EXTERNAL DEBT AND ECONOMIC PERFORMANCE IN NIGERIA MEASURED

WITH UNEMPLOYMENT AND TRANSPORT DEVELOMENT

ABSTRACT

It was observed from the review of the previous studies that the concentration has been on
the relationship between external debts and economic growth with rarely a study, relating
external debt to infrastructure and job creation, the gap of which this study is set out to fill.
This study is set out to ascertain the nexus among external debt sustainability, transport
infrastructural development and job creation in Nigeria. The data scope of the study will
range from 1981 to 2017. Following the operationalization of the data to be used for the
analysis of this study, the study will employ an Autoregressive distributed lagged model the
choice of which was informed by the test of the unit root on the data of the study. The
expected outcomes of the study is based on the examination of the impact of external debt
on unemployment rate in Nigeria; investigating the extent to which transport infrastructure
has impacted on unemployment rate in Nigeria and the determining the causal relationship
among external debt, infrastructural provision and unemployment rate in Nigeria. The study
will also proffer policies on how to improve on the high rate of unemployment in Nigeria
through investment in transport infrastructure. The study will also recommend policies on
the management of external debt in Nigeria in terms of making judicious use of the debt
incurred as this will help cushion the negative effect of the debt on the macroeconomic
variables such as investment, unemployment’s, inflation through debt service etc.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

It is roundly believed that developing countries face shortage of capital and other financial
resources needed to finance their large developmental projects and consequent upon this
reason, the countries resort to borrowing, particularly externally, to supplement their
domestic revenue. Akin to majority of the developing countries, Nigeria had engaged in
massive external borrowing so much so that it was once classified by World Bank and IMF
as one severely indebted low income countries in the world. This pathetic situation has

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prompted the Multilateral, bilateral and commercial creditors to design a framework in 1996
aiming at providing relief to such countries. In fact, the decades of 1970s and 1980s had
stood out to be an era of pain for Nigeria and other developing nations of Asia, Africa and
Latin America. Most of these countries during these decades are characterized by high debt
profile which has caused severe macroeconomic shocks and declining national output.

Debt servicing made the problem of external debt more serious in Sub-Saharan Africa in
1980s despite the fact that their level of indebtedness was smaller than those of Latin
American and Asian countries. This was because of their low income and instability of their
export earnings during the period (Da Costa, 1991; James et al., 2014).

Debt servicing remains a huge resource leakage in Nigeria. It occupies a significant portion
in the country’s recurrent expenditure profile. Meeting debt obligations continues to pose a
threat to growth and development of Nigeria since paying it means sacrificing welfare and
capital projects for social and economic development.

External debt occurs from borrowing, as this is corroborated Soludo (2003) who opined that
countries borrow for two broad macroeconomic reasons[higher investment, higher
consumption (education and health)] or to finance transitory balance of payments deficits[to
lower nominal interest rates abroad, lack of domestic long-term credit, or to circumvent hard
budget constraints.

Infrastructure development has been well documented in the economic literature as a critical
factor driving economic growth (Estache, 2006). Development in whatever dimension cannot
result into good healthy living if infrastructure such as telecommunications, transport, energy,
water, health, housing and education are not invested on. Infrastructures raises growth
quality, reduces economic disparity and poverty level.

In Nigeria, the transport sector has suffered over fifty years of neglect with the rail sector
being the worst hit and the road segment being over used. This has led to the near complete
collapse of the transport sector in Nigeria, the position of the sector to the economic status of
the nation notwithstanding. Onolememe (2013) noted that the transport sector has not
received meaningful attention in Nigeria unlike the developed countries of the world. Hence,
the assertion that Nigeria is over twenty years behind in transport infrastructure.
Transportation, according to David (2001) is the movement of goods and people from one
location to another which can be by air, water, rail, pipeline, land etc.

