CHAPTER
ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
Securing
external loan is inevitable for a government when the economy faces financial
crisis. There is no iota of doubt that Nigeria, just as other developing
countries, is facing serious debt crisis. It has therefore emphasized the use
of external loans for financing public expenditure (National library 2006). It
is generally expected that developing countries, facing a scarcity of capital,
will acquire external debt to supplement domestic saving (pattillo,etal 2002; safdari;
and meherizi 2011).
According to global development
finance (2009), “every country in the world aims at achieving economic growth
and development”. However this is only possible if a country has adequate
resources. In developing countries especially those in sub Sahara African the
resources to finance the optimal level of economic growth and development are
in short supply. This ploughed with problem of low domestic savings, low tax
revenue, low productivity and meager foreign exchanger earnings. Basically, for
these reason, many developing counties yearning for economics growth inevitably
resort to external financing to bridge the gap between their savings and
investments. In the process of obtaining Finance from abroad, a country may
consider several options: grants, foreign investment and loans (concessional
and non- concessional ) in that order, However mix of these capital inflow in
varying proportion could be obtained depending on the socio- economic and
political situation in a country(World Bank 2009).
According to (CBN annual report 2002)
“Nigeria like most developing countries borrowed from external sources mainly
for investment purpose. The country external debt sustainable up to mid 1970s,
from the late 1979s because of poor macro- economic management and declining
prices of crude oil, the country’s external debt began its upward movement.
Thus from an external debt of US$ 557.74 millions in 1975. Nigeria debt packed
at US$33 .billions in 1990 before declining to US$27.1 billion in 1997 and rose
to US$28.8 billion in 1998. (CBN annual report 2002).
However, one of the greatest problem
facing African countries basically classified as the amount of their external
indebtedness (World Bank African Data base, 2003). This problem of increasing
rate of the external debt is threatening the development programmed embarked
upon by these countries, thereby retarding their economics growth and
development, the reason being that the size of debt relative to size of the
economic GNP is enormous. Also, the current system of debt management has a
serious macro-economic impact on the economy’s outputs: as such, there is an
urgent need to reduced African total outstanding debt service payments as well
as accumulating of arrears on payments. (Anyanwa etal 1993)” in 1986, the
federal government introduced the structural adjustment progrmme (SAP)”, to
address the problem of structural imbalance in the economy and create an
atmosphere for the achievement of macro- economics stability. It is obvious
that one of the integral parts of the SAP is to reduce Nigeria huge debt. It is
a fact that if the enormous amount spent on debt service payment could be
reduced greatly, the country will be able to finance a large volume of domestic
investment which enhances growth and development.
However, the borrowed funds are
embarked on ill conceived project which are equally badly implemented. Thus ,
the new international economic order sets out as one of its objective to secure
favorable condition for they transfer of resources to developing countries and
to ensure that a countries resources are fully utilizes for the development of
the country concerned. Thus, Nigeria resorted to external borrowing early in
her history so as to quicken the pace of economic development. The issue of
Nigeria’s external debt generated much public concern at the beginning of 1980
(World Bank African Data Base 2003). (Ugwu
2011), the etymology of Nigeria external debt can be traced back to 1958 when a
sum of US$28 million was contracted for railway construction. Between 1958 and
1977, the resort to foreign debt was minimal, as debts contracted during the
period were the confessional debt from bilateral and multilateral sources with
longer repayment period and lower interest rates constituting about 78.5
percent of the total debt stock. From 1978, following the collapse of oil
price, which exerted considerable pressure on the government finance, it became
necessary to borrow for balance of payment support and project financing. This
led to the promulgation of Decree No.30. Of 1978, limiting the first major
borrowing of US$ 1billion refereed to as the “jumbo loan” was contracted from
the international capital market (1 CM) in 1978, increasing the total external
debt stock to us$2.2 billion. Therefore, the spate of borrowing increased with
the entry of state government into external loan contractual obligations .while
the share of loans from bilateral and multilateral sources declined
substantially, borrowing from private sources at stiffer rates increased
considerably. Thus by 1982, the total external debt Stock was US$13.1billion.
According to the (federal ministry of finance)
Nigeria inability to settle her import bill resulted in the accumulation of
trade arrears amounting to US$9.8 billon between 1983 and 1988.The
reconciliation exercise, which took place between 1984 and 1988, reduced the
amount to US$3.8billon. The accrued interest of US$10.billon was re-capitalized
bringing the total to US$4.8billon in 1988, and the debt was eventually
refinanced. Nigeria’s external debt rose further to US$33.1billon in 1990, but
declined to US$27.5 billon in 1991 and increased steadily to US$32.6billon at
the end of December 1995.
According to the (federal ministry of
finance), the total external debt outstanding at the end of 1999 was US$ 28.0
billon, of the total outstanding debt, the Paris club constitutes the highest
source of share of 73.2 percent in 1999. The balance is owed to the London
club, the multilateral creditors, promissory note holders and others. Since the
beginning of civilian Administration in 1999, Nigeria in concert with other debtor
nations have canvassed for debt can cancellation all to no avail .However in
the year 2000, arising from good performance on a preliminary programme with the
international monetary fund (IMF), Nigeria debt service obligation was reduced
from about US$4.0 billion to us$1 billon per annum. (CBN 2000), by the end of
December 2003, Nigeria external public debt outstanding was estimated at US$32.9
billon. Although in the year 2005 certain debt concessions were granted Nigeria
of course this has made our debt obligation with the Paris club to be reduced
drastically. In April 2006, Nigeria became the first African country to fully
pay off its debt.
In essence, what matter most is not
the amount of the foreign loans but the way and manner the loans are used in
developmental process? If these loans are used for current consumption, they
will have minimal impact on future economic growth, but if invested rationally
in productive ventures, they will contribute positively to real, growth and
enhance the productive capacity of the economy.
The fact is that development depends
purely on a sustained increase in real income, which can only achieve or accumulated
from economic growth. Economic growth according to (Udabah 1999:24) “is
therefore a steady process by which the productive capacity of the economy is
increased over time to bring about rising levels of national income”. Growth
tends to occur when total productive increase more rapidly than population,
thus it is the country’s ability to maintain a strong defense or to pay for
some other national project. As a matter of fact, economic growth is an ever
increasing quantity of goods and services available to meet the economies need
over time, hence the higher the radio of debt servicing payment, the lower the
level of economic growth.
However, according to (Anyanwu etal 1997),
“the primary burden of Nigeria’s public debt is indeed shifted to the future”,
thereby retarding economic growth.
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