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IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN NIGERIA : 1981-2010

Code: 5DC3054C4E0421  Price: 4,000   61 Pages     Chapter 1-5    6330 Views

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 progre


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