studies (Elbadawi et al, 1996, Mbanga &
Sikod 2001). The estimation result for the growth equation showed that not only
does past debt accumulation deters growth but so do current debt flow in the
short run. The error correction term also showed that external debt had
negative implications on growth. Ali & Mshelia (2007) using Nigerian debt
data found among others; positive and negative relations with GDP.
Ezirim
et al (2007) in their study on the foreign investment burden, exchange rates
and external debt crises in Nigeria
using two different methods namely the OLS and exact maximum likelihood
(EML) techniques. They applied these methods to time-series annual Nigerian
data derived from 1970-2001. They found that the foreign investment crisis or
burden is associated positively and significantly with external debt crisis,
previous spates of foreign investment burden but negatively and significantly
related with exchange rates conditions and international oil prices
3.
RESEARCH METHOD
3.1
Sources of Data
The data for this study were derived from various
secondary sources such as: The Central Bank of Nigeria Statistical Bulletin
(2006) Volume 17; the Federal Bureau of Statistical (formerly federal office of
Statistics) Abstract of Statistics (various issues) and Central Bank of Nigeria
website (www.cenbak.org).
3.2
Model Specification
The following model was built in line with the
Ordinary Least Squares (OLs) of the Regression analysis which is given as:
GDP = β0 + β1LC + β3PC + β3MLC + ut
Where β0, β1, β2, β3 =
coefficients of the regression line
GDP = Gross Domestic Product
LC = Annual debt service payment to the London
Club Creditors
PC = Annual debt service payment to the Paris
club creditors
MFC = Annual debt service payment to
Multilateral Creditors.
Ut = error term
4.
DATA ANALYSIS AND RESULTS
|
Coefficientsa
|
||||||
|
Model
|
Unstandardized Coefficients
|
Standardized Coefficients
|
t
|
Sig.
|
||
|
B
|
Std. Error
|
Beta
|
||||
|
1
|
(Constant)
|
464595.027
|
779110.049
|
|
.596
|
.557
|
|
LC
|
-54.010
|
15.431
|
-.488
|
-3.500
|
.002
|
|
|
PC
|
.030
|
1.022
|
.004
|
.030
|
.977
|
|
|
MFC
|
48.952
|
2.875
|
1.045
|
17.030
|
.000
|
|
|
R = .964, R2 = .929, F-
Stat = 106.1, Sig = 000
|
|
|
|
|
||
Gross Domestic Product (GDP) shows a high
explanatory power of the independent variables. The coefficient of multiple
determination (R2) of 92.9% indicates that about 92.9% variation in
the observed behaviour in the dependent variable is jointly explained by the
independent variables. The remaining 7.1% may better be accounted for by other
omitted variables and is represented by the stochastic error term. The high R2
indicates that the model fits the data well and is statistically robust; there
is a tight fit of the model. The F- statistic of 106.1 is significant at 1%
level. On the test of significance, only debt payment to multilateral financial
creditors (PC) failed the test of significance. Under economic a prior criteria
the positive sign of the estimated coefficient of PC is inconsistent with the
economic a priors expectation. That debt payment should have a negative effect
on economic growth. This means that if there is a one percent increase or
decrease in debt payment to Paris club creditors (PC), gross domestic product
will increase or reduce by 0.030. The DW statistic is 1.164 shows an
inconclusive result about the presence or absence of serial correlation.
5.
CONCLUSION AND POLICY RECOMMENDATIONS
Discussion
of Findings
Our study shows that debt payment to Nigerian
creditors affect the economic growth both positively and negatively. This is
partially consistent with the work of Ali and Mshelia (2007) who found a mixed
outcome; the influence of the value of intercept and debt service payment to
Paris club creditor (PC) showed some level of positive relationship while debt
payment to London club of creditors (LC) indicated a negative relationship GDP;
but with difference in parameters sign in both study. In their study they found
MLC and PN to be positively significant while LC and OTHERS are negatively
significant. The main findings of this study are:
·
That
economic growth in Nigeria are significantly influenced by debt payment to
other creditors, Paris club creditors, London club creditors except payment to
Multilateral Financial creditors has no significant influence.
·
That
debt payment to Paris club creditors (PC) significantly and positively influence
the observed Nigerian economic growth.
