THE
IMPACT OF EXTERNAL DEBTS ON ECONOMIC GROWTH IN NIGERIA
Paul Aondona
Angahar PhD.
Department of
Accounting, Benue State University, Makurdi
Jacob Sesugh
Angahar
Department of
Economics, Kwararafa University,Wukari,
ABSTRACT
Nigeria’s debt profile has been on the increase over
the years, and the country may soon reach a debt threshold that would affect
economic growth negatively. This may lead the economy to a debt trap. The study
empirically examines the impact of external debt on economic growth in Nigeria.
Descriptive and econometric analytical tools were used in data analyses. Data
on Real Gross Domestic Product (RGDP), External Debt Stock, External Debt
Service Payment, and Exchange Rate were collected from Central Bank of Nigeria
Statistical Bulletin, 2014 and Debt Management Office 2014, various issues.
Diagnostic tests were conducted using Augmented Dickey Fuller Unit Root Test,
Co-integration, and Error Correction Model. Threshold Autoregressive model
(TAR) was used to test the level of debt sustainability in Nigeria within the
period under review. The independent variable was RGDP, while the explanatory
variables were External debt stock, External Debt Service Payment, and Exchange
Rate. The study showed that External Debt had a positive and significant
relationship with Real Gross Domestic Product in the long run. The research
shows that Nigeria is not in a debt trap and external debt is sustainable in
Nigeria. The study recommended amongst
others, utilization of external debt in to productive sectors of the economy
rather than recurrent expenditure, currently Nigeria is not in a debt trap,
therefore can still borrow for growth purposes and that the current trend in
external debt is still viable. The country can borrow within the stipulated
threshold. This will affect economic growth positively.
Key
words:
External
Debt, Economic Growth, TAR, Threshold, Debt Trap and Sustainability
INTRODUCTION
No
economy is an island on its own; it would require aid so as to perform
efficiently and effectively. One major source of finance is external debt. The
motive behind external debts is due to the fact that countries especially the
developing ones lack sufficient internal financial sources and this calls for
the need for foreign aid, (Sulaiman, and Azeez, 2012). It is also expected that developing
countries, facing a scarcity of capital, will seek external borrowings to
supplement domestic saving, (Pattillo et al, 2002; and Safdari and Mehrizi,
2011).
Since
1986, Nigeria had taken a decision to limit debt service to no more than 30
percent of oil receipts; this has not brought much relief. Between 1985 and
2001, Nigeria spent 'over US$ 32 billion on servicing external debt. This huge
external debt servicing according to Ndikumana (2000)
constitutes a major impediment to the revitalization of its shattered
economy as well as the alleviation of debilitating poverty. He further observed that Nigeria is among many African economies that
have achieved significant lower domestic savings as a result of debt servicing.
The low level savings brought about by high level of debt service payment
prevented the country from embarking on larger volume of domestic investment,
which would have enhanced growth and development. Consequently, poverty and
unemployment rates are high; life
expectancies are lower than the
average.
Soludo, (2003) opined that countries borrow for two
broad categories of reasons; macroeconomic reasons to either finance higher
investment or higher consumption and secondly to circumvent hard budget
constraints. This implies that an economy borrow to boost economic growth and alleviate
poverty. It is the objective of every sovereign nation to improve the standard
of living of its citizenry and promote economic growth and development of the
country. Due to the scarcity of resources and the law of comparative advantage,
countries depend on each other to foster economic growth and achieve
sustainable economic development (Adepoju, Salau and Obayelu, 2007). The necessity for governments to borrow in order to finance
a deficit budget has led to the development of external debt, (Osinubi and
Olaleru, 2006; and Obadan, 2004). External debt is one of methods
through which countries finance their deficits and carry out economic projects
that are capable of increasing peoples’ standard of living and promote
sustainable economic development. It is an important resource needed to support
sustainable economic growth (Audu, 2004). Therefore, this research seeks to
thoroughly and empirically investigate the impact of Nigeria’s foreign
borrowing (debt) on her economic growth.
In a bid to free the nation from
the huge external debt burden, the Nigerian Governments over time embarked on
policies/reforms and the establishment of institutions (Debt Management
Office). As a result, external debt management policies such as the Structural
Adjustment Programme (SAP), debt rescheduling, debt servicing, debt
cancellation, have been pursued vigorously with the sole aim of reducing the
debt burden on the country. This led to
debt relief of US$36 billion in 2005. With the debt forgiveness granted to
Nigeria, one would expect the economic process of the country to be improved.
However, Obademi (2013) observed that Nigeria’s debt profile is still on the
rise, and the country may soon reach a debt threshold that will affect economic
growth rate negatively. Hence push her to debt trap. It is against this
backdrop that this study is designed to investigate the extent external debt
has impacted on economic growth in Nigeria.
