CHAPTER ONE
1.1. Background to the Study
Sustainable economic growth is of utmost importance for any sovereign nation particularly the undeveloped countries which are characterized by low capital formation as a result of low levels of domestic savings and investment, (Adepoju, Salau, & Obayelu, 2014). As a result, it is expected that when these underdeveloped countries are facing a scarcity of capital, they would resort to borrowing from external sources in order to supplement domestic saving, (Aluko & Arowolo, 2016; Safdari & Mehrizi, 2011; Sulaiman & Azeez, 2012). According to Soludo (2003), he claimed that countries borrow for two major reasons which are; macroeconomic reason, i.e., to fund higher level of consumption and investment or to finance transitory balance of payment shortage and avert budget constraint in order to boost economic growth and minimize the rate of poverty. The continuous need for governments to borrow so as to finance budget shortage has led to the creation of external debt, (Osinubi & Olaleru, 2015).
According to Adepoju et al, (2014), external debt is regarded as a major source of public receipts and financing capital accumulation in any given economy. It is a means through which countries bridge their deficits and carry out economic projects that are able to enhance the standard of living of the citizenry and promote sustainable growth and development. Hameed, Ashraf and Chaudary (2017) stated that, external borrowing is expected to boost economic growth most especially when domestic financing is not enough. External debt as well enhances total factor productivity through an increase in output which in turn improves gross domestic product (GDP) growth of any given nation. The significance of external debt cannot be overemphasized as it is an avid enhancer of growth and thereby improves the standard of living, and thus helps to alleviate poverty.
Generally, it is recognized in the international community that extreme foreign indebtedness in most developing and underdeveloped countries is a major barrier to their economic growth in terms of standard of living and stability, (Audu, 2012; Mutasa, 2013). Nigeria as a developing country has often contracted large amount of external debts that has led to the increasing of trade debt arrears at highly concessional interest rates. Gohar and Butt (2015) asserted that, mount-up debt service payments create lots of challenges for countries most particularly the developing and underdeveloped countries, simply because a debt is actually serviced for more than the amount it was acquired and this slows down the growth process in such countries. The failure of the Nigerian economy to meet its debt service payments obligations has led to debt overhang or debt service burden that has negatively affected her economy growth and development, (Audu, 2012). The beginning of Nigeria’s debt service burden dated back to 1978 after a collapse in world oil prices. Before this incidence Nigeria had incurred a number of minor debts from World Bank in 1958 with a loan of US$28million dollars for the construction of railway and the Paris Club debtor nations in 1964 from the government of Italy with a loan of US$13.1million for the construction of the Niger dam. The first major borrowing of US$1billion referred to as the “Jumbo loan” was in 1978 from the International Capital Market (ICM), (Adesola, 2017).
External borrowing has an important effect on the standard of living, economy growth and investment of a country up to a point where high levels of external debt servicing comes in and affects the growth as the focus moves away from financing private investment to repayments of debts. According to Pattilo, Poirson and Ricci (2013) opined that, low levels debt has positive impacts on the standard of living and overall economy growth, but above certain points or thresholds accumulated debt starts having a negative effect on the standard of living and overall economy growth. Furthermore, Fosu (2015) noted that, high debt service payments moves spending away from health, educational and social sectors. This affects the reason behind external borrowing which is to enhance economy growth and development rather than get drowned in a pool of debt service payments which consumes most of the country’s resources and affects growth as a result of high interest payments on external debt.
Therefore, in order to proffer a solution to the issues of external debt Nigeria as a developing country, the federal government of Nigeria had adopted a number of economic policies such as the Structural Adjustment Programme (SAP) of 1986 to liberalize her economy and improve the gross domestic product (GDP) growth. In a bid to make possible the implementation of these policies the federal government of Nigeria embarked upon enormous borrowings from multilateral sources which led to a high external debt service burden and by 1992 Nigeria was listed among the deeply indebted poor countries (HIPC) by the World Bank. According to Omotoye, Sharma, Ngassam and Eseonu, (2016), Nigeria is the largest debtor nation in sub Saharan Africa and her external debt stock flows in an upward pattern over the years, which ranges from US$9.7 billion in 2015 to US$27 billion in December 2019 which was about 59.4% of GDP.
The unabated increase in the level of external debt service payments has resulted in huge imbalances in monetary shortages and budgetary constraints that has negatively affected the standard of living and the overall economy growth and development in Nigeria. The ensuing effect of the debt bog in Nigeria has created some unfavourable situations like crowding out of private investment, poor GDP growth, etc., (Ngonzi Okonjo Iweala, 2011).
1.2. Statement of the Research Problem
A country with a huge external debt doesn’t necessarily mean a poor standard of living and slow economic growth; however, it is a country’s failure to meet its debt service payments fueled by lack of knowledge on the nature, structure and magnitude of the debt in question, (Were, 2011).