Based on our findings in this study, we wish to recommend
the followings:
·
Government
should provide enabling social and economic environment as this will encourage
entrepreneurship and promote foreign direct investment.
·
Government
should promote portfolio investment which will generate employment
opportunities that are highly needed for increase in per capital saving leading
to high capital labour ratio.
·
Place
embargo on new loans especially to the state government and other government
parastatals except for important economic reasons which are inevitable and for
project which are self floating and self sustaining.
·
Government
should ensure that any deal with the London Club and Other creditors(i.e. Non
Paris Club) should be deals that will open Nigeria to greater trade and
investment and can stimulate the private sector since; debt services to these
two creditors has a significant negative impact on our economic growth.
·
External
financing of project should be used only for projects with higher priority.
Thus is so because it is huge external debt that threw us into the series of
economic problem in the first instance.
REFERENCES
Anyanwu J.C, Oyefusi A, Oaikhenan and F.A. Dimowo
(1997): The Structure of the Nigeria Economy. Joanee Educational Publishers
Ltd, Onitsha, Anambra. Pg. 631.
Ajayi, S. I., (1991). ‘Macroeconomic approach to
external debt: the case of Nigeria’ Nairobi AERC (African economics research
consortium), research paper 8.
Ali, B.M and Mshelia, S.I., (2007). Impact of external
debt services on Nigeria’s Economy, global journal of social sciences, 6, (2):
pg. 111-118.
Borensztein, E., (1990). ‘Debt overhang, debt reduction
and investment. The case of the Philippines”. International monetary fund
working paper No WP/90/77, September.
Crowdhurry, K. A., (1994). ‘Structural analysis of
external debt and economic growth: some evidence from selected countries in
Asia and pacific.’ Applied Economics 26.
Degefe, B., (1992). ‘Growth and foreign debt: the
Ethiopian experience: 1964- 86’ Nairobi AERC Research paper 13.
Elbadawi, A. I., Ndulu, J. B. and Ndung’u, (1996). ‘Debt
overhang and economic growth in sub Saharan Africa’ A paper presented to the
IMF/World Bank Conference on external financing for low income countries
December.
Ezirim, C. B., Muoghalu, M. I., Elike, U. (2007) Foreign
Investment Burden, Exchange Rates and External Debt Crises in Nigeria: AN
Empirical Extension, Journal of Banks and Bank Systems, Volume 2, Issue 3, 2007
Fosu, A. K., (1996). ‘The impact of external debt on
economic growth in sub Saharan Africa’. Journal of economic development, 12.
(1):
Iyoha, M. A., (1996). “External debt and Economic growth
in Sub-Saharan African Countries: An Econometrics Study”, A paper presented at
AERC workshop, Nairobi.
Mbanga, G.N. and Sikod, F., (2001). ”The impact of debt
and debt-service payments on investment in Cameroon”. A final report presented
at AERC Biannual Research Workshop at the Grand Regency Hotel, Nairobi, May,
26-31.
Mbire, B. and Atingi, M.,(1997). “Growth and Foreign
Debt: The Ugandan Experience.”. AERC Research Paper 66, Nairobi.
Nwoke, C (1990): The Origins and Dimension of Nigeria
External debt: In Nigeria External Debt Crisis; Its Management. Edd by Adebayo
O. Olukosi. Malthouse Press Ltd, Pg 42 – 61.
Osei, B., 1995. “Ghana: The burden of debt service
payment under structural Adjustment”. AERC research paper 33: Nairobi.
Were, M., (2001). “The impact of external debt on
economic growth and private investments in Kenya: An Empirical Assessment”. A
paper presented at the Wider development conference on debt relief, August, 17
-18.