CONCEPTUAL FRAMEWORK
Concept of External Debt
Government
borrowing are debt owe by the government within its economy or externally.
According to CBN (2010), foreign debt are debt obligations the government owes
to multilateral bodies, London Club, Paris Club, foreign promissory notes and
other unclassified external borrowings. Oyejide et al (1985), debt is the
resources or money in use in an organization, which is not contributed by its
owner and does not in any other way belong to them. In a wider economic
perspective, external debt is the phenomenon used to describe the financial
obligation that ties on one party (debtor country) to another (lender country)
Adepoju et al, (2007).
Debt
instruments are I owe you (IOU)
certificates, that is, certificates that acknowledge indebtedness. They
are the tools governments often use to borrow money from the public. In
principles, state and local government can also issue debt instrument, but
limited in their ability to issue such. In Nigeria, public debt instruments
consist of Nigerian Treasury certificates, Federal government development
stocks and treasury bonds Adofu and Abula, (2010). Out of these, treasury
bills, treasury certificates and development stocks are marketable and
negotiable while treasury bonds; ways and means advances are not marketable but
held solely by the central Bank of Nigeria. The Central Bank of Nigeria (CBN)
is the banker and financial adviser to the federal government and as such, it
is charged with the responsibility for managing the public debt.
According to United Nation (2010) there are three
possible ways to define external debt. The first focuses on the currency in
which the debt is issued (with external debt defined as foreign currency debt).
The second focuses on the residence of the creditor (external debt is debt owed
to non-residents). The third focuses on the place of issuance and the
legislation that regulates the debt contract (external debt is debt issued in
foreign countries and under the jurisdiction of a foreign court). The first
definition does not seem appropriate because several countries issue foreign
currency denominated debt in the domestic markets and have recently started to
issue domestic currency denominated debt in international markets. Moreover,
this definition is problematic for countries that adopt the currency of another
country.
The second definition is the one which is
officially adopted by the main compilers of statistical information on public
debt. This definition makes sense from a theoretical point of view because it
focuses on the transfer of resources between residents and non-residents; it
allows the measurement of the amount of international risk sharing and the
income effects of variations in the stock of debt and to evaluate the political
cost of a default on public debt. However, this definition is almost impossible
to apply in the current environment where a large share of the external debt
due to private creditors takes the form of bonds.
Concept of Economic Growth
The
concept of economic growth has series of definitions: Eleje and Emerole, (2010)
see economic growth as a rise in the productive capacity of a country on a per
capita basis. It involves the expansion of the economy through a simple
widening process. It is the increase in the national output or GDP of the
nation Hogendorn, (1992). Ajayi (1996) perceived economic growth as the
increase overtime of country’s output of goods and services. Schumpeter (1973),
defines economic growth as gradual and steady change in the long-run which
comes about by gradual increase in the rate of savings and population.
Thus,
economic growth is related to the quantitative and sustained increase in the
countries per capita output or income accompanied by expansion in its labour
force, consumption level, capital and volume of trade. However, for the purpose
of this research, economic growth means an increase in country’s Real Gross
Domestic Product over a period of time usually one fiscal year.
Economic growth is the increase in the
market value
of the goods and services produced by an
economy
over time. It is conventionally measured as the percent rate of increase in
real
gross domestic product, or real GDP. Of
more importance is the growth of the ratio of GDP to population (GDP
per capita),
which is also called
per capita income.
An increase in growth caused by more efficient use of inputs is referred to as
intensive growth. GDP growth caused
only by increases in inputs such as capital,
population
or territory is called
extensive growth (Schema, 2004).
THEORETICAL FRAMEWORK
It is
no doubt a fact that it is rational to import foreign capital to foster
economic growth in the face of insufficient funds domestically and employ
measures to manage it. The following theories are applicable to this study for
proper assessment of the impact of external debt on economic growth in Nigeria.
Debt Overhang Theory:
Debt overhang, first formalized by Myers (1977) cited by (Douglas and
Zhiguo, 2014), captures the insight that investment often leads to external
benefits that accrue to the firm’s debt claims. These external benefits
consequently lead equity holders (or equivalently, man-agers who are paid
inequity) who make investment decisions to internalize only part of investment
benefits, and hence to under invest relative to the level that maximizes the
total value of the firm. A situation in which the external
debt-stock of a country exceeds the country’s capacity to repay such debts in
the immediate future is referred to as a debt overhang. This situation is often
synonymous with a country’s precarious economic imbalance. When the cost of
sustaining her external debt stock impact negatively on her trade balance, and
infrastructural build-up.
