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  ECONOMIC GROWTH AND EXTERNAL DEBT SERVICING: A COINTEGRATION ANALYSIS OF NIGERIA 1981-2010. UNOGWU SUNDAY UNOGWU Department of Economics Faculty of Arts and Social Sciences Gombe State University Gombe Nigeria. ABSTRACT The study examined the extent of external debt servicing and its consequences on economic growth in Nigeria for the period 1981 to 2010. It employed the error correction framework and co integration techniques to test the relationship between GDP and other macroeconomic variables such as total debt servicing, total external debt and total exports. The result shows that the variables are significant in the study and shows that uncontrolled external debts which are not channel to productive ventures has negative impac t on the country’s economic growth. Buoyant and increasing exports earnings and has positive impact on economic growth. 1.   INTRODUCTION  Nigeria’s human and environmental crisis is being played out against a back cloth of world recession, low commodity prices, high interest rates, expensive energy, corruption and misplaced aid. “Should we let our people starve so that we can pay our own debt?” (Julius  Nyerere of Tanzania, April, 1985). Throughout the 1980s and 1990s, many developing countries have struggled to service their external debts to both commercial banks and industrialized countries governments. The accumulation of external debt is common  phenomenon of the developing world and it has become a common feature of the fiscal sectors of most economies, Nigeria inclusive. A country with low saving rate like Nigeria needs to borrow to finance the given rate of economic growth. Since the collapse of the oil boom, the Nigerian economy has undergone considerable strains and stresses. This can be seen in the persistent deficits in the balance of payments, low and dwindling reserves, budget deficit, increasing external debt etc. the unattendant weaknesses in the structure of the economy as reflected in the over dependence on foreign exchange earnings from crude petroleum, imported oriented for her productive base in the face of declining exchange rate and weak terms of trade led to a situation in which government sought to bridge the domestic financial resources gap with external borrowing. The first major borrowing in Nigeria was the 1978 international capital market (ICM)  borrowing for jumbo pay which is worth US $1.00 billion (Economic & Financial Review of the CBN, 1992). Thereafter, more external borrowing, both by the federal and state  governments for unviable and all manners of projects became a routine exercise. Some even ended up in private pockets. An external debt problem usually exists when more and more current debt resources are deployed to service loans (Alabar T. & Anjande A., 2003). A debt to exports ratios of 10% does not call for debt problem, but as the ratios grows to about 20%, the tolerable limit is approached while beyond a debt problem sets in. this is why the debt management office (DMO) limit the debt service ratio to between 10 and 20% (CBN Bullion October/December, 1995) Contingent liabilities from government guarantee of private sector trade transactions that were taken without adequate planning has contributed in aggravating the Nigeria debt  burden. Economists always sought out to find ways through which a country can achieve long lasting sustainable growth. The repayment of actual principal and accumulated interest known as “debt service payments” is a serious threat to economic growth in Nigeria.   Nigeria takes debt from external sources for reasons of her low income; deficit financing and low investment on conditions to repay them with certain obligations. This debt servicing creates problems because a debt has to be serviced more than the actual amount that was borrowed. According to Clement B. et al (2003), foreign borrowing has positive impact on investment and growth of a country up to a threshold level.  Nigeria’s debt burden appears to be on a ceaseless and perpetual increase, the more we  pay, the more we seem to owe. Debts have become an albatross on our neck, jeopardizing our economic growth and compromising our social development. It is against this back drop that the country’s debt service ratio of 0.7% in 1980 raised to 29.1% in 1984, that necessitated the adoption of an efficient debt management strategy (CBN Bullion July/September, 1995).  2.0. REVIEW OF RELATED LITERATURE   Nigeria has enormous mineral and human resources that could make borrowing unnecessary if these resources are properly harnessed and utilized. In Nigeria, money  borrowed is hardly used for productive ventures and most people rather embezzle the money with active connivance of the lending countries and institutions, than to use it for the purpose to which it was borrowed. Borrowing is part of the world economic process. All civilized societies of the world take loans for one reason or the other. Nigerians are only worried that the loans taken by Nigeria may go into private pockets (Anyafo, 1996) Debt refers to payment which must be, but has not yet been paid to someone. Anyone having borrowed money or goods from another owes a debt and is under obligation to return the goods or repay the money, usually with interest (Encyclopedia Britannica Ultimate Reference Suite, 2011). Debt is an outstanding credit obligation. Public debt is an obligation of governments, particularly those evidenced by securities to  pay certain sums to the holders at some future time. Public debt is distinguished from   private debt, which consists of the obligations of individuals, business firms, and non-governmental organizations (Encyclopedia Britannica Ultimate Reference Suite, 2011).  National debt according to the New Webster’s Dictionary of English Language (2000), is the amount of money owned by a national government, usually in the form of interest  bearing bonds issued to finance budget deficits, temporary emergencies (flood, fire, drought, famine, war etc) and public works. The distinction between public debt and national debt is that public debt includes the obligations of other public bodies that borrowed etc. national debt is narrower in scope referring to the debt of the main stream government (Anyafo, 1996). Public debt may be also categorized as to whether internal or external. Increases in savings and investment in an economy leads to economic growth (Hunt, 2007). Growth will not take-off until capital stock has risen to a given threshold (Sachs, 2002). In a virtuous circle, as capital rises, and investment and output rises follows, savings level will also continue to rise. These rise in capital and savings will in due time be sufficient to trigger self-sustaining growth. Governments uses the argument provided by the dual gap theory to opt for external finance, as a means of ensuring sustained development rather than utilizing only domestic resources. The theory states that investment is a function of savings, and that in developing countries, the level of domestic savings is not sufficient to fund the needed investment to ensure economic development. The acquisition of external funds depends on the relationship  between domestic savings and foreign income, investment and economic growth. According to Edelman (1983), the factors affecting debt service capacity are returns on investment, the cost of borrowing, and the rate of savings. The cost of external borrowing include debt service burden, cost of resultant liquidity crisis, cost of accumulated debt, the management angle, debt rescheduling and import substitution (Ubok-Udom, 1978). According to Colaco (1985), debt service vulnerability in developing countries can be explain by the size of external loans which has reached a level that is much larger than equity finance, the proportion of debt of debt at floating interest rates has risen and maturities have shortened considerably. All these factors are relevant to Nigeria. 