The Impacts of External Debts on the Nigerian Economy

Topics: Debt, Development, Heavily Indebted Poor Countries Pages: 38 (13752 words) Published: January 2, 2013
1.1 Background to the study
One of the most traumatic events of economic experience is the problem of external indebtedness of developing countries. This phenomenon, which is, now of some great economic significance has been a feature of the international economic scene for about three decades or so now. While it was first recognized as not too serious a problem until early seventies, the external indebtedness of developing countries reached an alarming scale by the close of the seventies through to the early eighties. And since the latter date, the problem has reached a crisis proportion. Thomas (2001)

This was reflected in the indiscriminate external borrowing largely from non-concessional commercial sources to which were hardly self-liquidating, the factor leading to the debt crisis that has staged in the third world since the 1980s. The debt crisis that emerged in the 1980s has continued to be a dominant economic policy issue for a number of developing countries. For quite a handful of them, the debt burden has necessitated the introduction of some form of structural transformations within the local economy as a way of finding a lasting solution to the growing debt problem. However, the debt overhang, defined as the portion of debt which if forgiven, would allow the remaining debt to trade in secondary market(s) and eventually open up access to the credit market, has continued to be high thus making it difficult for the highly indebted middle-income countries to resume stable economic growth. It is incontrovertible however, that external borrowing by sovereign governments to finance economic growth and development or transitory balance of payment deficit is not undesirable. The underlying philosophy that underscores external borrowing is the existence of savings-investment gap in a domestic economy. Indeed, the existence of foreign exchange gap has also been identified in theory to justify foreign borrowing. The assumption is that, external borrowing can bridge the gap between the domestic savings and investment and between exports and imports of goods and services. By allowing higher expenditures over a given period of time than would otherwise be possible, external borrowing may assist development by supplementing export revenues and foreign direct investment, or it may smooth the impact of temporary shocks that reduce consumption and thus improve economic welfare by allowing for higher domestic incomes. However, this happy outcome can only manifest if: i. External borrowing is used for productive investment, with returns that at least match the cost of borrowing, taking into account, interalia, and the abortive capacity of the borrower.

ii. Aggregate domestic savings that at some point exceed aggregate domestic investment by a margin that is sufficiently large to meet at least the interest charges on preciously incurred debts. iii Growth in natural outputs exceeds population growth as well as an ability to obtain the external resources needed to service the debt. (Pfefferman, 1984) 1.2 Statement of Problem

This research study intends to make a comparative analysis of the effect of external debt on economic growth in Nigeria: a sectoral review. The most worrying aspects of developing countries debt emanates from the fact that a substantial part of it is owed to private institutions mainly in the form of commercial bank loans, which are usually at a very short term. This phenomenon of commercial bank lending to developing countries, has become a very important feature of the debt crisis in the country. This took an added significance from the mid-nineties, when the surplus funds of the organization of Petroleum Exporting Countries (OPEC) from the quadrupling of Oil prices in 1993-94, provided the source of funds for borrowing by developing countries, resulting from the deposits in commercial banks, especially in the oil importing countries. While the debt problem for all developing...
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