ABSTRACT
This study reflects an appraisal of Nigeria’s External Debt Management necessitated by inadequate internal capital formation arising from vicious cycle of low productivity, low income and savings in the Nigerian economy. Considerable linkage has been established between external debt and economic performance. The study determined the impact of Nigeria’s external debt stock on gross domestic product and also examined the impact of external debt penalties on arrears for default of external debt stock covering a period of 25 years, 1989-2014, using secondary data. The study used ordinary least square (OLS) estimation technique for analysis. Findings showed that external debt stock had a negative significant impact on gross domestic product. Threats associated with borrowing externally for capital formation in Nigeria outweigh the benefits therein. There was a positive significant impact of penalties arrears for default on external debt stock. An increase of external debt stock as a result of rising penalties on arrears has deepened the burden of debt and its sustainability in Nigeria. External debt by economic sector to support infrastructure should be taken into consideration, which is in accordance with the provisions of the Fiscal Responsibility Act and the National Debt Management Objectives & Strategy. Also external debt service payment should be paid as at when due to avoid accumulation of compounding late interest on penalty payment which in the past had contributed immensely to the deteriorated debt situation in Nigeria within the period under study.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Debt is created by the act of borrowing. It is defined according to Oyejide, Soyede, and Kayode (1985), as “the resource or money in use in an organization which is not contributed by its owners and does not in any other way belongs to them”. “It is a liability represented by a financial instrument or other formal equivalent. Legally debt is a chose in action transferable by the creditor to some other person debtor provided that the transfer is in writing and confirmed seal” (Anyafo 1996). When a government borrows, the debt is a public debt. Public debt either, internal or external is debt incurred by the government through borrowing in the domestic and international market respectively, so as to finance domestic investment. “Public debts are outstanding payment or contractual obligations of all tiers of government (Federal, State and Local) public corporations and parastatals”(Anyafo 1996).
After an attempt definition of public debt and debt, Uche (2005:127) “defines external debt of a country as the summation of indebtedness of a country to other countries, institutions and non-residents of that country”. The contractual liabilities are denominated in foreign currencies. In essence external debt can therefore be seen as the foreign exchange component of public debt. For the context of this research, Nigeria external debt management will be analyzed in terms of structure, genesis, challenges and contemporary issues. External debt in real sense is not bad, it depends on how the funds were applied, if it is prudently applied it facilities international trade, improves the International image of a country, buoys the economy of a country and improve infrastructure and general standard of living of a country. However where undue pressures exerted on the external debt to the point where available reserves are unable to support debt repayment such debt now becomes burden to the debtor.
The origin of Nigeria debt problems are related to both the nature of the economy, economic policies put in place by the successive government as well as exogenous factors beyond the control of government. The country is a mono-product economy; depending largely on oil revenue which accounts about 80% of foreign exchange receipts. It is therefore not a surprise that whenever the international oil market fluctuates, Nigeria react more rapidly.
Government’s debt portfolio is usually the largest financial portfolio in a country. It often contains complex financial structures and can create substantial balance sheet risk for the government. Large and poorly structured debt portfolio also make governments more vulnerable to economic and financial shocks and have often been a major factors in economic crisis (IMF, 2003:10).
Considering overall macroeconomic policy, debt management policy plays an important role in ensuring and maintaining long-term debt sustainability. Jill and Caroline (2004:6) stress “that following world war I , foreign governments began to issue large amounts of bonds in New York city”. “In the early 1920, the principal issues of sovereign bond were Argentina, Chile, Brazil and Cuba” (Erika and Jeffrey 1989:53). Over the course of the decade as the bond market grew banks established extensive network of branches that “successfully marketed the bonds to individual sovereign debtors, eager for the large premia they offered over domestic returns (Albert, 1983:419-20). “With the beginning of the great depression, these sovereign debtors experienced difficulty servicing their debts” (Vinod 2003:13). “In December 1930, Bolivia failed to meet sinking fund requirement on its bonds, and in January
1931 the fiscal agent for the bonds declared Bolivia to be in default making it the first country in history to default on its bonds” (Eichegren and Portes 1993:21). This was followed by default on bonds issued by Peru, and soon Chile followed this suit. “By 1933 twelve Latin America sovereign debtors suspended at least part of their debt servicing and by 1934, only Argentina, Haiti and the Dominican republic had not suspended normal debts servicing” (Wallich 1943:321). “International debt crisis has a history nearly as long as international debt flow” (Gray 2002:1). Bordo (1998:3) argues “that financial integration has followed a U. shaped pattern: it was at very high levels until the early twentieth century, collapsed between the wars, and then has gradually returned to pre-1914 levels”.
