NIGERIAN DEBT CRISIS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The word debt comes from the French dette and ultimately Latin debere (to owe), from de habere (to have). The letter b in the word debt was reintroduced in the 18th century, possibly by Samuel Johnson in his Dictionary of 1755 – several other words that had existed without a b had them reinserted at around that time.

Debt is as old as economy. The anthropologist David Graeber argues in Debt: The First 5000 Years that trade starts with some sort of credit namely the promise to pay later for already handed over goods. Therefore credit and debt existed even before coins.

Nigeria’s debts, like that of most other African countries, appear to be on a ceaseless and perpetual increase. The more we pay, the more we seem to owe.

Nigeria is neck-deep in the debt trap. Debt has become a millstone on Nigeria’s neck, jeopardizing her economic growth and compromising her social development. We spend a lion’s share of our national income servicing debts leaving little money for social services and infrastructures development, and even still much less for investment. In the process, we have paid more than we originally borrowed, yet our debt is like a malignant virus that continues to multiply.

Nigeria currently spends about one third of its budget, three times its sectoral budget for education and nine times its health budget on servicing outstanding debts.

In fact, since 1980, debt and education spending have been broadly reversed, with debt service rising from 1.9 per cent to 8 per cent of GNP, and education spending falling from 6.4 per cent to 1.3 per cent. Even so, Nigeria is only paying little over half its scheduled debt service. Grants from donor countries are now one-hundredth of the value of debt service. The reality is that there is a net transfer of funds from Nigeria to the developed countries.

1.2 STATEMENT OF PROBLEM

Debt allows people and organizations to do things that they would otherwise not be able, or allowed, to do. Commonly, people in industrialized nations use it to purchase houses, cars and many other things too expensive to buy with cash on hand. Companies also use debt in many ways to influence the investment made in their assets, “influencing" the return on their equity. This influence, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier. For both companies and individuals, this increased risk can lead to poor results, as the cost of servicing the debt can grow beyond the ability to pay due to either external events (income loss) or internal difficulties (poor management of resources).

Excesses in debt accumulation have been blamed for exacerbating economic problems.  For example, prior to the beginning of the Great Depression debt/GDP ratio was very high. Economic agents were heavily indebted. This excess of debt, equivalent to excessive expectations on future returns, accompanied asset bubbles on the stock markets. When expectations corrected, deflation and a credit crunch followed. Deflation effectively made debt more expensive and, as Fisher explained, this reinforced deflation again, because, in order to reduce their debt level, economic agents reduced their consumption and investment. The reduction in demand reduced business activity and caused further unemployment. In a more direct sense, more bankruptcies also occurred due both to increased debt cost caused by deflation and the reduced demand.

1.3 RESEARCH QUESTION

The following are the research questions that are aimed at obtaining more information and findings for the research work:

1.        Does debt create negative impact on economic growth and development?

2.        Does borrowing help to facilitate government expenditure in a country?

3.        Has borrowing lead to debt crisis in Nigeria?

4.        Can any economy survive without borrowing from any other economy?

5.        Is Nigeria currently experiencing debt crisis?

6.        If yes, can the debt crisis be completely eradicated?

1.4 OBJECTIVE OF THE STUDY

The following are the main objectives of this project research work:

1. To examine both the positive and negative effect as well as the impact of debt on Nigerian economic growth and development.
2. To employ and apply the dependency and liberal economic theories in order to demonstrate how these two theories help in the accurate analysis and explanations of the debt crisis in a developing country like Nigeria.
3. To examine debt crisis and the dwindling fortunes of a developing country like Nigeria.
4. To examination the problems that are associated with a large national debt, in relation to economic growth.
5. To examine the nature, sources and causes of public debt and some agencies through which foreign loans can be contracted.
6. To investigate a detailed comparison of internal and external indebtedness.
7. To investigate a detailed examination of the domestic and external factors that contributed to Nigeria’s debt problems; her economic dependence on petroleum resources; and the impact of all these on the economy.
8. Also to considered the prospects of international debt relief.
9. To provide recommendations for debt management.

1.5 RESEARCH HYPOTHESIS

Based on the foregoing, the following research hypotheses formulated will be empirically tested and the result gotten will serve as a spring board for recommendations. The Null hypothesis will tested against the Alternative hypothesis. These are as follows:

Null Hypothesis (Ho): The amount paid of Nigerian debt each year is greater than the amount owe.

Alternative Hypothesis (Hi): The amount paid of Nigerian debt each year is less than the amounts owed.

Null Hypothesis (Ho): debt crisis has no negative impact on economic growth and development. 

Alternative Hypothesis (Hi): debt crisis has negative impact on economic growth and development. 

1.6 SCOPE OF THE STUDY

This research is limited to the study of Nigerian debt crisis; the origin and extent of the debt crisis as it affect the economic growth and development of the country.

The scope of the study also includes the study that is carried out to examine debt crisis and the dwindling fortunes of Nigeria. It includes the examination of the problems that are associated with a large national debt, in relation to economic growth. 

It also includes the study of the nature, sources and causes of public debt and some agencies through which foreign loans can be constricted.

1.7 SIGNIFICANCE OF THE STUDY

This study and the results of the hypothesis tested will be of interest to academics and students in the area of public finance, public administration and economics; researchers in Nigeria and elsewhere; and others interested in the fate of Nigeria and other countries.

1.8 LIMITATION OF THE STUDY

During the conduct of this research work, some factors posed as constraints to the determined efforts of the researcher to carryout the research study to such a depth and in such a manner that it ought to have been carried out, such factors include:

1. Time Constraint: Time was a factor that acts as hindrances in carrying out this research study. This is as a result of the fact that other academic activities were still being attended to in the course of carrying out this research work.
2. Financial Constraint: Money also acts as a problem in the conduct of the research work. Traveling expenses were incurred in getting the materials for the research work. Also incurred, were expenses for the typing and distribution, building and a lot of other expenses.

REFERENCES

Investopedia (2011), Debt Crises and Debt Management.
African Forum and Network On Debt and Development. (2007).

David Graeber (2002), “Delivering on Debt Relief” From IMF Gold to a New Aid Architecture, Washington, D.C., Center for Global Development, Institute for International Economics

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