1.1 BACKGROUND OF THE STUDY
It is generally expected that developing countries, facing scarcity of capital, will acquire external debt to supplement domestic saving. The rate at which they borrow externally—the “sustainable” level of foreign borrowing—depends on the links among external and domestic saving, investment, and economic growth. The main lesson of the standard “growth with debt” literature is that a country should borrow externally as long as the capital thus acquired produces a rate of return that is higher than the cost of the foreign borrowing. In that event, the borrowing country is increasing capacity and expanding output with the aid of foreign savings (Bernal, 1987:155).
In theory, it is possible to calculate the sustainable level of foreign borrowing, based, for example, on the terms, maturity, and availability of foreign capital. In practice, however, the task is nearly impossible, since such information is not readily available. Thus, various ratios, such as that of debt to exports, debt service to exports, and debt to GDP (or GNP), have become standard measures of sustainability. Even though it is difficult to determine the sustainable level of such ratios, their chief practical value is to warn of potentially explosive growth in the stock of foreign debt. If additional foreign borrowing increases the debt-service burden more than it increases the country’s capacity to carry that burden, the situation must be reversed by expanding exports. If it is not, and conditions do not change, more borrowing will be needed to make payments, and external debt will grow faster than the country’s capacity to service it (Ajayi and Kahn 2000: 23).
According to Afxentiou, and Serletis (1996: 30), countries in sub-Saharan Africa have generally adopted a development strategy that relies heavily on foreign financing from both official and private sources. Unfortunately, this has meant that for many countries in the region the stock of external eternal debt has built up over recent decades to a level that is widely viewed as unsustainable. For example, in 1975 the external debt of sub-Saharan Africa amounted to about $18 billion. By 1995, however, the stock of debt had risen to over $220 billion. The standard ratios reflect this huge build up of debt. The region’s aggregate debt -export ratio rose from 51 percent in 1975 to about 270 percent in 1995 (excluding South Africa, the ratio was above 300 percent). For all low- and middle-income developing countries, the average ratio of debt to exports was less than 150 percent. Similarly, the debt -GNP ratio for sub-Saharan Africa was 14 percent in 1975, but by 1995 it had reached more than 74 percent. Although debt-service ratios have remained relatively low because of the highly confessional nature of external financing provided to Africa, many countries in the region have been unable to service their debt without recourse to rescheduling under Paris Club arrangements or by accumulating arrears.
The massive growth in external debt in sub-Saharan Africa over the past two decades has given rise to concerns about the detrimental effects of the debt on investment and growth, principally the well-known ” debt overhang” effect. Furthermore, there is now considerable evidence that the build up in debt was accompanied by increasing capital flight from the region. In other words, sub-Saharan Africa was simultaneously an importer and an exporter of capital.
Service delivery by key institutions designed to mitigate the living condition of vulnerable groups were hampered by decaying infrastructure due to poor funding. By cutting down expenditure on social and economic
infrastructure, the government appears to have also constrained private sector investment and growth through lost externalities. This has reduced total investment, since public investment is significant proportion of the total investment in the country.
External debt arises mainly when a given country’s imports is greater than its exports. So this debt arises directly because of the imbalances between balance of trade and balance of payment, or indirectly when a country borrows from richer or wealthy country/bodies in order to finance their mentioned imbalancement.
And debt, especially external one usually has a devastatic gametic, macro-economic effect. Yes it’s what portrays any nations stand and image before other nations in the international community. As was the case of my country Nigeria, when it began to experience this cankerworm called external debt. This was as a result of fall in the price of the almost mono-export product of my country called crude oil, in the early 1980’s. Things really meant too bad for the inhabitants of my country. Just because of export is less than import. What factors lead to its failure? What has been the impact of this external debt in the Nigerian economy? These and other things is what really this project is set up to research on.