EXAMINE THE RELEVANCE OF EXTERNAL DEBT TO ECONOMIC

GROWTH AND DEVELOPMENT OF NIGERIA FROM 1970-2013

PRESENTATION BY GROUP 6

LECTURERS-IN-CHARGE: Dr Olugboyega OYERANTIDr Olayinka LAWANSON

INTRODUCTION History

Nigeria started borrowing externally in the 1970s. Its external indebtedness in this period was relatively small. As subsequent years passed, Nigeria’s external debt profile took an upward turn, rising from $1.3 billion in 1976 to $3.2 billion in 1977 (about 146% increase).

Nigeria’s external debt had not generated much of a public concern at this time because Nigeria was experiencing oil-boom, and she was able to repay and service her debt.

At the beginning of 1980s when Nigeria experienced oil-price shocks, external debt became topical issue of discussion and a source of concern to the economy. Following subsequent periods, it had been rising in single and double digits till it reached a peak of about $34 billion in 1995 and $36.69 billion 2004.

To solve this problem of debt over-hang, Nigeria pleaded for debt relief, which was eventually granted in 2006.

The Nigerian Paris club arrangement provided that the club will write-off 60% (about $20 billion) of the debt that Nigeria owed members of the club,and Nigeria on its part will pay back the remaining 40% ($12.4 billion) in two phases. Nigeria paid this amount to the Paris club between October 2005 to April 2006 (7 months interval).

To guarantee that the resources freed from the debt relief are well utilized, a special tracking system known as OPEN (Oversight of Public Expenditure) under NEEDS (National Economic Empowerment and Development Strategy) was established to follow-up allocated resource from the point of disbursement to the point of expenditure to ensure that the intended results are achieved.

The causes of debt accumulation in Nigeria has been attributed mainly to internal and external factors. The external factors are: Impact of world oil price shocks, rising interest rates, decline in policies of trade, and liberal lending policies of international commercial banks.

The problem arising from the external factors were said to have been exacerbated by internal factors, mostly attributed to macro-economic policy errors. Two such errors were those associated to fiscal irresponsibility and exchange rate misalignment in Nigeria during the period

IMPORTANCE OF EXTERNAL DEBT TO NIGERIA’S ECONOMY AND DEVELOPMENT

1. External debt contributed to the growth of GDP by increasing the amount of money available for Investments.

2. It also helps to finance current account deficit arising from external disturbance in order to improve external reserves position and strengthen external liquidity position in the future.

◦ However, the effect of external debt to Nigeria’s economic growth and development has been adverse; it has affected the economy in various ways such as:

1. Nigeria’s external debt was so large that it has watered down a substantial part of the country’s revenue because part of the revenue was used to service and pay off the external debt.

2. Diversion of resources (which are originally meant to promote the objectives of economic growth and development) to debt servicing. Instead of these resources being used to develop infrastructure and improve the wellbeing of the citizens, it is used to

take care of pressing debt service obligations.

3. By cutting down expenditure on social and economic infrastructure due to debt servicing, the government may have constrained the private sector investment growth because of

unavailability of these infrastructures.

4. By reducing the private sector investment and public sector investment, total investment as a whole in the country is reduced.

5. The high debt stock also discourages foreign private investors from investing in the country.

6. The problem of the debt was so large that the country could not pay the full annual interest due on loans each year. The deferred debt services have resulted in accumulation of arrears and penalty charges which has continuously increased the debt stock.

THEORETICAL FRAME-WORK The under listed theoretical frame-work could be regarded as key premises to present how external debt relates with economic growth. They are:

1. Debt Over-hang Theory

2. Dual Gap Analysis

DEBT OVER-HANG THEORY

The debt over-hang theory predicts an inverse relationship between two variables, and as such, the theory predicts that a rise in external debt stock will result in a reduction in total GDP, and on the contrary a reduction in external debt stock will result in a rise in total GDP.

DUAL GAP ANALYSIS THEORY

The dual gap analysis theory tries to explain development as being a function of investment, and that such investment which require domestic savings will not be possible using domestic savings alone, rather there must be the possibility of obtaining from abroad the amount that can be invested in any country that is identical with the amount that is saved. The external debt serves to supplement domestic savings and allows those countries to carry out productive activities.

Source: CBN Statistical Bulletin

T H I S G R A P H E X P L A I N S T H E P O S I T I V E E F F E C T O F D U A L G R A P H A N A LY S I S A N D A L S O T H E N E G AT I V E E F F E C T O F D E B T O V E R - H A N G T H E O RY .

