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APPRAISAL OF NIGERIA’S EXTERNAL DEBT MANAGEMENT

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ABSTRACT

This study  reflects  an appraisal of Nigeria’s  External  Debt Management  necessitated  by inadequate  internal capital formation  arising  from vicious cycle of low  productivity,  low income and savings in the Nigerian  economy.  Considerable  linkage  has been established between  external  debt  and  economic  performance.  The  study  determined  the  impact  of Nigeria’s external debt stock on gross domestic product and  also examined the impact of external debt penalties on arrears for default of external debt stock covering a period of 25 years,  1989-2014,  using  secondary  data.  The  study  used  ordinary  least  square  (OLS) estimation technique for analysis. Findings showed that external debt stock had a negative significant impact on gross domestic product. Threats associated with borrowing externally for  capital  formation  in  Nigeria  outweigh  the  benefits  therein.  There  was  a  positive significant  impact of  penalties  arrears for default on external debt stock. An increase  of external debt stock as a result of rising penalties on arrears has deepened the burden of debt and its sustainability in Nigeria. External debt by economic sector to support infrastructure should be taken into consideration, which is in accordance with the provisions of the Fiscal Responsibility Act and the National Debt Management Objectives & Strategy. Also external debt service payment should be paid as at when due to avoid accumulation of compounding late  interest  on  penalty  payment  which  in  the  past  had  contributed  immensely  to  the deteriorated debt situation in Nigeria within the period under study.

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

Debt is created by the act of borrowing. It is defined according to Oyejide, Soyede, and  Kayode  (1985),  as “the  resource  or  money  in  use  in an organization  which  is  not contributed by its owners and does not in any other way belongs to them”. “It is a liability represented by a financial instrument or other formal equivalent. Legally debt is a chose in action transferable by the creditor to some other person debtor provided that the transfer is in writing and confirmed seal” (Anyafo 1996). When a government borrows, the debt is a public debt. Public  debt either,  internal  or external  is  debt incurred  by the government  through borrowing in the domestic and international market respectively, so as to finance domestic investment. “Public debts are outstanding payment or contractual obligations of all tiers of government (Federal, State and Local) public corporations and parastatals”(Anyafo 1996).

After an attempt definition of public debt and debt, Uche (2005:127) “defines external debt of a country as the summation of indebtedness of a country to other countries,  institutions and non-residents  of that country”. The contractual liabilities are  denominated  in foreign currencies.  In  essence  external  debt  can  therefore  be  seen  as  the  foreign  exchange component   of  public  debt.  For  the  context  of  this   research,  Nigeria  external  debt management will be analyzed in terms of structure,  genesis, challenges and contemporary issues. External debt in real sense is not bad, it depends on how the funds were applied, if it is prudently applied it facilities  international  trade, improves the International image of a country, buoys the economy of a country and improve infrastructure and general standard of living of a country. However where undue pressures exerted on the external debt to the point where  available  reserves  are unable  to support debt repayment  such debt now becomes burden to the debtor.

The origin of Nigeria debt problems are related to both the nature of the economy, economic policies put in place by the successive government as well as exogenous factors beyond the control of government.  The country is a mono-product economy; depending largely on oil revenue which accounts about 80% of foreign exchange receipts. It is therefore not a surprise that whenever the international oil market fluctuates, Nigeria react more rapidly.

Government’s  debt portfolio  is usually the largest financial portfolio  in  a country.  It  often  contains  complex  financial  structures  and  can  create substantial   balance   sheet  risk  for  the  government.   Large   and  poorly structured   debt  portfolio   also   make   governments   more   vulnerable   to economic  and  financial  shocks  and  have  often  been  a  major  factors  in economic crisis (IMF, 2003:10).