Chlenery
(1966) in his two-gap theory approach stipulate that external debt stock on
their own have no bearing with the debtor nation’s development. But what
actually matters is the use to which such loans have been put. Invariably, he
meant how well the borrowed funds (Loans) is managed can translate to national
development. Some individual finance theories such as Krugman (1988), Sachs
(1989), and Ndulu (1991) have ferociously argued that such external borrowings
only amount to a future tax on return to capital, they said except the amount
borrowed have been judiciously managed can actually inspire and instigate
developmental purposes for the debtor nation. Some financial expert in (Seriaux
and Krugman, 2001) subscribe that a good number of Sub-Saharan African
Countries have attempted to counter the effects of debt overhang, pointing out
that some of the mechanisms used in this respect include debt equity swap or
scrap, reduced debt servicing, debt restructuring, debt rescheduling and
organized pleas For corporate debt relief. The theory then concludes that, if
and when debtor nations adopt and implement appropriate domestic macroeconomic
policies even with or without a debt relief package, economic growth could
still be stimulated to reposition such debtor nations along the path of
economic recovery.
The Dependency Theory of Underdevelopment:
Dependency
theory developed in the late 1950s under the guidance of the Director of the
United Nations Economic Commission for Latin America, Raul Prebisch. Prebisch
and his colleagues were troubled by the fact that economic growth in the
advanced industrialized countries did not necessarily lead to growth in the
poorer countries. Indeed, their studies suggested that economic activity in the
richer countries often led to serious economic problems in the poorer
countries. Such a possibility was not predicted by neoclassical theory, which
had assumed that economic growth was beneficial to all (Pareto optimal) even if
the benefits were not always equally shared, Momoh (1988).The dependency theory
states that, the dependence of less developed countries (LDCs) on developed
countries (DCs) is the main cause for the underdevelopment of the former.
Though the theory has so many aspects, focus in on the foreign capital
dependence which has a bearing in the topic under study.
The
dependency theory divides partners into two categories. The less developed
countries it termed the “peripheries”. According to the theory, the peripheral
LDCs are heavily dependent on the “centre” (DCs) for foreign capital. As it,
the less developed countries exports primary products while importing
manufactures and making them dependent for industrialization of their
economics. Progressively, this leads to stagnation of agriculture, high
concentration on primary products for exports, high foreign exchange content of
industrialization and growing fiscal deficit in the peripheral countries which
necessitate foreign financing for them.
According to Momoh (1988) these
conditionalities were to the advantage of the International Monetary Fund (IMF)
against Nigeria since they did not conform to the development pattern of the
country. The theory has a relationship with this study from the perspective of
external borrowing. Since the focus of the theory is on the dependence of less
developed countries (LDCs) on developed countries (DCs) as the main cause of
underdevelopment of less developed countries (LDCs). An external borrowing is
also an aspect of poor countries depending on developed countries for financial
aid to fill the investment gap. Therefore the resultant effect of these debts
on borrowers is the underdeveloped nature of borrowers and the overhang
implication.
Harrod-Domar Growth Model:
The
Harrod-Domar model was developed independently by Sir Roy Harrod in 1939 and
EvseyDomar in 1946Tejvan, (2012). It is a growth model which states that the
rate of
economic growth in an
economy is dependent on the level of saving and the capital output ratio.
If there is a high level of saving in a country, it provides funds for firms to
borrow and invest. Investment can increase the capital stock of an economy and
generate economic growth through the increase in production of goods and
services.
The capital
output ratio measures the productivity of the investment that takes place. If
capital output ratio decreases the economy will be more productive, so higher
amounts of output is generated from fewer inputs. This again, leads to higher
economic growth (Tejvan, 2012).
Rate of growth
(Y) = Savings (s)/ capital output ratio (k)
It
suggests that if developing countries want to achieve economic growth,
governments need to encourage saving, and support technological advancements to
decrease the economy’s capital output ratio. It is argued that in developing
countries saving rates are often low, if left to the free market. Therefore,
there is a need for governments to increase the savings rate in an economy.
Alternatively, developed countries could step in and transfer capital stock to
the developing countries, which would increase the productive capacity (Tejvan,
2012).
The main
contention the model is stated in three (3) ways:
(1) Every economy
must generate its savings by setting aside a certain proportion of its national
income for investment.
(2) Investment
must be productive if more capital is to be generated.
(3) In the event
of a gap between domestic savings and investment for development, the model
favours foreign investment in the form of loan or aids and direct investment.
