1.1 BACKGROUND OF STUDY
“Since the collapse of the oil boom in 1981, the Nigerian economy has undergone considerable strains and stresses. The pressure has been evident in the persistent deficits in balance of payments, low external reserves, deficit in government finances, mounting external debts etc”.( Central Bank of Nigeria,1992)
The inherent weakness in the structure of the economy as reflected in the over-dependence on foreign exchange earnings from oil, undue dependence on imports for its productive base in the face of declining foreign exchange earnings and weak terms of trade led to a situation in which government sought to bridge the domestic financial gap with external borrowing.
Until recently that the Nigerian government negotiated and secured about $18b debt relief from the Paris club of creditors, this external borrowings which was supposed to place the economy in a sound footing for economic recovery assumed an alarming proportion without noticeable improvement in the economy.
According to Sanusi (1988), ”the emergence of the glut in the international crude oil market in 1978 with the attendant strains on the balance of payments, external reserves and government finances, Nigeria, for the first time had recourse to borrow in large chunks and shorter maturities from the International Capital Market (ICM) at higher and variable interest rates”. A number of ICM jumbo loans were negotiated in 1978 and 1979 for balance of payments support purposes, and for the establishment of a domestic steel industry.
Stressing further, Sanusi (1988), opines that many more such ICM loans were raised especially as funds from bilateral and multilateral institutions became increasingly inadequate to meet the needs of governments. Consequently, ICM loans rose rapidly from $1.0billion in 1979 to $5.5billion in 1982 and to $23.5billion in 1987, when it constituted 40.2 percent of total external debt.
In the same period, state governments joined the bandwagon of external borrowing. By 2005, Nigeria’s external debt stock stood at $34billion, at a time when the total volume of exports from which to service the debt had dwindled by over a half in real terms. Such huge external debt stock with the associated debt service hampered economic growth and employment through principally putting a limit on imports as well as the development of infrastructure, which are critical for domestic productive activities.
Ojo (1989), states that, “it is no exaggeration to claim that Nigeria’s huge external debt was one of the hard knots of the Structural Adjustment Programme (SAP) introduced in 1986 to put the economy on a sustainable path to recovery”. The corollary of this statement is that if only the high level of debt service payments was reduced significantly, Nigeria would have been in a position to finance a large volume of domestic investment which would enhance growth and employment, but more often than not, a debtor has only very limited room to manage a debt crisis to advantage.
Only recently, owing to the unbearable burden of the debt stock, the Nigerian government initiated a debt relief agenda that led to an $18billion debt forgiveness from the Paris club.
- STATEMENT OF THE PROBLEM.
The emergence of the international debt crises in the early 1980s was accompanied by intense debate on finding effective solution to it. According to the Central Bank of Nigeria (1992), the “ Nigeria, external debt stock witnessed substantial changes, both in quantum and structure over the years. In absolute terms, total external debt outstanding rose from $17,765million in 1983 through $23,364million in 1991 to $40billion towards the end of 2005. Thus, between 1983 and 2005, the external debt increased by US$22.235billion”.
There have also been some changes in terms of the structure and composition of the debt stock. Of the total outstanding in 1983, obligations to the Paris club of creditors amounted to US$5.390billion or 30.3 percent, while US$6.263 billion (35.3%), US$884million (5%) and US$1.526billion (8.6%) were owed to the London club of creditors, multilateral institutions and others respectively. “As at July 2005, about $28billion or 85% of the debt was owed to the Paris Club of 15 creditor nations. Only 8% was owed to multilateral institutions such as the African Development Bank and the World Bank, whilst the balance of 7% was owed to the London club of Commercial Creditors and holders of Promissory Notes”. (Okonjo – Iweala 2005:1).
At different times, Nigerian authorities have consciously adopted strategies to manage the country’s debt, not only to restore external equilibrium but also to stimulate sustainable growth in the economy. While these efforts provided some relief, the debt burden remained unbearable until the debt relief granted to Nigeria by the Paris club of creditors in 2005
In the light of the above, it becomes relevant more than ever before to examine the debt relief agenda and its implications on the economy, particularly in the rapidly changing international economic environment.
