THE EFFECT OF DEBT BURDEN ON NIGERIA'S ECONOMIC GROWTH

1.1 Introduction

Debt burden is the aggregate amount of money that government owes either to their citizens and/or local financial organizations (domestic debt) or foreign financial organizations (Balago, 2014). Public debt constitutes a medium used by countries to bridge their deficits and carry out economic projects that are able to increase the standard of living of the citizenry and promote sustainable growth and development. Hameed et al., (2008) stated that public borrowing ought to accelerate economic growth especially when domestic financing is inadequate. Public debt burden also improves total factor productivity through an increase in output which in turn enhances Gross Domestic Product (GDP) growth of a nation.

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.

1.2 Background of Study

Economic growth over the years has been in Government bonds, Economic growth over the years has been identified as a long term project. In this direction, the need for external debt cannot be understated as a reliable substitute to the usually high interest charge domestic debt which in most times does not exceed a year. The burden and dynamics of external debt shows that they do not contribute significantly to financing economic growth in Nigeria as in most case, debts accumulates because of the servicing and principal itself, The burden of external debt could constitute negative impact on G.DP of Nigeria as this is a measure of economic growth.

Public debt burden has been described as one of the major indicators of the macroeconomic variables which form the image of countries in the international markets. Generally, it is one of the determinants of foreign direct investment flows. Prudent management of public debt increases economic growth and stability via resources mobilization with low borrowing cost and limited financial risk exposure (Christabell, 2013).

Debt overhang arises when debt stock exceeds government’s ability to repay. This leads to an increase in taxes towards generating adequate revenue to settle both foreign and domestic creditors, thus discouraging investments due to a sudden increase in taxes. Thus, the indebted country retains only a fraction or nothing from domestic output and export revenue (Abdullahi et al., 2016). This implies that accumulation of debt hampers economic prosperity through tax disincentive. Tax disincentive denotes that rising debt stock impairs investments as potential investors foresee a possible tax increase on future income in a bid to repay the borrowed funds. As such, the debt overhang theory recommends that borrowed funds be well invested in productive sectors capable of generating adequate revenue for repaying the debt and financing domestic investments (Were, 2001).

Problem with foreign debt is when the burden accelerates so high that it negatively affects the growth and development of other sectors. Udeh (2013) highlighted that increased debt burden has led to the adoption of several measures capable of reducing the debt burden affecting the growth prospects of most countries that so much depend on foreign loan. These measures cover from debt rescheduling to outright cancellation. To worsen the situation, the resultant effect of debt serving leads to increase of increased deficit. This of course causes a great challenge to the economy as huge portion of the country’s income is being used up.

Government spending is a function of her income. Like corporate entities’ government articulate her expected income and expenditure on yearly basis in a budget. This is a plan of action prepared by government or corporate entity expressed in financial terms, for a given period, usually a year. Sometimes the expected expenditure exceeds the expected income, when that happens, it is known as budget deficit in financial parlance. The short fall income is in most cases financed through borrowing with attendant cost and associated terms and conditions relating to payment patterns at maturity. Essien et al., (2016), observes that borrowing by countries is occasioned by inability to raise enough revenue from local sources for the administration of government business. Borrowed fund if well applied is expected to accelerate economic growth and development in a country.

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Effect of Debt Burden on Nigeria’s Economic Growth.

1.3 Statement of Problems

Investigation revealed that the issue of external debt burden in Nigeria has become an immense status bestriding the main stream of international economy, and politics. Foreign aids are no longer used as instrument of assistance but as a weapon of oppression, suppression and perpetual under development. The need to examine and hence, utilize the machinery of foreign debt is anchored on a number of challenges and this includes:

1. Underdevelopment of the Nigeria Economy
2. The unreliability of Domestic debt facilities
3. Effect of external debt burden on Gross domestic product GDP)

Lack of capital in the country has been the major cause of underdevelopment in Nigeria, as a. result there is need to inject funds into the system from other economies so as to keep up the growth in the country This can easily be sought from external financial institutions, Domestic debt in Nigeria have not only been characterized by its short term nature, but it has also by fluctuations, The reality on grounds that Nigeria firms and investors prefer to invest their idle funds in company shares and treasury bills than in Government bonds.

1.4 Aim and Objectives of Study

The aim of the study is to examine the Effect of Debt Burden on Nigeria’s Economic Growth. In achieving this aim, the following specific objectives were laid out as follows:

1. To investigate the factors instigating the accumulation of debt on Economic Growth of Nigeria from 2012 to 2019.
2. To measure the impact of external debt on the Growth of the Nigeria within 2012-2019.
3. To evaluate the significance of external debt as against domestic debt in the area under study.
4. To determine the interaction between external debt burden and economic growth in the area under study.
5. To measure the effect of external debt burden on GDP level within 2012-2019.
6. To recommended appropriate yardstick for further research and documentation on Nigeria’s economic debt burden crises.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Are there factors instigating accumulation of debt on Economic Growth of Nigeria from 2012 to 2019?
• Is there any relationship between External debt burden and GDP level in the area under study?
• To what extent has external debt been significant over domestic debt in the area under study?
• What is the impact of external debt on the Growth of the nation?
• Does debt burden have a negative and insignificant effect on economic growth in Nigeria within 2012-2019?

1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: There is no significant relationship between External Debt burden and Economic Growth in the area under study
• H1: There is a significant relationship between External Debt burden and Economic Growth in the area under study

Hypothesis Two

• H0: There are no significant factors instigating accumulation of debt on the Economic Growth of Nigeria from 2012 to 2019
• H1: There are significant factors instigating accumulation of debt on the Economic Growth of Nigeria from 2012 to 2019

Hypothesis Three

• H0: External debt does not have impact on the growth of the Nigeria economy.
• H1: External debt has impact on the growth of the Nigeria economy.

Hypothesis Four

• H0: External debt is not more significant than domestic debt in Nigeria.
• H1: External debt is more significant than domestic debt in Nigeria.

1.7 Significance of Study

The study will be relevant to economic policy formulators and Government investors, foreign international organizations, private, individuals and firms. It will be helpful to citizens informing them of how the impact of external debt will improve their Output thereby their standard of living.

This study will also be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.

1.8 Scope of Study

The scope of the research is focused on the Effect of Debt Burden on Nigeria’s Economic Growth from the year 2012 to 2019, which is a period of 7 years. The study covers the whole economy of Nigeria and will be limited to evaluation of external debt burden and impact on economic growth of Nigeria. One problem of this study is the unreliability of Domestic debt facilities. An objective is to evaluate the relevance of external debt over domestic debt.

1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this project work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
3. Research material: availability of research material is a major setback to the scope of the study.
4. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
5. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

1.10 Definition of Terms

Principles and terminologies are subject to various interpretations depending on the context in which they are used for the purpose of this study the major operating terms are defined as follows:

External Debt: These are debts incurred when the Government of a country borrows from foreign banks, Government and international institutions like IMF, World Bank, parts club etc. Also it can be seen as unpaid portion of external resources required for development purposes and balance of payment support which could not be repaid when they fell due.

Economic Growth: is a long term rise in. capacity to supply increasingly diverse economic goods to nit’s populations. This growing capacity is based on advancing technology, the institutional and ideology adjustment that it demands. It refers to increasing real output or real per capital output, of economy.