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The issues of job creation is key in the economic development efforts of the government.
This is one way of delivering the dividends of democracy and thereby stemming the tide of
restiveness and insecurity in the nation. In realizing this, the Government has been trying to
establish structures to ensure that the business environment is conducive for the private
sector to thrive and create jobs. For instance, Feridun and Akindele (2006) identified
unemployment as one of the major challenges confronting the Nigerian economy. The social
impacts of unemployment are less prevalent in economies that are able to support
unemployed class with subsidies and social security allowances. Following the discussion
above, it can be deduced that the main reason for low standard of living in underdeveloped
countries is the relative inadequate and inefficient utilization of labour compared with
advanced nations.

1.2 Statement of Problem

According to Omoleye et al (2016), Nigeria is the largest debtor nation in the Sub-Saharan
Africa. The genesis of Nigeria’s external debt can be traced to 1958 when 28 million US
dollars was contracted from the World Bank for railway construction. Between 1958 and
1977, the need for external debt was on the low side. However, due to the fall in oil prices in
1978 which exerted a negative influence on government finances, it became necessary to
borrow to correct balance of payment difficulties and finance projects.

The first major borrowing of 1billion US dollars referred to as Jumbo loan was contracted
from the international capital market (ICM) in 1978 increasing the total to 2.2 billion U.S
dollars (Adesola, 2019). The spate of borrowing increased thereafter with the entry of the
state government into external loan contractual obligation. According to the Debt
Management Office (DMO), Nigeria’s external debt outstanding stood at N17.3 billion. In
1986, Nigeria had to adopt a World Bank/International Monetary Fund (IMF) sponsored
Structural Adjustment Programme (SAP), with a view to revamping the economy making the
country better-able to service her debt (Ayadi and Ayadi, 2008). The increasing fiscal deficits
driven by the higher level of external debt servicing is a major threat to growth of the nation.
The resultant effect of large accumulation of debt exposes the nation to high debt burden.
However, the country has continued to groan under heavy debt servicing due to penalty and
unpaid interest arrears. As Aluko (2015) observe, the bulk of Nigerian debts outstanding are

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due to unpaid fines and penalties. More than 34% of Nigeria’s GDP is channeled to debt
servicing yearly (Yesufu, 2002).

Nigeria is about the richest on the continent of Africa, yet due to the numerous macro-
economic problems, such as inflation, unemployment, sole dependency on crude oil as a
major source of revenue, corruption and mounting external debt and debt service payment,
majority of her citizen fall below the poverty line. Therefore, the study seeks to thoroughly
and empirically investigate the determinants of external debts in the economy and arrive at a
logical conclusion.

The main issue here is that there have been various attempts in terms of the existing studies
but those studies have either related external debt to economic growth or the level of
infrastructure to economic growth with no studies relating external debt to infrastructure and
job creation which is the focus of the study. This study aims at filling the identified missing
gap of no previous study relating external debt to transport infrastructure and job creation for
the case of Nigeria.

1.3 Objective of the Study

The general objective of the study is to examine the relationship among external debt
sustainability, transport infrastructural development and job creation in Nigeria. Specifically,
the study is set out to;

i. Investigate the impact of external debt on unemployment rate in Nigeria.

ii. Assess the extent to which transport infrastructure have impacted on
unemployment rate in Nigeria.
iii. Examine the causality among external debt, infrastructural provision and
unemployment rate in Nigeria.

1.4 Research Questions

The study seeks to answer the following research questions;

i. What is the impact of external debt on unemployment rate in Nigeria?

ii. To what extent does transport infrastructure impact on unemployment rate in
Nigeria?
iii. What is the causal relationship among external debt, infrastructural provision and
unemployment rate in Nigeria?

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1.5 Scope of this study

The focus of the study is to thoroughly look into the Nigerian external debt, how sustainable
it is and its effect on the level of infrastructure and job creation in Nigeria. The scope of the
data ranges from 1981 to 2018. The scope is considered large enough as it is more than a 30
year sample data which is required as a minimum for a time series data in order to have a
robust result.