Considering overall macroeconomic policy, debt management policy plays an important role in ensuring and maintaining long-term debt sustainability. Jill and Caroline (2004:6) stress “that following world war I , foreign governments began to issue large amounts of bonds in New York city”. “In the early 1920, the principal issues of sovereign bond were Argentina, Chile, Brazil and Cuba” (Erika and Jeffrey 1989:53). Over the course of the decade as the bond  market  grew  banks  established  extensive  network  of  branches  that  “successfully marketed the bonds to individual sovereign debtors, eager for the large premia they offered over domestic returns (Albert,  1983:419-20).  “With the beginning of the great depression, these sovereign debtors  experienced  difficulty servicing their debts” (Vinod 2003:13). “In December 1930, Bolivia failed to meet sinking fund requirement on its bonds, and in January

1931  the fiscal agent for the bonds declared  Bolivia to be in default  making  it the  first country in history to default on its bonds” (Eichegren and Portes 1993:21). This was followed by default on bonds issued by Peru, and soon Chile followed this suit. “By 1933 twelve Latin America sovereign debtors suspended at least part of their debt servicing and by 1934, only Argentina,  Haiti and the Dominican  republic  had not suspended  normal debts servicing” (Wallich 1943:321). “International debt crisis has a history nearly as long as international debt flow” (Gray 2002:1). Bordo (1998:3) argues “that financial integration has followed a U. shaped pattern: it was at very high levels until the early twentieth century, collapsed between the wars, and then has gradually returned to pre-1914 levels”.

Williamson  (1999:11)  argues  that  “when  debt  servicing  capacity  was  undermined  by decreased oil prices and the world recession of the early 1980s at the same time that global interest rates soared because the West Europe decided  to bring inflation down  and crisis ensued”. The debt managers primary objectives of securing funds to finance the government deficit is complemented by objectives of minimizing the cost and risks of the debt portfolio and promoting financial development and  efficient market.

There has been an inspiring development around Nigeria’s public debt management issues, in terms of growing interest and participation  by stakeholders.  This  development which has

manifested in various forms including comments, enquires, concerns, critics and suggestions demonstrates that the efforts of the Debt Management Office (DMO) to democratize public debt management  knowledge  and practice is producing the desired  results. It represents a growing effective demand for public debt management services, which is very essential for guaranteeing and sustaining quality supply of the services. In this context, it would be useful to present to stakeholders and the general public the true position of the country external debt, even after the paying off of the Paris club and London club debts. Indeed, some of the loans were  contracted  in  the  1960s,  1970s  and  1980s  for  various  infrastructure  and  social development  projects.  There is no  doubt that some of the infrastructures  funded  in those periods are still useful assets to the people. The repayment were scheduled to be gradual so as not to put serous burden on fiscal resources that part of them are still outstanding. That the loans have a long repayment period is beneficial, given the nature of the projects and services they financed  i.e. basic education,  health and rural water supply as well has roads whose revenue generating impact is at the best slow, small and indirect.

1.2      STATEMENT OF THE PROBLEM

In this research effort, there is a problem  (fundamental  questions)  necessitating  the investigation and study, reflecting the obvious fact that Nigeria is in debt.

Nigeria’s External Debt Stock “was characterized by excessive and poorly controlled borrowing,  a situation in which poor debt management  practices  has  become a recurring event in the country” (DMO 2009:44). Nigeria began to experience external debt problems from the early 1980s when foreign exchange earnings plummeted as a result of the collapse of  prices  in  the  international  oil  market,   and   external   loans  began  to  be  acquired indiscriminately. Most of the borrowing was not linked to future growth, export or targeted at impacting positively on the GDP. Some financial creditors before the fall in world oil prices classified Nigeria to be under borrowed. The applause given to Nigeria, make the rule of law on external borrowing to be upheld up to 1979. However during the period 1980-1983, there was an unfortunate  departure from the guidelines, thus the federal government and the 19 state governments, each on its own account, borrowed from foreign sources.

State Governments were able to negotiate huge external project finance with a  retroactive federal Government approval and guarantee. Due to poor control by the Shagari – led federal Government, there was difficulty to exactly determine the volume of Nigeria’s external debt.

At this period, the government relied heavily on foreign resources, a situation where shortage of foreign exchange become one of the bottlenecks to national economic development.

Accumulation  of  Penalties  for  default  on  Nigeria’s  External  Debt  Stock  is  another salient factor that causes Nigeria’s external debt burden. The international creditors through a compounding method sanctioned heavily on default of principal repayment, interest charges and other surcharges  which penalty charges  has a great  significance,  because it threatens economic growth. This situation makes the international inflows of financial resources not to accommodate production capacity vis- a –vis total export of goods and services.