Theoretical Link with the Research
Problem:
This
research adopted the dependency theory and the Harrod—Domar Growth theory The
Harrod-Domar Growth theory specifies basically that savings accumulation is
required to increase the capital stock of an economy to achieve growth. This
implies that savings capital output ratio is highly required for real GDP to
grow. The resultant effect of large accumulation of debt
exposes the nation to high debt burden. Nigeria is about the richest on the
continent of Africa, yet due to the numerous macroeconomic problems, such as
inflation, unemployment, sole dependency on crude oil as a major source of
revenue, corruption and mounting external debt and debt service payment,
majority of her citizen fall below the poverty line. It is therefore
as result of the savings and investment gap that Nigeria has involved seriously
in external borrowings. This is because of the high deficiency in this process
of capital formation through organized savings. Nigeria operates as periphery
in world economic management determined by the centre’ developed economies. In
this vain, less developed countries require foreign assistance or debt for
acquiring capital to achieve economic growth. This is the thrust of the
dependency theory of development. To make up for the capital savings deficiency
to achieve capital formation which would lead to growth of GDP, these LDCs
require borrowing from DCs as linked by the Harrod-Domar and dependency
theories of growth.
EMPIRICAL LITERATURE
There have been several attempts to
empirically assess the external debt-economic growth link. Most of the
empirical studies include a fairly standard set of domestic debt policy and
other exogenous explanatory variables. The majority find one or more debt
variables to be significantly and negatively correlated with investment or
growth (depending on the focus of the study).
James
(2014) examines the interaction between external debt and
economic growth, and analyses the sustainability of Nigeria’s foreign debt.
Given the several rescheduling and persistent accumulation of the debt arrears,
and consistently high debt burden ratios. This study employed analytical method
and the findings from the analysis show that the effect of external debt on
growth is negative. The role of debt overhang in precipating debt crisis is
crucial. Moreover, to a greater extent the Nigerian debt situation is highly
unsustainable. This unsustainability of Nigeria’s external debt could be
associated with high initial debt stock, high interest rate, lower real GDP
growth, and large trade deficits. It is difficult to stabilize the debt ratio
when interest rate is rising, growth rate is falling and the initial levels of
the debt ratios are high. The findings showed that debt relief would have
positive impact on investment and growth. Furthermore, government needs to
step-up its growth performance and use concessional debt with lower interest
rate in order to keep the debt at sustainable level. Furthermore, as long as
revenue (export income) continue falling, the external debt strategy becomes
highly unsustainable because it constraints import capacity and hence lower
growth.
Hameed et al, (2008) conducted a
research on the impact of external debt on Investment and economic growth, the
objectives was to determine the effect6s of external debt on economic growth,
the research adopted OLS and found out positive relationship between external
debt and economic growth. The study recommends that external debt should be
utilized economically to achieve desired growth. Therefore too much of external debt could dampen growth
by hampering investment and productivity growth because of the fact that when greater
percentages of reserves (foreign currency) are consumed in meeting debt
service, exchange rates fall and creditworthiness erodes; causing reduction in
access to external financial resources.
Iyoha (1999)
examined the impact of external debt on growth in African countries south of
the Sahara from 1970 to 1994 using an econometric simulation model. He noted
that the variables related to the external debt have a negative effect on
investment, showing that an accumulation of outstanding debt discourages
investment through two effects: the discouragement and eviction. From a
simulation of relief debt policies in order to highlight the impact of this
reduction on investment, he reached the following results:
- If the debt is reduced by 20%, the
investment will grow by 18% over the study period.
- If
the same reduction is applied, the GDP will grow by 1%.
He concluded that
the results of his research have proved that the debt relief would stimulate
investment and encourage the resumption of economic growth in South Sahara
Africa. In search of the link between debt and growth.
Boyce and Ndikumana (2002)
conducted cross sectional survey on sub-saharan African countries, the
objectives was to determine whether or not these countries have the ability to
meet their social needs and escape from debt is, to a large extent, a result of
the fact that the borrowed funds have not been used productively. The study
adopted OLS and found out that instead of financing domestic investment or
consumption, a substantial fraction of the borrowed funds was captured by
African political elites and channelled abroad in the form of capital flight,
they revealed which indicated negative relationship between external debt and
economic growth. The research recommends that t in order to prevent diversion
of borrowed fund through capital flight, there is need for greater
accountability on the creditor side as well as the establishment of mechanisms
of transparency and accountability in the debtor countries’ own decision-making
processes with regard to foreign borrowing and the management of borrowed
funds.
Were (2001) objectives was to
discover the impact of external debt on economic growth sustainability, the
study adopted econometrics method of analysis and found out that Sub Sahara Africa
countries were plagued by their heavy external debt burden. He argued that the
debt crisis, compounded by massive poverty and structural weaknesses of most of
the economies of these countries made the attainment of rapid and sustainable
growth and development difficult. It then became widely accepted that the
heavily-indebted countries require debt relief initiatives beyond mere
rescheduling to have a turn-around in their economic performance and fight
against poverty.
