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DEBT CRISIS AND ECONOMIC UNDERDEVELOPMENT IN NIGERIA: A CASE STUDY OF THE FOURTH REPUBLIC
1.1 Background to the study
The Nigeria state, just like many other states in Africa (example, Kenya, Democratic Republic of Congo, formerly Zaire and Ghana to mention but a few) in the 1960s and early 70s were not indebted.
However, trend of events during some of the successive governments and administration from the periods of General Obasanjo’s regime (1976-1979) till Babangida and Abacha regimes (1985-1998), surprisingly, caused the nation’s ‘boast’ to begin to fade. Then, it was discovered that to keep moving, Nigeria had to take foreign loans. In no time, Nigeria was caught up in a crippling foreign debt crisis that besides compromising its economic progress, political stability, social dignity and cultural integrity, also dealt a debilitating blow to the Nigerian masses, because of the pains and sufferings they inflicted as a result of implementation of the World Bank IMF policies.
Another feature of the crisis is the continued negotiations for rescheduling of the debts (Mimiko, 1997:50). Nigeria made so many frantic efforts before she could be granted debt forgiveness. Nigeria was, however, granted debt concessions with the condition of initiating new economic reforms that would liberalize and commercialize its economy for private participation (CIA World Fact book, 2010). The case of Nigeria’s foreign debt was pathetic and disturbing before the forgiveness. Nigeria's debt profile had been put at $31 billion, while its foreign reserve had grown to eight billion dollars. Nigeria ought to service its debt by paying $4.9 billion annually, in line with contractual agreements over payment of foreign debt. This amount included a total of $1.1 billion required by state governments to service their foreign debts and $3.8 billion required by the federal government to service its foreign debt (Aluko and Arowolo, 2010).
Nigeria was already in default on $22 billion worth of Paris Club debts owed to sovereign lenders, and was struggling to service its $3.5 billion London Club obligetions (CIA World Fact book, 2008). Abia and Niger States top the list with a debt service requirement of $89 million and $85.5 million respectively, followed by Lagos State with $79.2 million, Imo State with $78 million and Plateau State with $70.3 million. Zamfara State has the least debt service requirement of three million dollars, followed by Katsina State with $3.7 million, Kebbi State with $ 4 million and Cross River State with $11 million (Ekundayo, 2010:13). But because the country has been defaulting, it had to face a number of penalties (Daily Times, 2003). Nigeria’s debt profile at the end of year 2009 stands at $3.97 billion, out of the amount, the federal government owes $2.093 billion while state governments owe $1.85 billion (CIA World Fact book, 2010).
In 2003, the government began deregulating fuel prices, announced the privatization of the country's four oil refineries and instituted the National Economic Empowerment Development Strategy (NEEDS), a domestically designed and run program modeled on the IMF's Poverty Reduction and Growth Facility for fiscal and monetary management. In November 2005, Abuja won Paris Club approval for a debt-relief deal that eliminated $18 billion of debt in exchange for $12 billion in payments, a total package worth $30 billion of Nigeria's total $37 billion external debt (CIA World Fact book, 2008; Ekundayo, 2010: 13). The debt crisis that originated from the poor management of loans was further compounded by sheer mismanagement of resources, widespread and unregulated cases of official corruption.
1.2 STATEMENT OF THE PROBLEM
Nigeria has since been suffering under the huge external debt burden resulting into a retrogressive growth and development. Nigeria began to experience debt problem 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. The debt crisis, which is the combination of accumulated debt stock and difficulty servicing, has imposed several burdens on the Nigerian economy. This is reflected in the fall in real growth rates, investment rate and export earning since 1980. The debt burden has clearly been a constraining factor on rapid economic recovery growth and development with the debt increasing at an alarming rate. Funds which should have been used for economic development are channeled towards servicing the debt. The constraining effect of the debt burden services is more pronounced as the economy has failed to grow sufficiently to reduce the burden to a sustainable level. In the fourth republic, following the debt cancellation in 2005 by the Paris club, Nigeria continues to experience deficit in its economic processes thereby creating a resultant effect of acute under-development due to series of mismanagement, and corruption that characterize the entire spectrum of the Nigerian economy.