- OBJECTIVES OF THE STUDY
Consequent on the research questions stated below, the broad objectives formulated for this study is to examine the implications of Paris Club debt relief on Nigeria.
Implicitly, the sub – objectives are stated as follows:
- To ascertain the impacts of external debt indicators on the debt financing investment in the economy.
- To evaluate the implications of Paris Club debt relief on Nigerian economy.
- To trace the causal
relationship between external debt and economic growth in Nigeria.
- RESEARCH QUESTIONS.
The under listed questions will constitute the research questions for this study.
- What are the impacts of debt indicators on the debt financing investment in the economy?
- What are the implications of Paris Club debt relief on Nigerian economy?
- What is the causal relationship between external debt and
economic growth in Nigeria?
- RESEARCH HYPOTHESES
The following hypotheses were tested in this study;
- There is no correlation between external debt indicators and debt financing investment in the economy.
- Paris Club debt relief has no significant impact on Nigerian economic growth.
- There is a negative causal relationship between external debt stock and economic growth in Nigeria.
- SCOPE OF THE STUDY
The scope of this dissertation is limited to Nigeria’s external debt profile and implications of the Paris Club debt relief on the economy. This is to enable the researcher to be as specific as possible and to focus his attention more objectively in consonance with the research questions and objectives.
To accomplish this, the study covered the period from 1980 to 2008. The choice of this period is because in the 1980s, the management of the external debt became the major responsibility of the CBN, and as a result of this, external debt became pronounced. Again,a close examination of Nigeria’s growth rate shows that the relative position of the country started to deteriorate significantly in the 1980s, when Nigeria found itself in a quagmire of economic problems. The acute economic crises since this period has resulted in the extremely poor growth performance of the economy, which is attributable to a host of factors; both internal and external. The prominent among the external factors is the escalating external debt stock.
- SIGNIFICANCE OF THE STUDY
Given the dimensions and magnitude of Nigeria’s external debt burden, the intricacies of debt management and the attendant consequences of huge debt stock on the economy, this study would no doubt be of immense benefit to a wide range of economic operators, policy makers, government as well as the academia.
First, this study would expose to the reading public the magnitude and severity of Nigeria’s external debt as well as government management efforts.
Second, it would add to the very limited literature on Nigeria’s debt issues, thereby offering the academia, financial sector and the general public the much needed information in this area.
Third, the recommendations, offered would guide the government and monetary authorities in such areas as debt accumulation and management.
Fourth, it would greatly assist policy makers and implementers in designing effective economic policies that can thrive in the face of serious debt crises and place the economy on sustainable for development.
Fifth, this dissertation would be an articulated source of materials or reference to students that would want to carry out further research work on this topic or an aspect of it in the future.
- OPERATIONAL DEFINITION OF TERMS:
I consider it necessary to define some important words used in this study in order to enhance understanding in the context in which they are used throughout this dissertation.
This involves exchanging external debt for domestic debt or equity. The redemptor, if he is not the original creditor, uses foreign exchange to purchase a country’s debt at a discount, either from the original creditor or in the secondary market. The debtor negotiates with the agency responsible for managing the conversion programme in the debtor country, usually the Central Bank to exchange the acquired debt for local currency or local debt.(Central Bank of Nigeria briefs, Series No.93/04)
The restructuring of debt involves the conversion of an existing debt into another category of debt, through refinancing, rescheduling, buy-back, issuance of a collateralized bond, and the provision of new money. .(Central Bank of Nigeria briefs, Series No.93/04)
This involves the procurement of a new loan by a debtor to pay off an existing debt, particularly short- term trade debt. The new loan may be contracted from the same creditor(s) or a new set of creditors as the case may be. The repayment of such debts normally negotiated with the creditors is contained in the loan agreements. . (Central Bank of Nigeria briefs, Series No.93/04)
Debt Rescheduling The rescheduling of debts involves changing the maturity structure. It usually covers repayments ( principal or principal and interest) falling due in a particular period, usually one year. This exercise does not only postpone the debt.