The issue of linkage between external sector financing and economic growth has attracted wide debate within the context of domestic and international economies. Earlier studies have found that the inability of the developing countries to direct resources to productive use has been a disincentive to domestic capital formation resulting in repudiation to loan repayment, slow pace of economic growth, unfavourable credit terms and foreign exchange variations. Most of the studies however failed to align the contributions of each source of external financing to economic growth and also failed to use the human factor index or the standard of living as a major economic growth determinant. Against this backdrop, the study sought to assess the effect of increase in external debt on economic growth; examine the effect of loans from each of the external debt sources on economic growth; examine the effect of external debt services on per capita GDP; analyze the effect of external debt service outlets to each of the creditors on the nation’s GDP and to examine the impact of external debt stock on the standard of living of the average Nigerian. Five models were formulated in line with the five hypotheses. Variables employed alongside the models include: (1) Aggregated external debt stock and economic growth, (2) Disaggregated external debt stock and economic growth; (3) Aggregated Eternal Debt Services and Economic Growth (4) Disaggregated External Debt Services and Economic Growth and (5) Standard of living and External Debt. The study adopted ex-post-facto research design and secondary data used were sourced from CBN Statistical Bulletin, Debt Management Office and CBN Annual Report, covering 30-year time series period (1981-2010). Descriptive statistics (means, standard deviation, etc) was employed and Augumented Dicker-Fuller (ADF) analysis for unit root tests was conducted. The Johanssen Co integration test was performed to establish the nature of co integration in the models. Ordinary Least Square (OLS) regression technique was used to test the hypotheses at 5% level of significance. The results indicated that (1) Aggregate external debt stock in Nigeria does not have significant positive effect on economic growth; (2) External debt stock borrowed from the various creditors has significant effect on economic growth in Nigeria; (3) External debt services paid out over the years have insignificant and negative effect on economic growth in Nigeria;  (4) Effect of external debt services to the various creditors on economic growth in Nigeria is insignificant; and (5) External debt has a negative and significant effect on the standard of living in Nigeria. The study concludes that as a developing country, Nigeria should make judicious use of all loans (borrowed) and should also enter into other forms of bilateral relationships that could reduce her foreign exchange risk and balance of payment disequilibrium. The study recommends that Nigeria’s external debt policies should be reviewed regularly; the debt service obligations should be properly aligned with the debt stock and that external debt management policies should be made to deepen the economy and also avoid the debt overhang syndrome that characterized Nigeria’s debt management initiatives before her final exit from the Paris Club. In contributing to knowledge, the study adopted modified versions of Malik (2010); Levine and Renart (1992); Karagol (2007); Adesola (2009); Uzochukwu (2011); and Fosu (2007). The study also contributed in terms of geography to knowledge by providing evidence in respect of a developing country, Nigeria.

Title Page
Table of Contents
List of Tables
List of Figures
List of Appendices

1.1       Background to the Study
1.2       Statement of the Problem
1.3       Objectives of the Study
1.4       Research Questions
1.5       Research Hypotheses
1.6       Scope of the Research
1.7       Significance of the Study

2.1       Theoretical Review
2.2       Empirical Review
2.3       Summary of Review

3.1       Research Design
3.2       Nature and Sources of Data
3.3       Specification of Models
3.4       Description of Research Variables
3.5       Further Tests

4.1       Presentation and interpretation of Data
4.2       Statistical properties of variables
4.3       Test of hypotheses
4.4       Implications of Results
4.5       Contribution to knowledge

