CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

One of the key macroeconomic objectives of a nation is the achievement of sustainable economic growth. To achieve this goal, every Government requires a substantial amount of capital finance through investment expenditures on infrastructural and productive capacity development (Umaru et al, 2013). Consequently, this facilitates the growth of their gross domestic product (GDP), which if persistent should culminate in economic development, a status vigorously pursued by all less developed countries (LDCs), Nigeria inclusive. However, Ayadi & Ayadi (2008) note that the amount of capital available in most developing countries treasury is grossly inadequate to meet their economic growth needs mainly due to their low productivity, low savings and high consumption pattern. Governments therefore resort to borrowing from outside the country to bridge the resource gap.

Countries borrow to promote economic growth and development, by creating conducive environment for people to invest in various sectors of their economies (Umaru et al, 2013). Similarly, Obudah and Tombofa (2013) argued that the specific reasons why countries may borrow include: to be able to finance their reoccurring budget deficit, as a means of deepening their financial markets, to enable them fund the increasing government expenditures, to enhance their narrow revenue sources and low output productivity which results in poor economic growth.

Sustainable economic growth is a major concern for any sovereign nation most especially the Less Developed Countries (LDCs) which are characterized by low capital formation due to low levels of domestic savings and investment (Adepoju et al., 2007). It is expected that these LDC’s when facing a scarcity of capital would resort to borrowing from public sources so as to supplement domestic saving (Aluko and Arowolo, 2010; Sulaiman and Azeez, 2011). Soludo (2003) asserted that countries borrow for two broad reasons; macroeconomic reason that is to finance higher level of consumption and investment or to finance transitory balance of payment deficit and avoid budget constraint so as to boost economic growth and reduce poverty. The constant need for governments to borrow in order to finance budget deficit has led to the creation of public debt (Osinubi and Olaleru, 2006).

Hameed et al., (2008) stated that public borrowing ought to accelerate economic growth especially when domestic financing is inadequate. public debt also improves total factor productivity through an increase in output which in turn enhances Gross Domestic product (GDP) growth of a nation. The importance of public debt cannot be overemphasized as it is an ardent booster of growth and thus improves living standards thereby alleviating poverty.

It is widely recognized in the international community that excessive foreign indebtedness in most developing countries is a major impediment to their economic growth and stability (Audu, 2004). Developing countries like Nigeria have often contracted large amount of public debts that has led to the mounting of trade debt arrears at highly concessional interest rates. Gohar and Butt (2012) opined that accumulated debt service payments create a lot of problems for countries especially the developing nations reason being that a debt is actually serviced for more than the amount it was acquired and this slows down the growth process in such nations. The inability of the Nigerian economy to meet its debt service payments obligations has resulted in debt overhang or debt service burden that has militated against her growth and development (Audu, 2004).

public borrowing has a significant impact on the growth and investment of a nation up to a point where high levels of public debt servicing sets in and affects the growth as the focus moves from financing private investment to repayments of debts. Pattilo et al., (2002) asserted that at low levels debt has positive effects on growth but above particular points or thresholds accumulated debt begins to have a negative impact on growth. Furthermore Fosu (2009) observed that high debt service payments shifts spending away from health, educational and social sectors. This obscures the motive behind public borrowing which is to boost growth and development rather than get drowned in a pool of debt service payments which eats up most of the nation’s resources and hinders growth due to high interest payments on public debt.

Nigeria as a developing nation has adopted a number of policies such as the Structural Adjustment Programme (SAP) of 1986 to liberalize her economy and boost Gross Domestic product (GDP) growth. In a bid to ensure the implementation of these policies the government embarked upon massive borrowings from multilateral sources which resulted in a high public debt service burden and by 1992 Nigeria was classified among the heavily indebted poor countries (HIPC) by the World Bank. The genesis of Nigeria’s debt service burden dates back to 1978 after a fall in world oil prices. Prior to this occurrence Nigeria had incurred some minor debts from World Bank in 1958 with a loan of US$28million dollars for railway construction and the Paris Club debtor nations in 1964 from the Italian government with a loan of US$13.1 million for the construction of the Niger dam. The first major borrowing of US$1 billion known as the ”Jumbo loan” was in 1978 from the International Capital Market (ICM) (Adesola, 2009).

