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The effect of the External Debt on GDP and Unemployment in Nigeria

 Format: MS WORD   Chapters: 1-5

 Pages: 68   Attributes: COMPREHENSIVE RESEARCH

 Amount: 3,000

 Feb 21, 2020 |  06:46 pm |  1846


1.1       Background of the study

    Economic theory suggests that reasonable levels of borrowing by a developing country are likely to enhance its growth (Pattilo, Ricci and Poirson, 2002). When economic growth is enhanced (at least by more than 5% growth rate), the economy’s situation is likely to be affected positively. In order to encourage growth, countries at early stages of development like Nigeria borrow to augment what they have because of dominance of small stocks of capital; hence they are likely to have investment opportunities with rates of return higher than that of their counterparts in developed economies.

    This becomes effective, as long as borrowed funds and the internally generated ploughed back funds are properly utilized for productive investment and do not suffer from macroeconomic instability; policies that distort economic incentives; or sizable adverse shocks. Growth therefore is likely to increase and allows for timely debt repayments. When this cycle is maintained for a period of time, growth will affect per capita income positively which is a prerequisite for economic growth. These predictions are known to hold even in theories – based on the more realistic assumption that countries may not be able to borrow freely because of the risk of debt denial.

    Although the debt overhang models do not analyze the effects of debt on growth explicitly, the implication still remains that large debt stocks lowers growth by partly reducing investment with a resultant negative effect on poverty. But the incentive effects associated with debt stocks tend to reduce the benefits expected from policy reforms that would enhance efficiency and growth such as trade liberalization and fiscal adjustment. When this happens the government will be less willing to incur current costs if it perceives that the future benefit in terms of higher output will accrue partly to foreign lenders. Supporting the conception, Stiglitz (2000) posited that government borrowing can crowd out investment which will reduce future output and wages. When output and wages are affected the welfare of the citizens will be made vulnerable. Soludo, (2003) opined that countries borrow for two broad categories: macroeconomic reasons [higher investment, higher consumption (education and health)] or to finance transitory balance of payments deficits [to lower nominal interest rates abroad, lack of domestic long-term credit, or to circumvent hard budget constraints].

    This implies that an economy indulges in debt to boost economic growth and reduce poverty. He is also of the opinion that once an initial stock of debt grows to a certain threshold, servicing them becomes a burden and countries find themselves on the wrong side of the debt laffer curve – with debt crowding out investment and growth. This seems to be the position of Nigeria today because investment, which will accordingly result to high-speed growth with a positive effect on poverty, is moving sporadically in both positive and negative directions.

    Historically, debt crisis could be traced as far back as 1973 and 1979 triggered by oil price shocks, which resulted to current account deficits in most non-oil producing less developed countries. Prior to this occurrence Nigeria had incurred some minor debts from World Bank in 1958 with a loan of US$28million dollars for railway construction and from the Italian government in 1964 with a loan of US$13.1 million for the construction of the Niger dam. The first major borrowing of US$1 billion known as the “Jumbo loan” was in 1978 from the International Capital Market (ICM) (Adesola, 2009).

    Iyoha (1999) agrees with the views shared by Adam Smith and further asserted that the external debt crisis of the Sub-Saharan Africa is best understood when considered as an integral part of the global debt crisis that emerged in 1982. The global debt crisis resulted from over-borrowing by the developing countries, reckless lending by international commercial banks in the 1970s, collapse of world commodity prices (especially petroleum) in the early 1980s, and the sharp increase in international interest (lending) rates in 1982. Ever since then, it has become a global phenomenon especially among the developing economy.

1.3    Statement of the Problem

    Hicks, Marshall, Chamberlin and Samuelson hold the view that the current crisis that has engulfed the African continent can be explained by the distortions in the internal operations of the African economies and their excessive dependence on the advanced countries (Bhatia, 2006). For the past two decades, Nigeria has borrowed large amounts, often at highly concessional interest rates with the hope to put them on a faster route to development through higher investment, faster growth and poverty improvement. But on the contrast; economic growth, employment and poverty situations are staggering at the back door amidst excess debt as if that was the initial intention of borrowing. It is then obvious that the Nigerian indebtedness has gone beyond such limits and it is conventional if such limits are curtailed to help the economy in their pursuit towards debt free or less debt burden that will enhance economic growth with a resultant improvement in poverty level.

    It suffices to note that, available data on economic performance like per capita income, poverty rate, unemployment rate, portends that, most of the fund was not used for the purposes for which they were borrowed. It becomes worrisome, given the borrowing pattern by the government in recent years, as well as the anticipated increase in the nation’s debt burden due to current realities of tough economic conditions following the dwindling global oil prices from June 2014 till date. For instance, Nigeria’s external debt outstanding stood at US$28.35 million in 2001 – about 59.4% of GDP rising from US$8.5 million in 1980 – about 14.6% of GDP (WDI 2013). Thus the need for the external debt of the nation to be analyzed with the Gross Domestic Product and The rate of Unemployment.


1.2       Research Questions

     i.        Evaluate the rate of increase in External Debt in the nation Nigeria?

   ii.        Examine the dimension and relationship between Gross Domestic Product, Unemployment and External Debt in Nigeria?

1.4      Objectives of the study

      The main objective is to examine The Influence of the External Debt, GDP and Unemployment in Nigeria. The specific objectives of the study are:

     i.        Analyse the rate of increase in External Debt in the nation Nigeria.

   ii.        Examine the relationship between Gross Domestic Product, Unemployment and External Debt in Nigeria.

1.6         Research Hypothesis

Ho – There is no significant relationship between Gross Domestic Product, Unemployment and External Debt.

H1 – There is a significant relationship between Gross Domestic Product, Unemployment and External Debt.

1.7     Scope of the study

    This research would be carried out using secondary data obtained from the Central Bank of Nigeria’s database and World Bank sources and the results might can be applied to various states in the nation.

1.8      Significance of this study

    The situation of public loans and by default of public debt is a real current issue with which many developed and developing economies of the world are facing. The figures regarding the public debt share in GDP are intensely publicized and thus the states are incriminated or “applauded” in terms of governance quality. Of course that the absolute level of the public debt and its share in GDP are important indicators that deserve a careful monitoring, but the analysis must be thorough. The level of the public debt should be seen in comparison with the effects produced by these borrowed money, the effectiveness of using these funds and not least, the evolution and sustainability of the public debt should be determined.

    The states that register rates above average over the permissible level of public but that have redirected their funds into investment projects that will generate jobs cannot be blamed, these will generate an economic environment attractive to investors, who will contribute to the long-term growth of wealth of the population and will generate a real economic growth and create more employment.

1.9        Organization of the chapters

    The study is structured into five chapters. Chapter one is Introduction which is included background to the study, objectives of the study, scope of the study, significance of the study. Chapter two is Literature Review and theoretical framework. Chapter three is research methodology. Chapter four is presentation and analysis of data obtained from the field survey and testing of hypothesis. Chapter five is summary, conclusion and recommendations.


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