CHAPTER TWO

LITERATURE REVIEW

2.1 Conceptual Review

According to Bamidele et al (2013), debt is defined as the resource or liquid asset that is used
up in an organization, without being contributed by the owner and does not in any other way
belong to the organization. However, a public debt could be external or internal. External
debt which is the focus of this study is the amount, at any given time, of disbursed and
outstanding contractual liabilities of residents of a country to nonresidents to repay principal,
with or without interest, or to pay interest, with or without principal.

Nigeria’s domestic borrowing (debt) is aimed at escaping the dangers associated with
external borrowings occasioned by rising government expenditures vis-a-vis falling
government revenues to supplement the internal savings for productive activities through
infrastructural development as well as management of other macroeconomic conditions of the
country (Abula, 2010).

Public debt is a global phenomenon that is acceptable to a certain extent and under certain
controls. But, if the debt exceeds this extent and goes out of these controls, it would become a
serious problem or turn into a crisis, leading to negative effects of large risks to public money
and to the whole national economy. External debt is considered an important, main source of
financing that governments depend on to achieve developmental or other public objectives.

5
Thus, external debt is incurred in the case of needing funds, when governments suffer from
shortages of domestic savings and foreign currencies needed (Abu et al., 2015).

2.2 Theoretical Literature Review

2.2.1 The Classical View on Public Indebtedness and its Economic Effects

From the standpoint of the classical doctrine (having as representatives the well-known A.
Smith, R. T. Malthus, D. Ricardo, J.S. Mill or J.B. Say), the outlook appears to be
predominantly unfavorable to public borrowing. Faithful to the principle of “laissez-faire”
and the regulatory actions of market forces, the classics attributed to the state only the role of
ensuring the smooth ongoing of economic relations, public authorities not being allowed to
intervene in the economy. Arguing that public expenditure are unproductive, in relation to the
traditional tasks undertaken by the state (public order, national defense, diplomatic relations,
etc.), and that resources are managed more wastefully in the public sector compared to the
private one, the classics blamed state indebtedness considering that it distorts private capital
from its productive function to non-productive uses, thus affecting the accumulation (and
hence stock) of capital and the growth and development of the economy, as a whole.

The vision of Adam Smith is relevant to this view, one of the arguments he puts forward to
support the denial of the state’s right to incur debt being that indebtedness delays the natural
progress of a nation towards wealth and prosperity since, in this way, resources that would
receive productive destinations in the private sector are diverted by the state to cover its
unproductive expenditure, thus being wasted without any hope of future reproduction. The
effects of contracting public loans in terms of capital accumulation (and thus, long-term
economic growth) are considered to be even more harmful than those of taxes, since public
borrowing leads to the reduction of existing production capacities through “the perversion of
some portion of the annual produce which had before been destined for the maintenance of
productive labour towards that of unproductive labour” (Smith, 1904).

The negative effects on the accumulation of productive capital in the economy are also
confirmed by David Ricardo, who states that “when, for the expenses of a year’s war, twenty
millions are raised by means of a loan, it is the twenty millions which are withdrawn from the
productive capital of the nation” (Ricardo, 2005).

However, a different approach can be found at Thomas Malthus who, anticipating the
possibility of imbalances under the form of overproduction of goods (entailing a gap between
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the supply and demand of goods), admits in this situation (subject to the lack of other
possible alternatives) to use borrowed resources to increase demand for goods and services,
thus making up for the economy’s failure to self-regulate. Consequently, Malthus advocates
for maintaining “an adequate level of public debt because otherwise the generalized
overproduction of commodities from a mere possibility will become a harsh reality”
(Tsoulfidis, 2007).

2.3 Review of Empirical Literature

Review of Studies on External Debts

This section contains the review of previous studies on this area with a view to identifying the
scope and the findings of the study.

Awan et al. (2015) studied the determinants of external debt in Pakistan during the period
(1976-2010), annual time series data were used to find long run equilibrium relationship
while short run dynamics have been analyzed using ECM. By applying ARDL model .The
results revealed that there is a positive, statistically significant relationship between the
following economic variables; fiscal deficit, nominal exchange rate and trade openness, and
external debt. It was found that there is a positive relationship between foreign aid and
external debt, but this relationship was insignificant.

