THE IMPACT OF FOREIGN LOAN AND FOREIGN INVESTMENT ON THE NIGERIA ECONOMY
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND OF THE STUDY
Most developing countries of the world are regarded as being poor not because they don’t have the resources but because bulk of their resources (income) are being channeled to meeting the consumption needs of their people with little or nothing left for savings. Hence low savings rate brings about low investments rate and low investments rate results to low growth rate. Therefore, poverty at the beginning through low savings, low investments and low growth leads to poverty again (poverty trap). For this reason, developing countries are left with no option than to result to external borrowings and foreign assistance (foreign aid) to bridge the saving- investment gap with the intention to achieving economic growth and poverty reduction.
Official development assistance (ODA), more commonly known as foreign aid, consists of resource transfers from the public sector, in the form of grants and loans at concessional financial terms, to developing countries. Many studies in the empirical literature on the effectiveness of foreign aid have tried to assess if aid reaches its main objective, defined as the promotion of economic development and welfare of developing countries (Sandrina, 2005). On the other hand, the act of borrowing creates debt. Debt therefore, refers to the resources of money in use in an organization which is not contributed by its owners and does not in any other way belong to them, it is a liability represented by a financial instrument of other formal equivalent (Udoka and Ogege, 2012).
Recent years have seen a surge in calls for more ODA to developing countries in order to eliminate poverty. Developed countries, international organizations and other Philanthropists have all made renewed pleas for a massive infusion of development aid to developing countries including Nigeria. Experts who argued in favour of more aid are of the view that injecting more foreign aid would materially benefit the people of the recipient country (Okon, 2012). Developing countries like Nigeria are indeed characterized by low level of income, high level of unemployment, very low industrial capacity utilization, and high poverty level just to mention a few of the various economic problems these countries are often faced with. In addressing these problems, foreign aid has been suggested as a veritable option for augmenting the saving investment gap. While some countries that have benefited from foreign assistance at one time or the other have grown such that they have become aid donors (South Korea, North Korea, China etc.), majority of countries in Africa like Nigeria have remained backward. Nigeria has continued to benefit from all sorts of foreign assistance and in fact still collect at least as much as the amount collected in the early 1980s, yet socio-economic development has remained dismal (Fasanya and Onakoya, 2012).
Aside foreign aid, external borrowing has also over the years attracted much concern as an important aspect of any country’s macroeconomic policy framework. A developing country wishing to mobilize capital resources to foster economic development may at one time or the other resort to borrowing (internally or externally) to supplement domestic savings. Soludo (2003), reacting to this, opined that countries borrow for two broad reasons: macroeconomic reasons [higher investment, higher consumption (education and health)] or to finance transitory balance of payments deficits [to lower nominal interest rates abroad, lack of domestic long-term credit, or to circumvent hard budget constraints]. This implies that economy indulges in debt to boost economic growth and reduce poverty. He is also of the opinion that once an initial stock of debt grows to a certain threshold, servicing them becomes a burden, and countries find themselves on the wrong side of the debt-laffer curve, with debt crowding out investment and growth. This seems to be the position of Nigeria today because investment, which will accordingly result to high-speed growth with a positive effect on poverty, is moving sporadically in both positive and negative directions.
Sanusi (2003) opined that an escalating debt profile presents serious obstacles to a nation’s path to economic growth and development. The cost of servicing public debt (domestic and external) may expand beyond the capacity of the economy to cope, thereby impacting negatively on the ability to achieve the desired fiscal and monetary policy objectives. However, whether or not external debt would be beneficial to the borrowing nation depends on whether the borrowed money is used in the productive segments of the economy or for consumption (Ezenwa, 2012).
1.1 STATEMENT OF PROBLEM
Owing to such inequalities and independence, there is a constant flow of international resources from one country to another, particularly from surplus to deficit areas. There resources are transferred through many methods that sis foreign loans and investments both of which bring about economic development if well directed and utilized.
1.2 RESEARCH QUESTIONS / HYPOTHESIS
These researches are broadly classified into two parts, first part relates to internal test management problems while the other part is on the problem associated with borrowing nations. There are ten research question as follow:
1. What are the role of financial institution in assisting foreign loan?
2. How far has foreign loan and foreign investments enhance or boost employment in the nation?
3. What are the impacts of foreign investment on the economic and industrial development of the nation for the past forty (40) years?
4. Has the foreign investment been able to create development most especially to the third world countries?
5. What are the risks encountered by the financial institutions in foreign investment to the economy?
6. Is the economic situation conducive for borrowing or more funds?
7. Is these monetary term to monitor the realized fund vise-visa application to the agreed economic and industrial development?
8. Incase of default is there any measured of recovering to foreign loan?
9. Is there any collateral security adequate and valid for borrowing nations?
10. What are the advantages of foreign loans and foreign investment in economic and industrial development?
1.3 PURPOSE OF THE STUDY
i. To examine critically the aids of foreign loans and foreign investment giving to developed countries and developing countries.
ii. To find out the reason behind foreign loan and foreign investment in economic an industrial development of Nigeria.
iii. To appraise the impacts of foreign loans and foreign investment in economic and industrial development in Nigeria.
iv. For stimulation of employment.
1.4 SCOPE OF THE STUDY
Although foreign and foreign investment taking as dictionary of business and management defines advance to be banking loan. It goes further to define loans itself as a business transaction between two legal entities whereby one party (the lender) agrees to lend finds to the developing countries.
PLAN OF THE STUDY
The plan of the study is to examine the prospect and impact of foreign loans and foreign investment in economics and industrial development in Nigeria. To achieve this, the granting of foreign loan and foreign investment in economic must be given to the developing countries more than given to developed countries in other to be productive and effective. It is necessary to determine which percentages of loans given out will yield and appreciable revenue and its impact and effect on general price level index. Based on the findings, additional recommendation of any will be towards efficient and effective collecting foreign loan and foreign investment.
1.5 LIMITATION OF THE STUDY
The study is expected to cover the research aspect, however due to time visit more banks and financial constraint of the research been due to the non-availability of some required materials to conduct the research work. In spite of these constraints, an attempt had been made to solve processes involved to the best of our knowledge.