According to (Omotoye et al., 2006) Nigeria is the largest debtor nation in sub Saharan Africa. When compared with other sub Saharan nations such as South Africa, Nigeria’s public debt stock follows an upward pattern over the years while the former is relatively stabilized (Ayad and Ayadi, 2008). The resultant effect of the debt quagmire in Nigeria could create some unfavourable circumstances such as crowding out of private investment, poor GDP growth e.t.c (Okonjo Iweala, 2011).

1.2 SIGNIFICANCE OF STUDY

public debt is a major source of public receipts and financing capital accumulation in any economy (Adepoju et al., 2007). It is a medium used by countries to bridge their deficits and carry out economic projects that are able to increase the standard of living of the citizenry and promote sustainable growth and development.

The burden of public debt has been a matter of great concern to the Government of Nigeria and the nation as a whole which has resulted in embarking upon drastic actions like dividing the nation’s scarce resources in servicing of debts annually. This action has thus led to disinvestment in the economy, and as a result a fall in the domestic savings and the overall rate of growth.

This research seeks to investigate the relationship between public debt liability and economic growth in Nigeria by finding a short run and long run effect of public debt liability and economic growth. 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.

1.3 STATEMENT OF THE RESEARCH PROBLEM

Nigeria like most highly indebted poor countries has low economic growth and low per capita income, with domestic savings insufficient to meet developmental and other national goals. Nigerian exports were primarily primary commodities with export earnings too small to finance imports which are mostly capital intensive (Manufactured) goods which are comparably more expensive (Siddique, Selvanathan and Selvanathan, 2015). Compounding the problem is Nigeria’s drift to mono economy with the discovery of oil. The oil sector generates about 95% of foreign exchange earnings and about 80 percent of budgetary revenue. The quest for economic growth and development compelled Nigeria to seek public debt. The first major public loan of US$28 million by Nigeria was acquired from World Bank in 1958 to finance railway construction. Ever since then, there has been accumulation of loans aimed at various development projects without obvious results as expected. As the amount of loans increased, Debt Management Office (DMO) was established in October, 2000. Prior to the establishment of DMO, Central Bank of Nigeria (CBN) was saddled with the responsibility of management of national debts. At moment, DMO in collaboration with CBN and Federal Ministry of Finance manage Nigeria’s debts.

“Huge public debt does not necessarily imply a slow economic growth; it is a nation’s inability to meet its debt service payments fueled by inadequate knowledge on the nature, structure and magnitude of the debt in question” (Were, 2011).

It is no exaggeration that this is the major challenge faced by the Nigerian economy. The inability of the Nigerian economy to effectively meet its debt servicing requirements has exposed the nation to a high debt service burden. The resultant effect of this debt service burden creates additional problems for the nation particularly the increasing fiscal deficit which is driven by higher levels of debt servicing. This poses a grave threat to the economy as a large chunk of the nation’s hard earned revenue is being eaten up. Nigeria’s public debt outstanding stood at US$28.35 million in 2001 which was about 59.4% of GDP from US$8.5 million in 1980 which was about 14.6% of GDP (WDI 2013). The debt crisis reached its maximum in 2003 when US$2.3 billion was transferred to service Nigeria’s public debt. In the year 2005 the Paris Club group of creditor nations forgave 60% (US$18 billion) of US$30.85 billion debt owed by Nigeria. Despite the debt relief of US$18 billion received by Nigeria from the Paris club in 2005 the situation remains the same (Bakare, 2010).

The question then becomes; who are the bodies borrowing Nigeria this huge funds? what have we achieved in terms of economic growth and development with the fund borrowed over-time? where are we heading to as a nation with the continuous increase in debt service payment, which is negatively impacting into the nations total revenue? when will this continuous borrowing and debt servicing end or come to a minimal level? why has public borrowing not accelerated the pace of growth of the Nigerian economy? 

There are various empirical studies that have been conducted to investigate the impact of public debt burden on economic growth in Nigeria and have arrived at different results using the same scope of study (see Fosu, 2007; Ayadi, 2008). My research study will focus on these issues in public debt to determine the long run relationship between public debt and economic growth.