Awan et al. (2015) studied the determinants of external debt in Pakistan over the period 1976-
2010, annual Time series data were used to find a long-term equilibrium relationship, while
short-term dynamics were analyzed using the CCM. Applying the ARDL model .The results
showed a positive and statistically significant relationship between the following economic
variables: fiscal deficit, nominal exchange rate and trade openness, and external debt. There
was a positive relationship between external aid and external debt, but the relationship was
insignificant.

Kasidi, et al (2013) studied the Impact of external debt on economic growth in Tanzania for
the period 1990-2010. The analysis of co-integration has been used in this study. The study
found that debt servicing and external debt have a significant impact on GDP growth. The co-
integration test also confirmed that there is no long-term relationship between external debt
and GDP.

Al-Refai (2015) examined the relationship between debt and economic growth in Jordan for
the period (1990 - 2013), using the production function is Cobb-Douglas. The results showed

7
a positive and significant relationship between gross fixed capital formation and domestic
debt on the one hand and economic growth in Jordan on the other. The results also showed a
negative and insignificant relationship between Labour, foreign debt, and long-term foreign
debt with economic growth in Jordan.

Ahmed et al (2015) explains the impact of foreign debt on economic growth in Iraq for the
period (1980-2014). To achieve the objective of the study, an ARDL analysis using an OLS-
based estimation method was used. The results showed that external debt had a negative
impact on gross domestic product (GDP) in the short and long term, but it was noted that this
impact was greater in the short term than in the long term.

Abu et al. (2015) examined the impact of external debt on economic growth in heavily
indebted poor countries (HIPCS) over the period 1970-2007.The study sample consisted of
40 HIPCS, and the ARDL model was applied to obtain the results. External debt is found to
have a negative impact on short-and long-term economic growth in the surveyed indebted
countries.

Babu et al. (2014) studied the relationship between external debt and economic growth in the
East African community over the period (1970-2010). The Johansen co-integration test was
used for data analysis. The results indicate a statistically significant negative relationship
between external debt and economic growth in the East African community.

CHAPTER THREE

THEORETICAL FRAMEWORK AND METHODOLOGY

3.1 Theoretical Framework

Keynesian theory of increasing government activity

There exist many economic theories but the Keynesian theory of increasing government
activity as catalyst to economic growth was deemed most appropriate. This is an economic
theory named after a British Economist, John Maynard Keynes. The theory is based on the
concept that in order for an economy to grow and be stable, active government intervention is
required. The Keynesian Economists argue that private sector decisions sometimes lead to
inefficiency macroeconomic outcomes. Therefore, monetary policy action by central bank

8
and fiscal policy action by the government are required to direct the economy. These actions
will bring about stability in output over the business cycles.

Keynes stated that during depression, a combination of two approaches must be applied viz: a
reduction in interest rate (monetary policy), and government investment in infrastructure
(fiscal policy). Both Keynesians and monetarists believe that both fiscal and monetary
policies affect aggregate demand (Blinder, 2008). The monetary policy requires CBN to
reduce interest rate to commercial banks and the commercial banks to do the same to their
customers. Government investment in infrastructure injects fund into the economy by
creating business opportunities, employment and demand. One of the sources of fund for
infrastructural development is external borrowing during fiscal deficit, hence external debt is
incurred.

This implies that Keynesian theory which views capital accumulation as a catalyst to
economic growth is supportive of external loans as it injects fund into the economy to
increase economic activity resulting in the provision of infrastructural facilities and job
creation as this in turn help boost the economy.

3.2 Model Specification

In the light of the theoretical framework discussed above, this study adopts the model of
Igberi et al. (2016).