Ajayi (2012) investigated the impact of external
debt on economic growth in Nigeria for the period 1980-2012. Time series data
on external debt stock and external debt service was used to capture external
debt burden. The study set out to test for both a long run and causal
relationship between external debt and economic growth in Nigeria. An empirical
investigation was conducted using time series data on Real Gross Domestic
Product, External Debt Stock, External Debt Payments and Exchange Rate from
1980-2012. The techniques of Estimation employed in the study include Augmented
Dickey Fuller (ADF) test, Johansen Co-integration, Vector Error Correction
Mechanism and Granger Causality Test. The results show an insignificant long
run relationship and a bi-directional relationship between external debt and
economic growth in Nigeria, the study recommended that external debt be managed
properly to achieve desired growth.
Ngassam (2000) conducted a study on
cross section data among countries in Africa. The objective was to investigate
the impact of external borrowing on the competitive nature of their economies.
He adopted an analytical method of analyses. He however, noted that African
countries that are undergoing external debt crisis may improve their situation
by liberalizing their economies in order to bring competitive pressures on
domestic private business activities, adjusting the exchange rate so that
exports are encouraged and imports are restrained, and reducing inflation
through strong policies of fiscal and monetary adjustment. He concluded that
because of the structural difficulties facing most African countries, a
comprehensive policy package for managing external debt has to aim at
addressing not only demand management issues, but also the structural problems.
Amaeteng
and Amoako-Adu (2002) conducted a research on foreign debt service and GDP. The
major objective was to determine the relationship between foreign debt service
and GDP. The study adopted linear regression as methodology. The empirical
study declared that there is a unidirectional and positive causal relationship
between foreign debt service and GDP growth after excluding exports revenue
growth for Africa and South of Saharan countries during 1983-1990. {Afxention
and Serletis, 2004(a)}. These people argued that whether indebtedness impacts
on the economic activity of developing countries. It is also argued that if
foreign loan are converted into capital and other necessary inputs, development
will occur. On the other hand, if borrowing countries misallocate resources or
divert them to consumption, the economic development is negatively affected.
This study employs the frame work of granger. In doing so, six measure of
indebtedness were used as proxies for the multiple mechanisms.
Ocampo
(2004) proclaimed that the external debt situation for number of low income
countries, mostly in Africa has become extremely different. For these
countries, even fill use of traditional mechanism of rescheduling and debt
resection together with continued provision of confessional financing and
purist of sound economic policies may not be sufficient to attain sustainable
external debt levels within a reasonable period of time and without additional
external support. Despite the efforts made by countries themselves and the
commitment made by the international communities; they are failing behind in
their endeavour to achieve the “Millennium Development Goals”.
Asley
(2002) opined that high level of external debt in developing country negatively
impact their trade capacities and performance. Debt overhang affects economic
reforms and stable monetary policies, export promotion and a reduction in
certain trade barrier that will make the economy more market friendly and this
enhances trade performance. Furthermore, debt decreases a government ability to
invest in producing and marketing exports, building infrastructure, and
establishing a skilled labour force.
According
to Nweke (1990) a correct analysis of external debt in a third world countries
such as Nigeria must be replace in the content of the country’s forceful
integration into the western structural and dominated world capitalist economy
as a peripheral appendage that provide natural resources and cheap lab our for
the industrialization process in the west include lucrative markets for surplus
of the advanced country’s manufacturers and the advance countries get a very
high cost of the manufactured product of the west.
METHODOLOGY
Data
were analyzed using descriptive statistics and econometrics analytical tool.
The descriptive statistics consisted of tables, charts, graphs, percentages and
averages (means). The econometrics tool on the other hand includes Augmented
Dickey-Fuller (ADF) test, Co-integration Vector Error Correction Method (VECM).
The research also employed Threshold Autoregressive Model (TAR) to ascertain
the sustainability of debt in Nigeria within the period under review.
Model Specification
Model One
The
dependency theory and the Harrod-Domar Growth theory were adopted in this
research work as they emphasize the role savings accumulation play in economic
growth. Thus using the theoretical underpinning of the theories as expatiated
in the work of Ayadi and Ayadi, (2008).
FOREIGN ECON
& SYSTEM
|
|
Fig 1: The Schema (Visual Depiction of the Relationships)
(+,
-)?
The
basic model proxied Real Gross Domestic Product (RGDP) as the endogenous
variable to measure economic growth while External Debt (EXD), External Debt Servicing (EDS), and Exchange Rate (EXR)
represent independent variables.
The
implicit form of the model is specified as follows:
RGDP = f (EXD,EDS
, EXR) …………………….. ………… (1)
The model in its
explicit form is as stated below:
RGDP = βo
+ β1EXD+ β2EDS + β3EXR + U …………..….… (2)
Where
RGDP = Real Gross
Domestic Product
EXD = External
Debt
EDS = External
Debt Servicing
EXR = Exchange
Rate.