However, earlier studies have shown that the debt burden in Nigeria has resulted in various distortions in the macro-economy. Essentially, these distortions are structural in nature, and thus affect the level of per capita incomes and are instrumental to the rising poverty in the country. The latter has attracted the attention of various authors and Nigerian economic planners. The various points of view are all agreed that the condition of Africa in general and that of Nigeria in particular have now deteriorated to an economic and political catastrophe (Nzotta, 2004).
Therefore, the main interest of this study is to examine the economic underdevelopment which is the nature of, and the problems created by, the external debt crisis; a need to examine the external debt crisis in the context of both development and underdevelopment in the Fourth republic from May 1999 till present moment.
1.3 AIMS AND OBJECTIVES OF THE STUDY
The aims and objectives of the study are to:
- Examine the surrounding issues of under-development caused by the debt crisis in the Fourth republic.
- Identify the causes and effect of the external debt burden on economic growth and development of Nigeria.
- Examine the impact of debt forgiveness on Nigeria’s economy.
1.4 WORKING ASSUMPTIONS
- The debt crisis contributed immensely to the continued economic underdevelopment of Nigeria, even during the Fourth Republic.
- The forgiveness of Nigeria’s debt by the Paris club did not end debt crisis in the economy.
1.5 SIGNIFICANCE OF STUDY
This work will serve as a material to other researchers and in practical it will serve as a tool to the government, guiding them on implementation of policies, this policies shall serve as a guide to Nigeria’s development. This work, prescribes how Nigeria can move past its Debt challenges and focus more on the development of the country and this will determine the relevance of the existing government policies.
1.6 THEORETICAL FRAMEWORK
In this study, some scholars in Latin America and Africa have their views concerning this theory. They include: Dos Santos ,Andre Gunder etc.
According to Dos Santos (1979) “Dependency relates to a situation which the economy of certain countries is conditioned by the development and expansion of the other to which the former is subjected .The relation of inter dependence between two or more economies , and between these and the world trade ,assumes the form of dependence when some countries, the dominant ones which are the capitalist nations like America can expand and can be self sustaining while other countries, the dependent ones like Nigeria can do this only as a reflection of expansion which can have either a negative or positive effect on their immediate development. ”There basic assumption is that there is a dialectical relationship between development and underdevelopment, in other words according to Andre Frank(1975) “Development and under development are two different sides of a universal historical process. ”To him what causes under development in third world is as a result of what brought about development in Europe and America.
This dependency concerns the centre which refers to the technological advanced countries of the world and the periphery refers to the third world countries, also, when looking at this theoretical framework we talk about the centre of the centre which refers to the urban areas of the world. Centres of the periphery refer to the urban centre of the developing countries like Nigeria; periphery of the centre refers to the rural areas of the industrialized countries while the periphery of the periphery refers to the rural areas of the developing country.
The dependency theory as a theoretical framework for this study is predicated on the notion that there is a ‘centre’ of wealthy states and a ‘periphery’ of poor, underdeveloped states. Resources are extracted from the periphery (developing nations) and flow towards the states at the centre (developed nations) in order to sustain their economic growth and wealth.
The major contention here is that the economic development of the developing countries (the Global South) was rendered impossible by the domination of the global economy by the already industrialized capitalist powers (‘the Global North’, Offiong, 1980).
1.7 SCOPE OF STUDY
The scope of study focuses on the process through which Nigeria became a debt nation and later into debt crisis, as well as the implication of this on the country’s economic development. Emphasis is also laid on the process through which Nigeria’s debt was forgiven by the Paris club of creditors and the impact this action has on the country’s economic development.
The study makes use of secondary sources such as textbooks and documented works of scholars, articles in journals, news magazines, newspapers and sources from the internet.
1.9 ORGANISATION OF WORK
The research work is divided into five chapters.
Chapter one: is the introduction to the study, which includes the statement of problem, the aims and objectives of the study, working assumptions, significance of the study, theoretical framework, scope of study, and organization of work
Chapter two: reviews relevant works to the study.
Chapter three: discusses the history of debt crisis in Nigeria and conditions that led to its
Chapter four: discusses public debt management strategies and the conditions that led to the establishment of the Debt management office (DMO).
Chapter five: this chapter comprises of the conclusion, summary of major findings, implication of major findings and of course the recommendations.
The references will be at the end of each chapter.