The model above is adjusted to suit the purpose of this study of capturing the relationship
among the external debt, transport infrastructure and employment. The adjustment to the
equation one as contained in equation 2 is in terms of adding inflation and interest rate.
Inflation rate is added as theory has suggested that a movement in inflation will affect the
cost of production which will in turn affects unemployment rate. Interest rate is also
suggested to have an inverse relationship with the level of investment and investment is
expected to have positive relationship with the employment rate. Hence, interest rate is
expected to affect the level of employment.

Therefore, the model of this study is stated in the equation 3.2 below.

Note;

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 = employment rate at time t, = the level of employment in the previous year.

= External debt at time t. = Infrastructural facilities at time t. = Gross

Domestic Product at time t. = Inflation rate at time t. = Interest rate at time t.

= Stochastic variable at time t. While represents the constant, represents the

slopes of the independent variables of the study.

3.3 Method of Estimation and Diagnostics

The estimation procedure for the model specified above follows the Autoregressive
Distributed Lag (ARDL) model Bounds Test. Since the results of unit root tests of the data of
this study are mix of I(0) and I(1) process, ARDL bound testing to cointegration approach is
chosen. The method is also chosen because of the following advantages.

From the empirical model above, the ARDL framework of equation 3.2 is as follows:

On the right-hand side, the expression from w 1 to w6 shows the long-run relationship among
the variables, while the notations from λ 1 to λ 6 with the summation signs corresponds to the
short-run dynamics of the variables.

3.4 Sources of Data and Measurement of Variable

The data for the empirical analysis of the study were collected from the world development
indicators (WDI), 2019 version, the CBN statically bulletin and Index Mundi. The scope of
the data ranges between 1981 and 2018. The need for more than 30year sample data was
considered given the study made use of a time series data. A time series data has been said to
be more reliable the larger the sample. The variables on which data were collected are;
employment rate, external debt, government expenditure on infrastructure, Gross domestic
product, inflation and interest rate.

CHAPTER FOUR

10
 PRESENTATION AND ANALYSIS OF RESULTS

Table 4.1: Pairwise Granger Causality Tests

Pairwise Granger Causality Tests
Sample: 1981 2018
Lags: 2

 Null Hypothesis: Obs F-Statistic Prob. 

 EXTD does not Granger Cause EMP  36  6.15005 0.0056

 EMP does not Granger Cause EXTD  1.06215 0.3580

 INFR does not Granger Cause EMP  36  0.83643 0.4428

 EMP does not Granger Cause INFR  0.36330 0.6983

 GDP does not Granger Cause EMP  36  0.45368 0.6394

 EMP does not Granger Cause GDP  0.56394 0.5747

 INF does not Granger Cause EMP  36  0.89522 0.4188

 EMP does not Granger Cause INF  0.32987 0.7215

 INT does not Granger Cause EMP  36  3.48437 0.0432

 EMP does not Granger Cause INT  0.11353 0.8930

 INFR does not Granger Cause EXTD  36  0.74412 0.4835

 EXTD does not Granger Cause INFR  0.01624 0.9839

The result in the table above shows external debt granger cause employment rate.
Employment rate on the other hand does not granger cause external debt.

Table 4.2: ARDL Long Run Form and Bounds Test

ARDL Long Run Form and Bounds Test
Dependent Variable: D(EMP)
Sample: 1981 2018
Included observations: Short run results

11
 LONG RUN RESULS

Variable Coefficient Std. Error t-Statistic Prob.   

EXTD 0.007387 0.006756 1.093374 0.0435

INFR 0.001873 0.007008 0.267258 0.0112
GDP 0.002098 0.031359 0.066903 0.0471
INF 0.004901 0.008449 0.580007 0.5665
INT 0.023077 0.022102 1.044102 0.3054
C 1.689962 0.143064 11.81259 0.0000

R-squared 0.666040     Mean dependent var 1.736445

Adjusted R-squared 0.613480     S.D. dependent var 0.019382

S.E. of regression 0.016059     Akaike info criterion -5.217277

Sum squared resid 0.007221     Schwarz criterion -4.825432

Log likelihood 105.5196     Hannan-Quinn criter. -5.079133

F-statistic 3.054794     Durbin-Watson stat 2.977129

Prob(F-statistic) 0.013326

Source: Author’s computation, 2021.