Model Two (Threshold Autoregressive (TAR)
Model)
The
Threshold Autoregressive (TAR) model developed by Howell Tong has been
enormously influential in economics. One statistical issue of primary importance
is testing for linearity against the TAR alternative. Such tests are of
particular importance in economics as there is a presumption among most economists
that applications should use linear models unless there is convincing evidence
to support a specific nonlinear specification. Test for threshold effects
provides such evidence.
TAR
models have been used to model aggregate output as measured by GNP growth
rates. The model makes use of Multivariate models, in particular the threshold
Vector Correction Model (VECM) and Vector Threshold Autoregressive (VTAR)
models, to jointly model aggregate output and other variables. According to
Bruce, (2011) TAR model in econometrics theory analyses output growth,
forecasting, interest rate, prices, stock returns, exchange rate and other time
series data measurable.
Following
the Framework of Li (2005), we specify the TAR for external debt sustainability
for Nigeria as follow
RGDP = βo
+ β1 RGDPt-1 + β2 EXD + β3EDS + β4
EXD [DM (EXD <K*)] + β5EXD [DM (EXD >K*)] + β6EXR
U …… (2)
Where
DM =
sustainability measure (dummy variable with values 1 if EXD < K* or 0 if
otherwise
K* = the threshold
level of external debt which is to be calculated
RGDP = Real
Gross Domestic Product
EXD = External
Debt
EDS = External
Debt Servicing
EXR = Exchange
Rate.
Apriori Expectation
This refers to the
expected behaviour of the independent variables on the dependent variable.
Thus, we have: β1>0; β2 <0; β3
<0;
ANALYSIS OF RESULT
Unit Root Test
The result of the Augmented Dickey-Fuller (ADF) unit root test is presented in Table 1
Table
1: Unit Root Test Result
|
Variable
|
ADF
Statistics (1st Difference
|
1%
Critical Value
|
5%
Critical Value
|
10%
Critical Value
|
P-value
|
Order
of Integration
|
|
EDS
|
-6.746192
|
-3.699871
|
-2.976263
|
-2.627420
|
0.0000
|
I(1)
|
|
EXD
|
-3.672627
|
-3.699871
|
-2.976263
|
-2.627420
|
0.0107
|
I(1)
|
|
EXR
|
-4.563161
|
-3.699871
|
-2.976263
|
-2.627420
|
0.0012
|
I(1)
|
|
RGDP
|
-34.99682
|
-3.699871
|
-2.976263
|
-2.627420
|
0.0001
|
I(1)
|
Source:
Extract from E-views 9.5 output
From Table 1, the test result shows that, after all
the variables were transformed to their first difference, they became
stationary. Therefore, they are said to be maintain stationarity at order one
[that is, I(1)].
Johansen
Co-Integration Test
Having
established that the variables are integrated of the same order, the study
proceeded to establish whether
or not there is a long-run
cointegrating relationship among
the variables by using
the Johansen cointegration.
In testing for the long run relationship, the trace statistic and the maximum
Eigen statistics are used. The results are show in Table 2
Table
4.2 Johansen Cointegration Test
|
Unrestricted Cointegration Rank Test (Trace)
|
|
|
Hypothesized
|
|
Trace
|
0.05
|
|
|
No. of
CE(s)
|
Eigenvalue
|
Statistic
|
Critical
Value
|
Prob.**
|
|
None*
|
0.702266
|
78.84686
|
73.34145
|
0.0344
|
|
At most 1*
|
0.545402
|
46.13488
|
35.24578
|
0.0425
|
|
At most 2
|
0.413262
|
24.84966
|
35.01090
|
0.3926
|
|
At most 3
|
0.258150
|
10.45388
|
18.39771
|
0.4377
|
|
Trace test indicates 2 cointegration at
the 0.05 level
|
|
* denotes rejection of the hypothesis
at the 0.05 level
|
|
**MacKinnon-Haug-Michelis (1999)
p-values
|
|
|
Unrestricted Cointegration Rank Test (Maximum
Eigenvalue)
|
|
Hypothesized
|
|
Max-Eigen
|
0.05
|
|
|
No. of
CE(s)
|
Eigenvalue
|
Statistic
|
Critical
Value
|
Prob.**
|
|
None*
|
0.702266
|
32.71198
|
27.16359
|
0.0410
|
|
At most 1*
|
0.545402
|
31.28521
|
30.81507
|
0.0443
|
|
At most 2
|
0.413262
|
14.39578
|
24.25202
|
0.5516
|
|
At most 3
|
0.258150
|
8.062420
|
17.14769
|
0.5960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Max-eigenvalue test indicates 2
cointegration at the 0.05 level
|
|
* denotes rejection of the hypothesis
at the 0.05 level
|
|
**MacKinnon-Haug-Michelis (1999)
p-values
|
|
|
|
|
|
|
|
|
|
|
Source: Extract
from E-views 9.5 output
The
result from both trace and the maximum Eigenvalue tests show that there were 2 cointegrating
equations in the system. This means that the null hypothesis that there is none
(r=o) cointegrating equation was rejected. This implied the existence of a long
run equilibrium relationship between real output measured by real GDP and the
fundamentals used in the model.