5.1       Summary of Findings
5.2       Conclusion
5.3       Recommendations

According to Claudio (2004:4), “the history of developing nations reveal that they have been subjected to repeated economic crises with serious consequences for their long term growth prospects and that the links of these crises to the external sectors performance including the problem of external debt and its sustainability have attracted prolonged debate”. Nations have various reasons for contracting external debt with other nations and borrowing by countries occurs as a result of their inability to generate enough domestic savings to carry out productive activities (Ezeabasili,, 2011). In Nigeria for instance, external debt is secured and channeled to serve as balance of payment support, project tied loans, budget deficit financing, meeting some developmental goals of the various levels of government, embarking on infrastructural development etc. Osinubi, (2006) observes that the need for government to finance its deficit budget leads to incurrence of external debt. Ezeabasili (2006), Adam (2007) and Anyanwu (1997) are of the opinion that countries borrow to supplement their domestic savings and allow the affected countries to carry out productive activities and if the borrowed funds are channeled to productive investments and the investments enjoy macroeconomic stability, they will be able not only to accelerate their economic growth but also to settle their debt obligations comfortably (Hameed, et. al., 2008). Other studies that have found relationship between debt and growth include Cohen (1995), Borenszteim (1990), Elbadawi, (1997), Patilo, (2002), Adeyemi (1996) and Indermit, (2005). The first external loan contracted in Nigeria was US $28 million in 1958. As a measure to curtail the rising debt profile, the federal government in 1978 promulgated Act No 30 of the same year limiting Federal government external loan to N5 billion. In the same year, a jumbo loan of US $1 billion was raised from the international capital market. Thereafter, the spate of borrowing increased with the entry of state governments into external loan contractual obligations coupled with fall from oil revenue (Adesola, 2009). Fajana (1990) and Olukoshi, (1990), observe that although the windfall from oil exports led to a considerable economic activities in Nigeria, it did very little to create a solid economic foundation for the country. Muttalab (1984) and Obi (2005) also observe that although the loans obtained by Nigeria from the international financial market were ear marked for specific projects, the disbursement was unrelated to the rate of progress of the projects on ground suggesting that the fund may have been looted by few government officials in collusion with or knowledge of the creditors.

The need to separate debt management from the Ministry of Finance gave rise to the creation of Debt Management Office in 2000 and the office was charged with the responsibility of managing both domestic and foreign debt in Nigeria. Again, in 2005 the government established a fiscal responsibility council and subsequently enacted a fiscal responsibility Act, 2005. These and other efforts were made to keep the nation’s debt stock at a sustainable level.
Claudio (2004) has observed that external debt sustainability is consistent with the objective to keep a debt level that promotes economic growth. Arrow, (2007) observe that sustainable development is an economic programme along which average well being of present and future generations taken together does not decline over time. As Metwally and Tamaschke (1994) and Geiger (1990) observe, capital inflows have significant impact on growth-debt relationship because when there is a considerable level of inflow of capital, economic growth will be accelerated thus less need for external borrowing. Ogunmuyiwa (2011) however argues that causality does not exist between external debt and economic growth as causation between debt and growth was found to be weak and insignificant in Nigeria.  Indermit and Brian (2005) posit that large budget surplus is associated with rapid economic growth. Savvides (1992), Edo (2002), Udoka, (2010) and Bullow, Rogoff (1990) are of the opinion that debt overhang acts like a high tax margin on the country and could provide disincentive to domestic capital formation. This virus inflicted the Nigerian economy before her total exit from the strong hold of Paris and London club of creditors. Shortly before the exit, her total external debt stock was N4.9 trillion in 2004 (CBN Statistical Bulletin, 2009). In 2006, Nigeria external debt stock was $3.54 billion, in 2007 it rose marginally to $3.67 and in 2008, it further inched up to $3.72billion, dropped slightly in 2009 to $3.62billion only to rise sharply to $8.43billion in March 2010 (Mgboji, 2010). As at 30th September 2011, the external debt stock stood at $5.63 billion made up of $3.316 billion owed by federal government and $2.317 billion owed by the states (Onwuka, 2011). These figures are alarming considering the fact that the country is expected to keep a sustainable level of debt stock after her debt relief experience in 2005. As Sacks (1989), Arslanalp and Henry (2004) argue, the problem faced by debt relief countries is lack of good institutions and if the poor institutional framework is not corrected, any new debt relief initiative would not achieve the objective to promote economic growth.
It is worrisome to note that in spite of the relief package secured in 2005, the World Bank ranked Nigeria as the 87th most indebted country in the World and 139th for purchasing power parity per capita GDP and debt service ratio (ratio of debt service to export) of 1.10% as against the international threshold of 20% (World Bank Report 2010). These phenomena contrast with the expectations that the resources freed from Paris and London Club as well as further debt procured externally would add value to the economy.......

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