The long run result shows that external debt has a positive signfiiant relationship with the
employment rate in Nigeria. An increase in external debt will lead to an increment in the
employment rate in Nigeria. This is possible if the external debt incurred is used for
development purpose.

Infrastructural development has also been shown to have a positive significant relationship
with the employment rate in Nigeria. The results shows that a 1% increase in the
infrastructural development will lead to an increase in the employment rate by 0.002%.

12
The result on GDP shows it has a positive significant relationship with the employment rate.
It shows that an increase in GDP will lead to an increase in employment rate in Nigeria. The
relationship is statistically significant at 5% level.

The result on inflation and interest rate shows non-significant relationship with the
employment rate in Nigeria.
Also, the Adjusted R-square or the coefficient of determination shows the value of 61%. This
implies that 61% of the behavior of the dependent variable or the public debt profile is
explained by the independent variables.

4.1.7 Post estimation test

Figure 4.2: Stability test

The Cusum test or a test for stability of the data is shown in figure four above. The result
shows that the curve is fit into the two lines that form a boundary. The curve staying within
the boundary implies the data are stable. Any intersection with the boundary or the curve
moving out of the boundaries implies instability of the data.

4.2 Discussion of Results

The result of the study has found out that external debt has a positive and a statistically significant
impact on the employment rate in Nigeria. External debt is considered an important, main
source of financing that governments depend on to achieve developmental or other public
objectives. Thus, external debt is incurred in the case of needing funds, when governments
suffer from shortages of domestic savings and foreign currencies needed (Abu et al., 2015).
Umaru et al., 2013) illustrated that debt is one of the sources of financing capital formation in
any economy, where it is important for the government to borrow in order to meet the
financial requirements in the case of deficit, so that it could close the resource gap between

13
savings and investments. Government expenditure on infrastructure was also found to have a
positive impact on the employment rate in Nigeria. in a case when infrastructural facilities
such as good road network, stable power supply, good railway among many others, if they
are put in place it will help facilitate employment opportunities in Nigeria. As also found out
by the result an increase in the GDP will lead to more employment opportunities. The
increase in the GDP would mean that there will be more money to invest or to spend which
will in turn leads to more employment opportunities.

CHAPTER FIVE

SUMMARY CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings

The scope of the data of the study is between 1981 and 2018. On the first objective, of the
impact of external debt on employment rate in Nigeria. The study has found that external
debt has a positive significant relationship with the employment rate in Nigeria. External
debt in most cases are incurred for development projects. When judiciously spent, it will
contribute meaningfully to the quality of life of the people. On the second objective, the
study has found out that transport infrastructure has a positive and a significant impact on
employment rate in Nigeria. When good road network is put in place, it will contribute to the
employment opportunities as people will be more mobile and the loss of man hours to traffic
will be corrected. For the case of Nigeria, bad road network has been a bane to employment
opportunities in Nigeria.

5.2 Conclusion

Following the findings of the study, the following are concluded;

i. i. External debt has positive impact on the employment rate in Nigeria. When the
external loans the country apply for is judiciously spent on project that are capable of
contributing to employment creation. For instance, spending on construction, and similar
projects will create more employment opportunities.

ii. ii. Investing more on transport infrastructure will lead to more employment creation in
Nigeria. Good road network will promote free movement of people and make easy for them
to work from a far distance.

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5.2 Recommendations

In line with the findings of the study, the following are recommended;

i. There should be judicious use of external loans the country apply for. Loans should be
put to the original purpose for which it is applied for.
ii. The government should invest more on transport infrastructure as this will help in
creating more employment opportunities in Nigeria.

5.3 Suggestions for future Research

Future studies should endeavor to capture more accurately the employment rate by also
considering the informal sector. The data used is based on the official employment rate which
does not represent the true picture of the employment situation in Nigeria.

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