High cost of borrowing and debt refinancing is a major factor of Nigeria’s debt stock. The over dependence on crude oil as a major revenue is a contributory factor to external burden of debt, because when the oil prices fell, the interest rate went up which did not result to reduced borrowing and spending of the Nigerian government, thus it level of debt started to increase.

The terms on which the country’s loan from the international capital markets was contracted were unfavourable primarily because the loans not only carried variable interest rates which increased the vulnerability of the economy but also had shorter maturity. Also, the repayment schedules  were  bunched  too  close  together  and  involve  several  other  indirect  costs,  yet rescheduling does not eliminate the debt but merely pushes the payment to a latter date

Poor  debt  utilization  has  become  significant  as  debt  management  is  of  great significance because loan will turn out to be good or bad depending on its negotiation and utilization.  The  negotiation  of external  debt/ loan by public and  private  bodies has been indiscriminately  contracted  not minding the terms associated  to it, such as (interest  rate, maturity,  penalty  of defaulters  i.e.  compounding).  Utilization  of  external  debt/borrowing should be prudently based. A short term borrowing to finance a long term project is definitely a  mismatch  while  a  loan  utilize   to  finance  unviable  project  will  eventually  become problematic  as  the  loan  will  have  no  chance  to  liquidate  itself.  Therefore  debt  serving problems  set in through  compounding  interest  leading to debt overhang  in the economy. Nigerian government over the years has finance various white elephant project using fund contracted externally mostly on stringent condition.

Ihimodu (1985;108) observed that “Kwara state contracted from a foreign private company loans worth N200 million specifically to transform its existing college of technology into a university yet it was obvious that such a project was incapable of generating funds at least immediately to service the debt”.

In other words, Mismatch of debt maturities against project yields is a great impediment to external financing of development in a country.

The  country  in  the  21st    century  still  struggle   with  financial   distress.   Rapid accumulation of external debt and payment arrears have constrained the scope of economic management and led to a consequent constraint on economic growth. A  mismatch of debt maturity against project yield posses a threat.

A borrower  must ensure that the maturity structure of any debt favours the project  yield otherwise,  cash flow problem  would  arise as the borrower  finds that the project  income distribution is sufficient to offset the debt obligations  as and when due. In  Nigeria’s case certain worthwhile industrial project such as steel and paper mills were financed with short and  medium  term  loans  with  amortization  falling  due  to  before  project  completion  and current account deficits were financed with short term credits.

It is quite evident that Nigeria’s external debt burden rest upon present and  future generation.  Recommendation  and result oriented  strategies  for mitigating  against possible external debt management problems in Nigeria in the future will be proffered.

1.3      OBJECTIVES OF THE STUDY

This research work has a primary objective which is an appraisal of Nigeria’s external debt management, with special focus on structure, source, control and utilization of  external debt of the government of Federal Republic of Nigeria. The secondary objectives of this research include:

i.   To determine whether there is a significant impact of Nigeria’s External Debt stock on Gross Domestic Product.

ii.  To examine whether the external debt penalties on arrears for default have impact on

Nigeria’s external debt stock.

1.4      RESEARCH QUESTIONS

These are very fundamental to this study and the researcher.

i. Does Nigeria’s  external  debt stock have significant  impact  on the Gross  Domestic

Product ?

ii. Does external debt penalties on arrears for default have positive impact on Nigeria’s external debt stock ?

1.5      RESEARCH HYPOTHESES

“This  is  a  tentative  statement  about  phenomena  whose  validity  is  usually  unknown”. (Onwumere 2009:25). Hypothesis  serves as a powerful beacon that light  the path for the research work. Uzoh (2000)  also describe  “hypotheses  as necessary  whenever  cause  and effect relationship are to be discovered”. Thus formulating hypothesis as framework for this study becomes imperative.

These hypotheses in specific form are:

Ho: External debt do not have a significant  negative  impact on Gross Domestic  Product

(GDP).

Ho: External  debt penalties  on arrears  for default  do not  impact  positively  on  Nigeria’s external debt stock.

1.6      SCOPE OF THE STUDY

This study is restricted  to external debt as it poses a threat to the National economies  of debtor  countries  including  Nigeria.  The  World  Bank  Annual  Report  (1977)  identified “external  debt problem  as a present  day major  obstacles  that  must  be  cleared  from  the development path to ensure progress in developing countries”.