Williamson (1999:11) argues that “when debt servicing capacity was undermined by decreased oil prices and the world recession of the early 1980s at the same time that global interest rates soared because the West Europe decided to bring inflation down and crisis ensued”. The debt managers primary objectives of securing funds to finance the government deficit is complemented by objectives of minimizing the cost and risks of the debt portfolio and promoting financial development and efficient market.
There has been an inspiring development around Nigeria’s public debt management issues, in terms of growing interest and participation by stakeholders. This development which has
manifested in various forms including comments, enquires, concerns, critics and suggestions demonstrates that the efforts of the Debt Management Office (DMO) to democratize public debt management knowledge and practice is producing the desired results. It represents a growing effective demand for public debt management services, which is very essential for guaranteeing and sustaining quality supply of the services. In this context, it would be useful to present to stakeholders and the general public the true position of the country external debt, even after the paying off of the Paris club and London club debts. Indeed, some of the loans were contracted in the 1960s, 1970s and 1980s for various infrastructure and social development projects. There is no doubt that some of the infrastructures funded in those periods are still useful assets to the people. The repayment were scheduled to be gradual so as not to put serous burden on fiscal resources that part of them are still outstanding. That the loans have a long repayment period is beneficial, given the nature of the projects and services they financed i.e. basic education, health and rural water supply as well has roads whose revenue generating impact is at the best slow, small and indirect.
1.2 STATEMENT OF THE PROBLEM
In this research effort, there is a problem (fundamental questions) necessitating the investigation and study, reflecting the obvious fact that Nigeria is in debt.
Nigeria’s External Debt Stock “was characterized by excessive and poorly controlled borrowing, a situation in which poor debt management practices has become a recurring event in the country” (DMO 2009:44). Nigeria began to experience external debt problems from the early 1980s when foreign exchange earnings plummeted as a result of the collapse of prices in the international oil market, and external loans began to be acquired indiscriminately. Most of the borrowing was not linked to future growth, export or targeted at impacting positively on the GDP. Some financial creditors before the fall in world oil prices classified Nigeria to be under borrowed. The applause given to Nigeria, make the rule of law on external borrowing to be upheld up to 1979. However during the period 1980-1983, there was an unfortunate departure from the guidelines, thus the federal government and the 19 state governments, each on its own account, borrowed from foreign sources.
State Governments were able to negotiate huge external project finance with a retroactive federal Government approval and guarantee. Due to poor control by the Shagari – led federal Government, there was difficulty to exactly determine the volume of Nigeria’s external debt.
At this period, the government relied heavily on foreign resources, a situation where shortage of foreign exchange become one of the bottlenecks to national economic development.
Accumulation of Penalties for default on Nigeria’s External Debt Stock is another salient factor that causes Nigeria’s external debt burden. The international creditors through a compounding method sanctioned heavily on default of principal repayment, interest charges and other surcharges which penalty charges has a great significance, because it threatens economic growth. This situation makes the international inflows of financial resources not to accommodate production capacity vis- a –vis total export of goods and services.
High cost of borrowing and debt refinancing is a major factor of Nigeria’s debt stock. The over dependence on crude oil as a major revenue is a contributory factor to external burden of debt, because when the oil prices fell, the interest rate went up which did not result to reduced borrowing and spending of the Nigerian government, thus it level of debt started to increase.