APPENDIX
1 TABLE 1.
|
PERIOD
|
GDP
|
LONDON
CLUB
|
PARIS
CLUB
|
MULTI-LATERAL
LOANS
|
|
1983
|
53107.38
|
2758.80
|
6002.20
|
566.40
|
|
1984
|
59622.53
|
5443.70
|
6360.40
|
1271.20
|
|
1985
|
67908.55
|
6164.30
|
7726.40
|
1293.50
|
|
1986
|
69146.99
|
8444.70
|
21725.30
|
4670.70
|
|
1987
|
105222.84
|
6766.50
|
63205.60
|
8781.50
|
|
1988
|
139085.3
|
14986.10
|
75445.30
|
9991.80
|
|
1989
|
216797.54
|
42840.00
|
121229.60
|
21473.60
|
|
1990
|
267549.99
|
53431.80
|
154550.60
|
34606.30
|
|
1991
|
312139.74
|
58238.10
|
173051.20
|
39458.30
|
|
1992
|
532613.83
|
41890.60
|
324729.90
|
89274.30
|
|
1993
|
683869.79
|
45323.80
|
400380.90
|
81456.30
|
|
1994
|
899863.22
|
45367.90
|
404212.60
|
97056.60
|
|
1995
|
1933211.55
|
44990.00
|
476731.20
|
97042.00
|
|
1996
|
2702719.13
|
44946.00
|
420002.00
|
102630.00
|
|
1997
|
2801972.58
|
44946.00
|
417568.80
|
96199.00
|
|
1998
|
2708430.86
|
44946.00
|
458257.80
|
93214.00
|
|
1999
|
3194014.97
|
187627.10
|
1885664.80
|
361194.90
|
|
2000
|
4582127.29
|
223832.60
|
2320269.00
|
379043.00
|
|
2001
|
4725086
|
228950.20
|
2475509.40
|
313504.70
|
|
2002
|
6912381.25
|
182964.50
|
3220823.50
|
375700.10
|
|
2003
|
8487031.57
|
196156.90
|
3737279.90
|
413877.70
|
|
2004
|
11411066.91
|
196155.50
|
4196844.60
|
384248.70
|
|
2005
|
14572239.12
|
189768.40
|
2028580.10
|
330654.40
|
|
2006
|
18564594.73
|
0.00
|
0.00
|
332219.20
|
|
2007
|
20657317.66
|
0.00
|
0.00
|
363448.79
|
|
2008
|
24296329.29
|
0.00
|
0.00
|
420603.58
|
|
2009
|
24794238.66
|
0.00
|
0.00
|
524208.11
|
|
2010
|
29205782.96
|
0.00
|
0.00
|
635454.90
|
Source: CBN statistical bulletin 2011 edition.
Regression
|
Variables Entered/Removedb
|
|||
|
Model
|
Variables Entered
|
Variables Removed
|
Method
|
|
1
|
MLA, LC, PCa
|
.
|
Enter
|
|
a. All
requested variables entered.
|
|
||
|
b.
Dependent Variable: GDP
|
|
||
|
Model Summaryb
|
|||||
|
Model
|
R
|
R Square
|
Adjusted R Square
|
Std. Error of the Estimate
|
Durbin-Watson
|
|
1
|
.964a
|
.929
|
.920
|
2.51858E6
|
1.184
|
|
a.
Predictors: (Constant), MLA, LC, PC
|
|
|
|||
|
b.
Dependent Variable: GDP
|
|
|
|||
|
ANOVAb
|
||||||
|
Model
|
Sum of Squares
|
df
|
Mean Square
|
F
|
Sig.
|
|
|
1
|
Regression
|
1.999E15
|
3
|
6.665E14
|
105.066
|
.000a
|
|
Residual
|
1.522E14
|
24
|
6.343E12
|
|
|
|
|
Total
|
2.152E15
|
27
|
|
|
|
|
|
a.
Predictors: (Constant), MLA, LC, PC
|
|
|
|
|||
|
b.
Dependent Variable: GDP
|
|
|
|
|
||
|
Coefficientsa
|
||||||
|
Model
|
Unstandardized Coefficients
|
Standardized Coefficients
|
t
|
Sig.
|
||
|
B
|
Std. Error
|
Beta
|
||||
|
1
|
(Constant)
|
464595.027
|
779110.049
|
|
.596
|
.557
|
|
LC
|
-54.010
|
15.431
|
-.488
|
-3.500
|
.002
|
|
|
PC
|
.030
|
1.022
|
.004
|
.030
|
.977
|
|
|
MLA
|
48.952
|
2.875
|
1.045
|
17.030
|
.000
|
|
|
a.
Dependent Variable: GDP
|
|
|
|
|
||
For comments, observation or other
feedback or if you need assistance with your research projects/papers, you can
contact the author via E-mail: researchmidas@gmail.com or call/Whatsapp
(+234)0803-544-6622
No comments:
Post a Comment