2.1. ECONOMIC GROWTH Growth is defined as the increase in output of an economy’s capacity to produce goods and services needed to improve the welfare of the country’s citizen. Growth is seen as a steady  process which involves raising the level of output of goods and services in the economy. Growth is meaningful when the rate of growth is much higher than population growth  because it has to lead to improvement in human welfare (Balami, 2006). Economic growth can be measured using nominal measurement of growth, real output growth rate and per capita income values. 2.2. GROWTH MODELS  According to the classical growth theory, the rate of investment is the main factor for fostering growth. Growth is a function of the share of profits in the national income. According to them, there exist a positive relationship between higher rates of profit and higher rate of economic growth. The increased division of labour and specialization in an economy made possible by increased in growth rate of capital would result in increases in  both profits and wages. 2.3. ROSTOW’S STAGES OF GROWTH   According to W.W. Rostow in his linear stage model, countries must pass through five stages in the growth process. These stages are: The traditional society which is like a feudal one, economic decision making is based on obligation, culture and traditions. It is a non-monetized economy. The preconditions for take-off were advancement in agriculture is taking place. Uneconomic culture and traditions are being done away with. This is similar to a primitive capitalist stage. There is the presence of market. Next is the stage of take-off. Since economic activities are taking place, the economy is on it path to economic growth. After take-off, the economy drives towards maturity and finally to a stage of high mass consumption. 2.4. HARROD-DOMAR GROWTH MODEL According to the capital only model of Harrod and Domar, savings is a certain proportion of national income and net investment as the change in capital stock (K). It assumes a direct relationship between the capital stock (K) and the total gross national product (Y). This is known as capital-output ratio.  .  sY S     By utilizing data from Nigeria, Iyoha (1997) reports confirm the crowding out and debt overhauling effects of debt servicing. He came to the conclusion that this is the reason for low level of investment in the Nigerian economy. According to Ashinze and Onwioduokit (1996), say if external funds are not judiciously utilized it resultant effect is economic decline. 2.5. DEBT OVERHAULING THEORY This school of thought considers external debt as a substitute for domestic savings and investment which crowded out domestic savings and investment (Krugman, 1988). The thinking is that the returns from investing in a country are seen as being subjected to high marginal tax by creditor and this may discourage domestic and foreign investors. It also argued that foreign savings may be used for consumption rather than for investment. 2.6. DEBT-LATTER CURVE THESIS This school of thought is concerned with the burden of external debt which emphasizes the non-linear relationship between debt and growth (Calvo, 1998). It links debt and growth to  problem of capital flight where at high debt levels, growth falls. According to the theory, distortionary tax burden on capital to service debt is responsible for the fall. Calvo 1998,  maintain that low debt regimes have higher growth rate and lower strand of thought in the debt-growth nexus and sees external debt as capital inflow with positive effect on domestic savings and investment and thus on growth which leads to reduction in poverty. 2.8. HISTORY OF NIGERIA’S DEB T CRISIS Since 1970s and 80s, African countries experienced severe savings gap and shortage of investment funds. In the face of low international interest rates, Nigeria like other developing countries succumbs to the temptation of external borrowing. In 1 970, Nigeria’s external debt stock was less than one billion dollars. By 1980s, the debt profile has reached an alarming rate due to her inability to meet its debt obligations. The external debt stock which was about U.S. $9 billion in 1980 grew to nearly U.S. $19 billion by 1985 (, 2006). The debt stock as a percentage of total export earning and GNP rose to 151% and 24% respectively. In the same year, the debt service payment due was above U.S. $4 billion which was 33% of total export earnings. By 2001, the debt stock as  percentages of total export and GNP was 149% and 83% respectively (, 2006). How does Nigeria get into this debt spiral? Nigeria’s debt had been incurred at non -concessional terms, during a period of low interest rate regime when the London Inter- Bank Offered Rate (LIBOR) was between 3 and 4 percent. Nigeria’s debt grew as a result of accumulated debt service arrears due to inability to meet debt obligations and the escalation of market interest rate. The collapse in oil prices and the rising prices of imported manufactured goods, poor economic policies, bad management and unfavourable loan terms, particularly those of Paris Club, worsen Nigeria situation. Despite three rescheduling arrangements in 1986, 1989 and 1991, arrears continued to accumulate. The trend of the external debt show that the country’s external debt is owed to fifteen creditor countries belonging to the Paris Club; as a percentage of the total external debt,  Nigeria’s indebtedness to this gro up rose from 30% in 1983 to about 80% in 2001 (, 2006). 2.8. DEBT RELIEF Since 1986, Nigeria has been having negotiations with the Paris Club and other creditor nations. In December, 2000, following a second round of negotiations, Nigeria reached agreement with the Paris Club. The rescheduled agreement was structured in Houston terms, which applies to lower middle income countries with per capita income of between U.S.$785 and U.S.$3125 (Nigeria has a per capita income of U.S.$260 in 2006). This  provides for the rescheduling of Nigeria’s Paris Club debt of about U.S. $21.4 billion over 18-20 year period. 2.9. EXTERNAL DEBT MANAGEMENT IN NIGERIA
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