The terms on which the country’s loan from the international capital markets was contracted were unfavourable primarily because the loans not only carried variable interest rates which increased the vulnerability of the economy but also had shorter maturity. Also, the repayment schedules were bunched too close together and involve several other indirect costs, yet rescheduling does not eliminate the debt but merely pushes the payment to a latter date
Poor debt utilization has become significant as debt management is of great significance because loan will turn out to be good or bad depending on its negotiation and utilization. The negotiation of external debt/ loan by public and private bodies has been indiscriminately contracted not minding the terms associated to it, such as (interest rate, maturity, penalty of defaulters i.e. compounding). Utilization of external debt/borrowing should be prudently based. A short term borrowing to finance a long term project is definitely a mismatch while a loan utilize to finance unviable project will eventually become problematic as the loan will have no chance to liquidate itself. Therefore debt serving problems set in through compounding interest leading to debt overhang in the economy. Nigerian government over the years has finance various white elephant project using fund contracted externally mostly on stringent condition.
Ihimodu (1985;108) observed that “Kwara state contracted from a foreign private company loans worth N200 million specifically to transform its existing college of technology into a university yet it was obvious that such a project was incapable of generating funds at least immediately to service the debt”.
In other words, Mismatch of debt maturities against project yields is a great impediment to external financing of development in a country.
The country in the 21st century still struggle with financial distress. Rapid accumulation of external debt and payment arrears have constrained the scope of economic management and led to a consequent constraint on economic growth. A mismatch of debt maturity against project yield posses a threat.
A borrower must ensure that the maturity structure of any debt favours the project yield otherwise, cash flow problem would arise as the borrower finds that the project income distribution is sufficient to offset the debt obligations as and when due. In Nigeria’s case certain worthwhile industrial project such as steel and paper mills were financed with short and medium term loans with amortization falling due to before project completion and current account deficits were financed with short term credits.
It is quite evident that Nigeria’s external debt burden rest upon present and future generation. Recommendation and result oriented strategies for mitigating against possible external debt management problems in Nigeria in the future will be proffered.
1.3 OBJECTIVES OF THE STUDY
This research work has a primary objective which is an appraisal of Nigeria’s external debt management, with special focus on structure, source, control and utilization of external debt of the government of Federal Republic of Nigeria. The secondary objectives of this research include:
i. To determine whether there is a significant impact of Nigeria’s External Debt stock on Gross Domestic Product.
ii. To examine whether the external debt penalties on arrears for default have impact on
Nigeria’s external debt stock.
1.4 RESEARCH QUESTIONS
These are very fundamental to this study and the researcher.
i. Does Nigeria’s external debt stock have significant impact on the Gross Domestic
Product ?
ii. Does external debt penalties on arrears for default have positive impact on Nigeria’s external debt stock ?
1.5 RESEARCH HYPOTHESES
“This is a tentative statement about phenomena whose validity is usually unknown”. (Onwumere 2009:25). Hypothesis serves as a powerful beacon that light the path for the research work. Uzoh (2000) also describe “hypotheses as necessary whenever cause and effect relationship are to be discovered”. Thus formulating hypothesis as framework for this study becomes imperative.
These hypotheses in specific form are:
Ho: External debt do not have a significant negative impact on Gross Domestic Product
(GDP).
Ho: External debt penalties on arrears for default do not impact positively on Nigeria’s external debt stock.
1.6 SCOPE OF THE STUDY
This study is restricted to external debt as it poses a threat to the National economies of debtor countries including Nigeria. The World Bank Annual Report (1977) identified “external debt problem as a present day major obstacles that must be cleared from the development path to ensure progress in developing countries”.
This research is therefore limited to the management of Nigeria’s external debt with an appraisal on its control, challenges, utilization profile and impact as stated in the hypothesis. The external debt’s is thus seen as a financial resource for national economic development.
