Impact of External Debt on Economic Growth
THE IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN NIGERIA.
BY
ABUBAKAR SADIQ SALEH Department of Banking and Finance, University of Abuja abubakar008@yahoo.co.uk
ABSTRACT
Debt is borrowing that is either for the purpose of smoothening the consumption path in the face of transitory shocks or as a means of supplementing domestic savings in order to expand productive capacity and raise the long – run growth rate. The objective of this work is to link foreign borrowing with growth. Whether debt could be used as a development strategy especially among low-income countries is the question of interest in this research. By using a simple open macro-economic model and focusing on the external balance of payment of a developing economy with rigidities, this work derives an empirically testable condition to show the impact of foreign borrowing on growth, i.e. as factor of growth and its negative impact on growth or when acting as a burden on growth. It concluded that foreign debt could have negative relationship with growth if not managed prudently. It is recommended that for external debt to be of positive impact on growth there is the need for a comprehensive and effective debt management strategy.
1.1 INTRODUCTION
Foreign debt is a situation of the indebtedness of one country to another or institutions of the world. Many developing countries have used the instrument of foreign borrowing for the purpose of promoting or meeting their economic growth. It is a fact that many of today’s advanced industrial economies also resorted to foreign borrowing at one time or the other, especially after the Second World War (Farzin, 1988). The difficulties faced by many indebted developing countries led to a widespread and frequent debt reschedule which in turn raise serious concerns among policy makers culminating in clamours for debt cancellation for the poor indebted countries (World Bank, 2002).
This
BY
ABUBAKAR SADIQ SALEH Department of Banking and Finance, University of Abuja abubakar008@yahoo.co.uk
ABSTRACT
Debt is borrowing that is either for the purpose of smoothening the consumption path in the face of transitory shocks or as a means of supplementing domestic savings in order to expand productive capacity and raise the long – run growth rate. The objective of this work is to link foreign borrowing with growth. Whether debt could be used as a development strategy especially among low-income countries is the question of interest in this research. By using a simple open macro-economic model and focusing on the external balance of payment of a developing economy with rigidities, this work derives an empirically testable condition to show the impact of foreign borrowing on growth, i.e. as factor of growth and its negative impact on growth or when acting as a burden on growth. It concluded that foreign debt could have negative relationship with growth if not managed prudently. It is recommended that for external debt to be of positive impact on growth there is the need for a comprehensive and effective debt management strategy.
1.1 INTRODUCTION
Foreign debt is a situation of the indebtedness of one country to another or institutions of the world. Many developing countries have used the instrument of foreign borrowing for the purpose of promoting or meeting their economic growth. It is a fact that many of today’s advanced industrial economies also resorted to foreign borrowing at one time or the other, especially after the Second World War (Farzin, 1988). The difficulties faced by many indebted developing countries led to a widespread and frequent debt reschedule which in turn raise serious concerns among policy makers culminating in clamours for debt cancellation for the poor indebted countries (World Bank, 2002).
This
References: 1. Augustine K.F. 2000. “ The International Dimension of African Economic Growth”, CID Working Paper No.34 2. Alfredo S. 2004. “Debt and Economic Growth in Developing and Industrial and Industrial Countries” 3. Andrea F. P. 2005. “The Debt-Growth Nexus In Poor Countries: A Reassessment” 4. Barbara M. and Michael A. (1997) “Growth and foreign debt: The Ugandan experience”, AERC Research Paper 68 5. Farzin, Y.H. 1988. “The Relationship of External Debt and Growth. Sudan’s Experience, 1975-1984”. World Bank Discussion Paper 24 6. Misan, R. 2007. “Overrated? The Impact of Oil Revenue on Nigeria’s Creditworthiness, Debt Profile and Sustainability, 1973-2004.” 7. Stephen K. and Irfan N. 2004. “Drilling Into Debt: An Investigation Into the Relationship Between Debt and Oil”.