The
parameters of the cointegrating vector for the long-run RGDP are presented in
the equation below.
Table
4.3 Long-run Results
Dependent
Variable: RGDP
|
Variable
|
EXR
|
EXD
|
EDS
|
|
Coefficient
|
-0.336141
|
0.048613
|
-0.294745
|
|
Standard
Error
|
(0.06589)
|
(0.013078)
|
(0.06321)
|
The
above normalized cointegrating equation shows that there is a long-run negative
and significant relationship between the exchange rate and economic growth
proxied with RGDP in the long run. However, there is a positive but
insignificant relationship between external debt (EXD) and economic growth in
the long run. Furthermore, the results in the table show that while external
debt service (EDS) has negative and significant relationship with economic
growth in the long run.
Error
Correction Model
When
co-integration has been employed it is also expected to complete the estimation
process with the short run equation models. The short run model in this study
assumed a one-year lag in the variables. The short run model process helps to
observe the convergence in the long –run as earlier revealed by the
co-integration test. The result of the short-run dynamics is presented in Table
4
Table
4: ECM Results
Dependent Variable: RGDP
|
Variable
|
Coefficient
|
Std. Error
|
t-Statistic
|
|
EXR(-1)
|
- 0.862518
|
0.08258
|
-10.4445
|
|
EXD(-1)
|
-0.498302
|
0.06051
|
-8.23564
|
|
EDS(-1)
|
-0.873171
|
0.08488
|
-10.2868
|
|
C
|
-2.572438
|
|
|
R-Square= 0.589295, CoinEqi = -0.072406
The result of ECM regression is
presented in Table 4. From the
table, it can be observed that the lag of exchange rate has a negative and significant
effect on RGDP at 5% level of Significance. The positive sign is in line with
the theoretical expectation. It implies that a unit increase in exchange rate
will reduce economic growth by 86%. Similarly, the coefficient of external debt
is
negative. This is correctly signed and statistically significant at 5% level of
significance. On the average, it means that an increase external debt to the
turn of 100% will reduce economic growth by 49.8%. Finally, external debt
service has negative
and statistically significant relationship with economic growth in the short.
The negative sign is in line with the a priori expectation. On the average, it
means increase in external debt services to the turn of 100% is accompanied by 87.3% decrease in GDP in
the short run.
The
coefficient of determination (R2) which tests the total variation in
the dependent variable explained by the independent variables is 0.589. This
indicates that the model’s predictive power is moderately high. It implies that about 58.9% of the
total variation in the output in Nigeria is collectively explained by the
explanatory variables. The one-period lagged
value of
the
error
from
the cointegrating regression has the negative expected
sign (-0.072406). This shows that when economic growth is above
its equilibrium value, it will
start falling in the next period to correct the equilibrium
error and vice versa with the
speed of adjustment of 7.24%.
Table
5 Threshold Regression Results
|
Variables
|
Coefficient
|
Standard
Error
|
t-statistics
|
Probability
|
|
EXD
EDS
EXD
EDS
EXD
EDS
|
RGDP<433203.5…..13
obs
-0.0000268
-22.24421
433203.5<RGDP527576.039…6obs
-0.000384
-0.844055
527576.039<RGDP…10obs
-0.000451
-21.15782
|
0.00000892
2.828118
0.000121
29.29422
0.0000123
7.282252
|
-3.003989
-7.865375
-0.318144
-0.028813
-3.667474
-2.905395
|
0.0070
0.0000
0.7537
0.9773
0.0015
0.0087
|
R-squared 0.970695 Mean Deviation 409671.4
Adjusted R-Squared
0.958974 S.D
Dependent Var 200946.9
S.E of Regression 40701.76 Akaike
criterion 24.31506
Sum of Square
Resi. 3.31E+10 Schwarz Criterion 24.73039
Log likelihood -343.5683 Hannan-Quinn
Criter 24.44795
F-statistic 82.81086 Durbin-Watson
Stat 1.951000
Prob(F-statistic) 0.000000
|
Source: Extracted from E-views 9.5
output.
|
The result in
table 5 revealed two threshold values of N433, 203.50 million and optimal value
of N527, 576.039 million for RGDP in Nigeria. The optimal RGDP is put at a
threshold value of N527, 576.039 million given that the country borrows
externally to finance the economy. The result indicates that in the low RGDP
regime (that is RGDP <N433, 203.5 million) one unit increase in external
debt significantly leads to a decrease in RGDP by 0.0000268 while increase in
external debt servicing significantly leads to a decrease in RGDP by 22.24421.