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

EXTERNAL DEBT GROWTH RATE (%)GDP GROWTH RATE (%)

EXTERNAL DEBT GROWTH RATE AND GDP GROWTH RATE

PERFORMANCE INDICATORS EXTERNAL DEBT TO EXPORTExternal debt of the economy X 100%Total export of the economy

EXTERNAL DEBT TO GROSS DOMESTIC PRODUCTExternal debt of the economy X 100%GDP of the economy

EXTERNAL DEBT TO GOVERNMENT REVENUE External debt of the economy X 100% Government revenue of the economy

EXTERNAL DEBT TO EXPORTExternal debt of the economy X 100%Total export of the economy

YEAR

1970-1974

1975-1980

1981-1985

1986-1990

1991-1995

1996-2000

2001-20052006

20072008

20092010

20112012

20130.00%

100.00%

200.00%

300.00%

400.00%

500.00%

600.00%

700.00%

800.00%

EXTERNAL DEBT TO TOTAL EXPORT (%)

EXTERNAL DEBT TO TOTAL EXPORT (%)

EXTERNAL DEBT TO GROSS DOMESTIC PRODUCTExternal debt of the economy X 100%GDP of the economy

YEAR 1970-

1974

1975-

1980

1981-

1985

1986-

1990

1991-

1995

1996-

2000

2001-

2005

2006 2007 2008 2009 2010 2011 2012 20130.00%

50.00%

100.00%

150.00%

200.00%

250.00%

EXTERNAL DEBT TO GDP (%)

EXTERNAL DEBT TO GDP (%)

ASSESSMENT OF THE NIGERIAN ECONOMY IN RELATION TO EXTERNAL DEBT

YEAR

1970-1974

1975-1980

1981-1985

1986-1990

1991-1995

1996-2000

2001-20052006

20072008

20092010

20112012

20130

5

10

15

20

25

30

35

TOTAL EXTERNAL DEBT STOCKS (US $ BILLION)

TOTAL EXTERNAL DEBT STOCKS (US $ BILLION)

YEAR 1970-1974

1975-1980

1981-1985

1986-1990

1991-1995

1996-2000

2001-2005

2006 2007 2008 2009 2010 2011 2012 20130

10

20

30

40

50

60

TOTAL GDP (US $ BILLION)

TOTAL GDP (US $ BILLION)

It can be seen that in the 1970s, external debt was relatively low, and GDP was increasing. We can say that the controlled external debt in the 1970s was a positive influence on the GDP growth through investment.

During the mid 1970’s to the late 1970’s, external debt was rising, this was as a result of the world oil price boom, which enabled Nigeria to be able to service her debts.

However in the early 80’s, the external debt grew at an alarming rate, which raised issues of concern. This external debt grew as a result of world oil price shock in the early 80’s, which reduced the ability of Nigeria to service her external debts.

Around the period of 2005-2006, we can see that Nigeria experienced a sharp fall in its external debt, which can be attributed to the debt relief she received from the Paris club during this period.

From 2007 till date, there has been a fluctuation in the external debt rising in 2007, and falling in 2010.

It is important to note that the years when external debt was high, GDP growth was low, while the years when external debt was minimal and controlled the GDP growth rate was relatively high. Hence we can conclude that a minimally controlled external debt used for productive activities can increase GDP.

INSTITUTIONAL ENVIRONMENToDEBT MANAGEMENT OFFICE

oTHE FEDERAL MINISTRY OF FINANCE

oOFFICE OF THE ACCOUNTANT GENERAL OF THE FEDERATION

oBUDGET OFFICE OF THE FEDERATION

oCENTRAL BANK OF NIGERIA

oNATIONAL BUREAU OF STATISTICS

oSECURITIES AND EXCHANGE COMMISSION

oBUREAU OF PUBLIC ENTERPRISE

oNATIONAL PLANNING COMMISSION

POLICIES 1. An external debt stock GDP ratio of 20% was recommended by The Debt Management Office.

2. DMO had between 2007 and 2012 implemented a debt management strategy at the sub-national level of government, leading to the establishment of the debt

management department in each state of the country

3. Any arm of government in the federation or its agencies and parastatals can only obtain external loans through the federal government.

RECOMMENDATIONS 1. Monitoring both federal and state government external loans; ensuring that external debts stay within prudent and conservative range that is appropriate for the economy.

2. Contracting external loans on concessional terms like: 0% interest rates, 40years maturity and 10 years grace. By this we mean that loans that must be contracted

must be well scrutinized to give allowance to these concessional terms that will help make debts incurred easy to repay.

3. Paying off debt that is due to the extent of our ability. This implies that the country should not keep accruing debt that are due for servicing that could have been paid off.

4. Monitoring of loans, and making sure that the loans are applied to specific projects that are productive.

5. Making the procedure for federal and state government borrowing transparent. In other words, due process should be followed in every borrowing transaction.