It is not a hyperbole that, this is the key challenge encountered by the Nigerian economy. The failure of the economy of Nigeria to effectively meet its debt servicing requirements has opened the country to a high debt service burden, (Yesufu, 2010). The ensuing effect of this debt service burden creates more issues for the country most especially the increasing fiscal shortage which is driven by increased levels of debt servicing, and this has negatively affected the country’s standard of living and overall economic growth. This poses a serious threat to the standard of living and the economy at large as a large chunk of the country’s hard earned revenue is being consumed. According to World Development Index (2020), Nigeria’s external debt outstanding stood at US$27 billion in December 2019 which was about 59.4% of GDP from US$9.7 billion in 2015 which was about 14.6% of GDP.
The Nigeria structural adjustment programme (SAP) policy was set up to effectively adjust and streamline the consumption and productive the patterns of the Nigerian economy, also, to control price distortions and heavy reliance on the exports of crude oil and imports of consumer and producer good, (Anyanwu 2014). According to Adeyemi (2016), the economic performance under the structural adjustment programme seems to have performed quite well in terms of sectoral and overall GDP growth rates. This is attributable to positive development in the agriculture, oil and financial sectors. The programme as well corrected the over-valuation of the Naira which was a major cause of inexpensive import, improved the government revenue which accordingly minimized the need to borrow. However, the pains of SAP include endemic inflation, foreign exchange shortage, rapid increases in unemployment, deterioration in health and educational standard, and low capacity.
Although, little or no empirical studies have been carried out to investigate the nexus between external debt economic policies and the standard of living in Nigeria, therefore, this study will fill this gap by examining the issues in external debt to determine the long run relationship between external debt and standard of living by expanding the scope of study beyond what has been done in times past.
1.3. Research Objectives
The broad objective of this study is to ascertain the nexus between external debt economic policies on the standard of living in Nigeria. Other specific objectives are to:
- Determine the long run relationship between external debt and standard of living in Nigeria.
- Examine the effect of structural adjustment programme policy on the gross domestic product growth in Nigeria.
- Identify the causes of external debt burden in Nigeria.
1.4. Research Questions
This research seeks to investigate the nexus between external debt economic policies on the standard of living in Nigeria, and therefore tries to answer the following research questions:
- Does a long run relationship exist between external debt and standard of living in Nigeria?
- To what extent is the effect of structural adjustment programme policy on the gross domestic product growth in Nigeria?
- What are the identified causes of Nigeria’s external debt burden?
1.5. Research Hypotheses
The hypotheses to be tested in the course of this study will be in their null form, which are:
Ho1: There is no significant long run relationship between external debt and standard of living in Nigeria
Ho2: There is no significant effect of structural adjustment programme policy on the gross domestic product growth in Nigeria.
1.6. Scope of the Study
The study seeks to analyze Nigeria’s external debt economic policies and its impact on her standard of living. In order to fully capture its effect on the economy, a thorough empirical investigation will be carried out with data covering a period of 20years i.e.2000-2019. This study will make use of mainly secondary data to be obtained from CBN statistical bulletins and reports, journals, articles, newspapers and other statistical sources.
1.7. Significance of the Study
The topic of external debt has been an issue of great concern to the government of Nigeria and the country in general, which has resulted in embarking upon drastic actions like dividing the country’s rare resources in order to service the debts annually. This action has therefore led to disinvestment in the economy, and as a result a fall in the standard of living, domestic savings and the overall rate of growth.
Therefore, this study seeks to investigate the direct impact of external debt economic policies on the standard of living in Nigeria by finding a long run and causal relationship between external debt and standard of living. This study is significant as its findings will provide a basis which will aid policy makers in proffering polices aimed at managing the debt crisis situation in Nigeria.
1.8. Operational Definition of Terms
Economic Growth: means an increase in a country’s real gross domestic product over a period of time usually one fiscal year.
External Debt: is the phenomenon used to describe the financial obligation that ties one party (debtor country) to another (lender country)
SAP: is a programme established by the government of Nigeria to accelerate the rate of economic growth and the rate at which the standard of living of the population can be raised, and it is also to give an increasing measure of control over its future.
1.9. Outline of Study
This study is divided into five chapters.
Chapter 1 contains the general introduction which provides the background to the study, statement of problem, scope of the study, significance of study, objectives of the study, research questions, research hypotheses, research methodology as well as the data sources.
Chapter two examines the works of other economists’ scholars on the subject matter of external debt and it consists of conceptual and definitional issues, theoretical, empirical and methodological review and a summary of literature.
Chapter 3 provides the methodology employed. It also contains the specification and estimation of the model.
Chapter four carries out a descriptive, trend and empirical analysis of the model estimated in chapter three.
Chapter five contains the summary, conclusion and recommendations.
