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