The time span covered by the main thrust of the study was 1989-2014, focusing on Appraisal of Nigeria’s External Debt Management of the Government of the Federal Republic of Nigeria. The period 1989-2014 was selected based on the availabilty of consistent data and at 1989 Nigeria’s debt stock started to rise persistently.
1.7 SIGNIFICANCE OF THE RESEARCH
Uloglobui (2007), “identified that research work was not initiated and commissioned for the sake of it but for some significant benefits to the managers of Nigeria’s External Debt profile, the academic (student and experts)and the society at large”. This research work will be of significance to:
1. Government
2. Economic Policy Makers
3. Institutions, Researchers, Professionals, Business Associate/Mogul & Corporate
Bodies
4. General Public
This research work will assist Nigeria Government in policy and decisions as regards borrowing outside the shores of the country. The work will also present the Impact of Nigeria External Debt Stock on Gross Domestic Product, vis-à-vis Nigeria Debt Management approach to Debt Sustainability, thereby allowing the managers of the nation’s Debt portfolio in ensuring a dynamic and efficient Debt Management Approach in Nigeria.
It will examine the consequences of Penalties on Arrears for Default on Nigeria External Debt Stock. Its findings will aid Economic Policy Makers and Government in proffering policies aimed at timely Servicing of Nigeria External Debt Stock to avoid compounding penalty payment for default vis-à-vis Debt crisis situation in Nigeria.
The study will serve as a body of reserved knowledge to be referenced to by Institutions, Researchers, Professionals, and Business Associate/Mogul & Corporate Bodies in making corporate business and academic decisions. It will contribute significantly to the enrichment of the literature External Debt Management.
The research work will awaken the consciousness of the General Public to the sensitivity of External Debt Stock to the Growth of the Economy and the Penalty on Arrears for Default on External Debt Servicing.
1.8 OPERATIONAL DEFINITION OF TERMS
For this study, terms as used here imply the key words which will be employed in the course of his research. This includes:
External debt to Export Ratio: This signifies the extent to which the debt outstanding and disbursed is accommodated by the annual export earnings.
External debt to GDP Ratio; Indicates the intensity of external debt burden on the economy.
Debt Sustainability; “is the level of debt which allows a debtors country to meet its current future debt services obligations in full, without recourse to further debt relief or rescheduling avoid accumulation of arrears while allowing acceptable level of economic growth” (UNCTAD/UNDP 1996)
Interest to Export Ratio: This gives consideration to export earnings to adequately accommodate interest payment.
External Debt Service to Government Revenue Ratio: It highlights the financial drain imposed on the economy and the extent to which the government must cut back domestic financial commitments in order to satisfy external debt obligations.
External Debt Service to Export Ratio: This expresses the extent to which the total foreign exchange earnings on current account are sufficient to offset the annual amortization and interests.
Interest to GDP Ratio: The level of burden which interest payment on external debt, as distinct from amortization imposes on the economy.
Debt service/Government Revenue Ratio: This ratio “shows the fraction of government revenue devoted to servicing of debt” (DMO, 2004:7)
Sovereign Debt: The IMF (1988:1) defines sovereign debt as “a liability represented by a financial instrument or other formal equivalent owed to other parties by an independent state”.
External Debt: Uche (2003:72) refers to the “summation of indebtedness of a country to other countries, institutions and non-residents of that country”.
Foreign Bonds: This refers to bonds that are designate in foreign currencies and traded in foreign capital markets
External Debt Management: Emmanuel (2004) refers it to be “the technical and institutional arrangement as well as policy measures, involved in organizing external liabilities so that the debt service burden is contained within a sustainable level”.
This material content is developed to serve as a GUIDE for students to conduct academic research
A1Project Hub Support Team Are Always (24/7) Online To Help You With Your Project
Chat Us on WhatsApp » 09063590000
DO YOU NEED CLARIFICATION? CALL OUR HELP DESK:
09063590000 (Country Code: +234)
YOU CAN REACH OUR SUPPORT TEAM VIA MAIL: [email protected]
09063590000 (Country Code: +234)