This research  is therefore  limited  to the management  of Nigeria’s  external debt with  an appraisal on its control, challenges, utilization profile and impact as stated in the hypothesis. The external debt’s is thus seen as a financial resource for national economic development.

The time span covered by the main thrust of the study was 1989-2014, focusing on Appraisal of Nigeria’s External Debt Management of the Government of the Federal Republic  of  Nigeria.  The  period  1989-2014  was  selected  based  on  the  availabilty  of consistent data and at 1989 Nigeria’s debt stock started to rise persistently.

1.7      SIGNIFICANCE OF THE RESEARCH

Uloglobui (2007), “identified that research work was not initiated and commissioned for the sake of it but for some significant benefits to the managers of Nigeria’s External Debt profile, the academic (student and experts)and the society at large”. This research work will be of significance to:

1.   Government

2.   Economic Policy Makers

3.   Institutions,  Researchers,  Professionals,  Business  Associate/Mogul  &  Corporate

Bodies

4.   General Public

This research work will assist Nigeria Government in policy and decisions as regards borrowing  outside  the shores of the country.   The work will also  present  the  Impact  of Nigeria External Debt Stock on Gross Domestic Product, vis-à-vis Nigeria Debt Management approach to Debt Sustainability, thereby allowing the managers of the nation’s Debt portfolio in ensuring a dynamic and efficient Debt Management Approach in Nigeria.

It will examine  the consequences  of Penalties  on Arrears  for  Default  on  Nigeria External  Debt  Stock.  Its  findings  will aid  Economic  Policy Makers  and  Government  in proffering  policies  aimed  at  timely  Servicing  of  Nigeria  External  Debt  Stock  to  avoid compounding penalty payment for default vis-à-vis Debt crisis situation in Nigeria.

The  study  will  serve  as  a  body  of  reserved  knowledge  to  be  referenced  to  by Institutions, Researchers, Professionals, and Business Associate/Mogul & Corporate Bodies in making corporate business and academic decisions. It will contribute significantly to the enrichment of the literature External Debt Management.

The  research  work  will  awaken  the  consciousness  of  the  General  Public  to  the sensitivity of External Debt Stock to the Growth of the Economy and the Penalty on Arrears for Default on External Debt Servicing.

1.8      OPERATIONAL DEFINITION OF TERMS

For this study, terms as used here imply the key words which will be employed in the course of his research. This includes:

External debt to Export Ratio: This signifies the extent to which the debt outstanding and disbursed is accommodated by the annual export earnings.

External debt to GDP Ratio;            Indicates the intensity of external debt burden on  the economy.

Debt Sustainability; “is the level of debt which allows a debtors country to meet its current future debt services obligations in full, without recourse to further debt relief or rescheduling avoid  accumulation  of  arrears  while  allowing  acceptable  level  of   economic  growth” (UNCTAD/UNDP 1996)

Interest  to  Export  Ratio:  This  gives  consideration  to  export  earnings  to  adequately accommodate interest payment.

External Debt Service to Government Revenue Ratio:     It  highlights  the  financial  drain imposed on the economy and the extent to which the government must cut back domestic financial commitments in order to satisfy external debt obligations.

External Debt Service to Export Ratio: This expresses the extent to which the total foreign exchange earnings on current account are sufficient to offset the annual  amortization  and interests.

Interest to GDP Ratio:         The level of burden which interest payment on external debt, as distinct from amortization imposes on the economy.

Debt service/Government Revenue Ratio:       This ratio “shows the fraction of government revenue devoted to servicing of debt” (DMO, 2004:7)

Sovereign Debt: The IMF (1988:1) defines sovereign debt as “a liability represented  by a financial  instrument  or other formal equivalent  owed  to other  parties  by an  independent state”.

External Debt: Uche (2003:72) refers to the “summation of indebtedness of a country to other countries, institutions and non-residents of that country”.

Foreign Bonds: This refers to bonds that are designate in foreign currencies and traded in foreign capital markets

External   Debt  Management:   Emmanuel   (2004)  refers  it  to  be  “the  technical   and institutional  arrangement  as  well  as  policy  measures,  involved  in  organizing  external liabilities so that the debt service burden is contained within a sustainable level”.


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APPRAISAL OF NIGERIA’S EXTERNAL DEBT MANAGEMENT

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