1.4 RESEARCH QUESTIONS

This research seeks to investigate the impact of public debt on economic growth in Nigeria and therefore tries to answer the following research questions:

1. Does a long run relationship exist between public debt liability and economic growth in Nigeria?

2. Has debt servicing had adverse effect on economic growth over time?

3. What are the causes of Nigeria’s public debt burden?

4. How can public debt be fully harnessed to impact on economic and development?

1.4 OBJECTIVES OF STUDY

The general objective of this research is to ascertain the impact public debt liability has on economic growth in Nigeria. Other specific objectives include:

1. To determine long relationship between public debt liability and economic growth in Nigeria.

2. To identify the causes of public debt burden in Nigeria.

3. To evaluate the effect of debt servicing on Nigeria’s economy during the period under review

4. Proffering appropriate framework based on the policy recommendations made.

1.5 RESEARCH HYPOTHESES

The hypotheses to be tested in the course of this research includes:

HYPOTHESIS 1

H0:   There is no significant relationship between public debt liability and economic growth in Nigeria.

H1:   There is a significant relationship between public debt liability and economic growth in Nigeria.

HYPOTHESIS 2

H0:   There is no significant relationship between debt service payment and economic growth in Nigeria.

H1:   There is a significant relationship between debt service payment and economic growth in Nigeria.

1.6 SCOPE / LIMITATION OF THE STUDY

The study seeks to analyze Nigeria’s public debt and its impact on her economic growth. In order to fully capture its effect on the economy, a thorough empirical investigation will be conducted with data covering a period of 5 years i.e. 2000-2015. This period was chosen to cover the period after the oil collapse and also the post debt-relief era.

Finance is one of the elements that assist a good research. Financial constraint caused difficulties in the process of this research work, however, it did not hinder the research. 

The main limitation of this study is time constraint. The time allotted for the completion of this research is not adequate based on recent and contemporary happening with respect to the impact of public debt on economic growth in Nigeria.

1.7.   JUSTIFICATION OF THE STUDY

The burden of public debt has been a matter of great concern to the Government of Nigeria and the nation as a whole which has resulted in embarking upon drastic actions like dividing the nation’s scarce resources in servicing of debts annually. This action has thus led to disinvestment in the economy, and as a result a fall in the domestic savings and the overall rate of growth.

The rationale behind this research is to investigate the direct impact of public debt burden on economic growth in Nigeria by finding a long run and causal relationship between public debt and economic growth. This study will justify the rationale behind borrowing by government of a nations, by making comparative analysis between developed and under-developed economies, and how public debt has impacted on the overall growth and development of economies.

Due to the linearity nature of the model formulation, Ordinary Least Square (OLS) estimation method would be employed in obtaining the numerical estimates of the coefficients in the model using Eviews. Gross domestic product will be used to capture economic growth in this study. Multiple regression models shall be used in the estimation. The model shall seek to investigate the effect of public debt, debt service payment and exchange rate on gross domestic product. This is a follow up on the objectives of the study stated earlier.

1.8 DEFINITION OF TERMS

        The following words are operationally defined as they would be used in this research study.

1. Public Debt: The acquisition of foreign loan. That is the amount of money owing by country to another.
2. Public Debt Service Payments: This is the amount used in repaying the interest and principal of the public debt.
3. Economic Growth: The rate of expansion in the volume of production of goods and services in an economy. It is the rate at which the Gross National Product (GNP) increases annually.
4. Inflation: A steady and progressive decline in the value of money, shown by the proportionate rate of increase in the general price level per unit of time.
5. Debt Conversion: This involves the practice of issuing new stocks and shares exchange for others. The transformation of repudiated loan stock into a new loan issue.
6. Foreign Exchange: currency or interest bearing bonds of another country. For example, holding by Nigerians of US Dollars. Euro - Dollars, Deutsche - Marks, Swiss - Francs or US Government bonds.
7. Fiscal Deficit: A situation where Government expenditure exceed income or where Government liabilities exceed assets at a specific point in time.
8. Economic Recession: A falling off in the progress of a country, which if it persists will lead to depression and to a slump.

Devaluation: A reduction in the official per-value of the legal unit of currency in terms of the currencies of other countries. Devaluation is used to correct a balance of payment deficits but only as a last resorts as it has major repercussions on the domestic economy.  

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