CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Sustainable economic growth is of predominant concern for all economies, especially for the developing economies which commonly face burgeoning fiscal deficits mainly driven by higher levels of debt servicing, particularly external debt servicing and widening current account deficits. Economists have, therefore, focused to explore the channels through which external debt can possibly hamper economic growth, and came up with two competing hypothesis, i.e. debt overhang theory and liquidity constraint hypothesis. Over the time, various studies tried to explore the validity of these hypotheses, using different data sets and different methodologies. Some of these studies confirmed these hypotheses, while others could not.
Since developing countries are striving for sustainable economic growth, they need to control their escalating fiscal deficit. In order to bring it down, these countries are confronted with the challenges of increasing revenues, curtailing unessential public expenditures and expanding avenues for new investment that can derive these economies to higher growth trajectory path while limiting the current account deficit to sustainable levels. Apart from that, as Nigeria heavily rely on foreign borrowings, the international donor agencies commonly demand fiscal prudence, economic and political stability, sound banking system, lower cost of doing business, and an environment conducive for investment to ensure further assistance. To address these internal and external concerns, countries often take counterproductive measures by slashing essential capital expenditures that have a large damaging impact on long-run economic growth. Therefore, it is imperative for such economies as Nigeria’s to provide investment opportunities for the private sector while reducing the cost of doing business that can help them to progress and achieve a higher level of income with improved living standards.
Heavy external debt does not necessarily imply a slow economic growth. It is a country’s inability to meet its debt obligations compounded by the lack of information on the nature, structure and magnitude of the external debt (Were 2001). Countries may have heavy external debt along with relatively higher level of exports that can help them to sustain their level of external debt. But external debt, if not sustainable, imposes higher risk to the economic prosperity, as its servicing which is also an indicator of higher current account deficit, may lead to debt overhang in a country. For any economy, debt either public or publically guaranteed, which also includes the contingent liabilities, plays a crucial role towards overall economic progress. Developing economies typically have limited sources to fetch revenues. If they fail to utilize their debt productively, mobilize investment and create new employment opportunities; they will eventually get stuck up with the dilemma of lower revenue base which will affect their spending capacity, thereby leading to higher debt servicing. Inability to service debt on time not only makes it harder for the developing countries to get aid at concessional rates with less conditionalities from the donor agencies but it also increases the country risk.
1.2 STATEMENT OF THE PROBLEM
External Debt and fiscal deficit has no doubt been of utmost importance to economic growth and development especially in Nigeria. It has often been debated by scholars what the effects of external debts are, especially to the poor man as it affects the economic growth and development of Nigeria.
In fact, some have argued that the external debts and fiscal deficit has in the past has rather than bring about an increased economic growth rate, decreased it and hence poverty rate is still on the increase.
However, the issue of economic growth and development has been pestilence in Nigeria despite the several moves by the government. This issue of economic growth and development has therefore led to his research to know why it is still not achieved yet in Nigeria.
The problem therefore is to unravel whether, external debts and fiscal deficit, has achieved economic growth and development.
1.3 OBJECTIVE OF THE STUDY
The broad objective of this research study is to carry out an econometric analysis of external debt and fiscal deficit on economic growth.
However, other specific objectives are highlighted below:
1. To determine the impact of external debt on the economy.
2. To determine the trend of fiscal deficit in Nigeria.
3. To examine what economic growth and development is as well as how they can be attained using external debt and fiscal deficit as an instrument.
1.4 RESEARCH QUESTIONS
The research questions are:
a. Are external debts really meant to bring about economic growth?
b. Are the policies being formulated by government in Nigeria on fiscal deficit in line with the trends what is obtained in developed countries?
c. How has both external debt and fiscal deficit affected the lives of the majority of Nigerians?
d. In what ways (positive or negative) have these two affected Nigerian economic growth?
1.5 HYPOTHESES
During the course of this research study, we will consider these two hypotheses: H0and H1While H is the null hypothesis, H is the alternative hypothesis.
H0: External debt does not have significant effect on economic growth.
H1: External debt has significant effects on economic growth.
H0: Fiscal Deficit does not have significant effect on economic growth.
H1: Fiscal Deficit has significant effect on economic growth.
1.6 SCOPE OF THE STUDY
This research work is centered on the econometric analysis of external debt and fiscal deficit on economic growth in the last 29 years between 1980 to well as other publications. This is quite important because it allows for a near perfect evaluation and examination of the research topic, the eventual result, which is to proffer, an answer to the possible effects of external debt and fiscal deficit on economic growth and development.
1.7 DEFINITION OF TERMS
POVERTY: This could be defined as the state of being poor. It is also a situation where someone has a very low standard of living, and can not afford the basic needs of life.
ECONOMIC GROWTH: This may be defined as a sustained increase in a country’s real GNP and per capital real GNP.
ECONOMIC DEVELOPMENT: This may be defined as economic growth achieved over a period of time added with qualitative increase in the standard of living of the populace, technological advancement, e.t.c.
1.8 CHAPTERIZATION
This research study is divided into five chapters. Chapter one has the introduction, statement of the problems, objectives of the study, significance of the study, research questions, scope of the study, hypotheses, and definition of terms. Chapter two consists of the introduction, literature review, and theoretical framework.
Chapter three is the research methodology, while chapter four is the presentation and analysis of data.
Lastly, chapter five consists of the summary, conclusion and recommendation.