In the second regime (N433, 203.5 million<
RGDP <N527,576.039 million), the results show that one unit increase
in external debt leads to 0.0000384 decrease in RGDP while one unit change in
external debt service leads to 0.844055 decrease in RGDP in Nigeria. However, the negative influence
at this level is not significant at 5% critical level. In the third regime
which is also the optimal RGDP (<N527, 576.039 million), one unit increase
in the amount of external debt is associated significantly with 0.000451
decrease in RGDP while the amount of external debt service is associated
significantly with 21.15782 decrease in RGDP in Nigeria. This means that the
RGDP along the optimal path in the long run is affected negatively and
significantly by increase in both external debt and external debt service at 5%
level of significance. This result is likely to be associated to the misuse of
the external debt, the failure of investing the external debt fund in
productive sectors that would yield returns, weak institutional framework, and
non-adherence to borrowing guidelines. This explains that Nigeria has exceeded
a healthy threshold as revealed in all the regimes of RGDP, the study therefore
concludes that the debt holding of Nigeria have led to increased debt servicing
hence, a negative impact on economic growth. This is because it has exceeded
the healthy threshold of significant positive impact.
External
Debt Sustainability: The Threshold.
The results in table 3 above shows that the optimal growth rate of RGDP
in Nigeria is put at a threshold value of N433, 203.5 million given the nature
of the countries external borrowing. The results show that in a low growth
regime (i.e RGDP< N433203.5 million) a hundred percent increase in external
debt will significantly lead to a decrease in the growth of RGDP by 26.8%. This
means the growth of RGDP along the optimal path in the long-run is affected
negatively and significantly by increase in external debt. Again, the result is
likely to be associated with low productivity, and corruption in Nigeria.
On the other hand, the second regime, the optimal rate of RGDP in
Nigeria is put at a threshold value of N527, 576.039 million given the nature
of the countries external borrowing. The results shows that at RGDP <N527,
576.039 a hundred percent increase in external debt will significantly lead to
a decrease in the growth of RGDP by 45.1%. This means the growth of RGDP along
the optimal path in the long-run is affected negatively and significantly by
increase in external debt. These results
show that economic growth path in Nigeria is highly significantly and
influenced by external debt.
Again from the results in table 4.5 above, the coefficients of external
debt service indicates that external debt is sustainable in Nigeria in the
long-run. This evidenced from the estimates of TAR. The second regime bench
mark of N527,576.039 < RGDP shows that with external debt RGDP will
increase but it external debt service will pull down RGDP growth by 45.1% as
compared to the First regime of 26.8%. The first regime is a healthier one as
compared to the second. This is because, at RGDP <N433, 203.50 resources
channeled for servicing external debt are minimal as compared to the second
regime. Hence, a productive economy that will stimulate economic growth.
CONCLUSION AND
RECOMMENDATIONS
The study clearly showed that,
external debts and economic growth are positively related in the long run. This
is an indication that external debts has the potential of accelerating economic
growth of the country in the long run. The study shows clearly that Nigeria is
not in a debt trap. The country can still borrow for growth purposes. Nigeria
is not yet at the level of reaping gains of external debt because of various
constraints. Some of these constraints include; the size of the debt relative
to the size of the economy is enormous and can lead to not only the capital
flight but also discourages private investment. Debt servicing payment forms a
significant proportion of the annual export earnings. Meeting debt servicing
obligations eats significantly into whatever facility can be provided to
improve the welfare of the citizens and therefore has macroeconomic
implication. Nigeria will benefit from external debt only if it maintains a
strong and stable macroeconomic framework as well as adhere to DMO guidelines,
eliminate corruption, utilize debt in productive sectors of the economy etc.
Based on the
findings and conclusion drawn from the study, the following recommendations are
made.
i.
Utilization of external debt in to
productive sectors of the economy rather than recurrent expenditure.
ii.
Currently Nigeria is not in a debt trap,
therefore can still borrow for growth purposes.
iii.
The current trend in external debt is
still viable. The country can borrow within the stipulated threshold. This will
affect economic growth positively.
iv.
Efforts should be made to enhance and
strengthen existing guidelines on public borrowing in line with relevant
provisions of the DMO Act.
v.
Debt Management Office (DMO) in
collaboration with monetary authorities should borrow within the sustainability
benchmark.
vi.
Execution of borrowed funds should provide for
debt servicing and sustenance on debt.
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