DEBT MANAGEMENT IN DEVELOPING COUNTRIES: A CASE STUDY OF NIGERIA’S NATIONAL DEBT

 CHAPTER I

INTRODUCTION

1.1       Background to the Study

Sustainable economic growth is a major concern for any sovereign nation most especially the Less Developed Countries (LDCs) which are characterized by low capital formation due to low levels of domestic savings and investment (Adepoju, Salau and Obayelu, 2007). It is expected that these Less Developed Countries (LDCs) when facing a scarcity of capital would resort to borrowing from external sources so as to supplement domestic saving (Aluko and Arowolo, 2010).

Soludo (2003) asserted that countries borrow for two broad reasons; macroeconomic reason that is to finance higher level of consumption and investment or to finance transitory balance of payment deficit and avoid budget constraint so as to boost economic growth and reduce poverty. The constant need for governments to borrow in order to finance budget deficit has led to the creation of debt (Osinubi and Olaleru, 2006).

On the other hand, debt management is any strategy that helps a debtor to repay or otherwise handle their debt better. Debt management may involve working with creditors to restructure debt or helping the debtor manage payments more effectively. A debtor may appeal to a debt management company or special unit as in government to handle issues of debt management.

Debt management, by the standard financial definition, involves a designated third party assisting a debtor to repay his or her debt.  Many companies specializing in credit counseling offer plans to help people with heavy debt and damaged credit get their financial situation under control. A simple definition could be the routine practice of spending less than one earns (Ayadi & Ayadi, 2016).

For all intents and purposes, however, it is a structured repayment plan set up by a designated order or as a result of personal initiation.  A plan to manage debt entails a series of steps, which the third party service works on with the help of the debtor. The first step typically involves compiling a list of all creditor and the amounts owed to each.

Debt management refers to how debt is administered or handled so as to avert/avoid adverse economic effects. Debt management is about the debt policy designed to achieve certain objectives and actual’ implementation of this policy (Nnamocha, 2012).  Traditionally, debt management consists of raising the necessary debt at the cheapest possible interest rate cost, and paying such interest with ease in the earliest possible time.

There are objectives of debt management. Debt management now belongs to monetary policy as part of general macro-economic policy of the state administered by the monetary authorities. Other objective of management of debt is to keep the interest rate cost as low as possible. There is also need to ensure that other macro-economic objective of the government, like stabilization at economic growth etc.

However, generally is expected that developing countries, facing a scarcity of capital, will acquired external debt to supplement domestic saving (Aluko and Arowolo, 2010) Besides, external borrowing is preferable to domestic debt because the interest rate charged by international financial institutions like International Monetary Funds (IMF) is about half to the one charged in the domestic Market (Pascal, 2010).

In any case, whether or not external debt would be beneficial to the borrowing nation depends on whether the borrowed money is used in the productive segments of the economy or consumption. Adepoju et al., (2007),  stated that, debt financial investment need to be productive and well managed enough to earn a rate at return higher than the cost of debt servicing.

 The main lesson of the standard “growth with debt” literature is that a country should borrow abroad as long as the capital thus acquired produces a rate of return that is higher than the cost of borrowing country is increasing its capacity and expanding output with the aid of foreign savings. The debt, it property utilized is (Hameed et al., 2008) by producing a multiplier adequate infrastructure base, a larger export terms of trade. But this has never been the African countries where it has been misused (Aluko and Arowolo, 2010). Apart from the fact that debt had been badly expended in these countries, the management is usually in foreign exchange has also affected their macro-economic performance (Aluko and Arowolo, 2010).

Prior to the 8 billion debt cancellation granted to Nigeria in 2005 by the Paris club, the county had externs’ debt of close to 40 billion with over 30 billion of the amount being owed to Paris Club alone (Semencatrious, 2015). The history at Nigeria huge debts can hardly be separated from its decades of misrule and the continued recklessness of its rulers’.

Before the debt cancellation deal, Nigeria was to pay a whopping sum of $4.9 billon every year on debt servicing (Aluko and Arowolo, 2010). It would have been impossible to achieve exchange rate stability or any meaningful growth under such indebtedness. The effect of the Paris Club debt cancellation was immediately observed in the sequential reduction of the exchange rate of Nigeria via-s-vis the dollar from 130.6 naira in 2005 to 128.2 naira in 2006, and then 120.9 in 2007 (CBN, 2009). Although, the growth rate of the economy has been inconsistent in the post-debt relief period as it plunged from 6.5% in 2005 to 6% in 2006 and then increased to 6.5% in 2007 (CBN, 2008) it could have been worse if the debt had not been cancelled.

Though management of national debt has to do with both the external and domestic debts of a country. This paper will concentrate more with external debt management investigating its effects on economic growth and also to, evaluate the impact of external debt servicing has on the economic growth of Nigeria and also to investigate its implication on the national foreign reserves.

1.2       Statement of the Problem

“Huge debt does not necessarily imply a slow economic growth; it is a nation’s inability to manage or meet its debt service payments fueled by inadequate knowledge on the nature, structure and magnitude of the debt in question” (Were, 2011).

It is no exaggeration that this is the major challenge faced by the Nigerian economy. The inability of the Nigerian economy to effectively manage or meet its debt servicing requirements has exposed the nation to a high debt service burden. The resultant effect of this debt service burden creates additional problems for the nation particularly the increasing fiscal deficit which is driven by higher levels of debt servicing. This poses a grave threat to the economy as a large chunk of the nation’s hard earned revenue is being eaten up.

The huge amount of debt stock and debt service payments of sub-saharan African countries and Nigeria in particular has prevented the countries from embarking on larger volume of domestic investment, which would have enhanced growth and development (Clement et al., 2013). Debt became a burden to most African countries because contracted loans were not optimally deployed therefore returns on investments were not adequate to meet maturing obligations and did not leave a favourable balance to support domestic economic growth.

Therefore, African economies have not performed well because the necessary macro-economic adjustment has remained elusive for most of the countries in the continent. It is against this background that this study seeks to investigate debt management in developing countries: A case study of Nigeria’s national debt.

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