THE IMPACT OF EXTERNAL DEBT MANAGEMENT ON THE NIGERIAN ECONOMY

ABSTRACT

This study examines Nigeria’s external debt profile, including its size, structure, source, type, and composition. It analyses the indices for measuring the debt burden and explores alternative debt scenarios in the context of the country’s evolving macroeconomic landscape. The work distinguishes between internal and external factors that drive external debt accumulation, identifies shifts in the international environment required to alleviate the debt burden, and examines the relationship between export performance and the debt burden. After reviewing the structure of the Nigerian economy and its political history, the study concludes that Nigeria’s debt crisis is rooted in structural defects inherent in the economy since independence. The indicators of the debt burden are found to have been persistently elevated. Using a growth-cum-debt model, the behaviour of these indicators under varying assumptions is explored. The external and internal causes of debt accumulation are tested econometrically, and results identify the real effective exchange rate and terms of trade as the most significant variables. The study ends with policy prescriptions for addressing Nigeria’s debt crisis, with particular relevance to contemporary challenges of debt sustainability, rising debt-service-to-revenue ratios, and the need for prudent debt management.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

It is generally expected that developing countries, facing a scarcity of capital, will acquire external debt to supplement domestic savings. The rate at which they borrow externally the “sustainable” level of foreign borrowing depends on the links among external and domestic savings, investment, and economic growth. The main lesson from the standard “growth with debt” literature is that a country should borrow externally as long as the capital thereby 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 (Ajayi & Khan, 2022).

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, such a task is extremely difficult since the requisite information is not readily available. Thus, various ratios such as debt to exports, debt service to exports, and debt to GDP have become standard measures of debt sustainability. While it is difficult to specify precise thresholds for these 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 service existing obligations, and external debt will grow faster than the country’s capacity to service it (Olasehinde & Afolabi, 2023).

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 debt has built up to a level widely regarded as unsustainable. Statistics reveal that as of 2021, African countries owed in excess of US$644.9 billion in external debt alone, with total public debt constituting approximately 24% of their combined GDP and debt servicing at the end of 2023 standing at US$68.9 billion (Thullah, 2023, as cited in Brou & Thiam, 2023). Standard ratios reflect this massive debt accumulation. The region’s aggregate debt-to-GDP ratio has significantly exceeded the 55% threshold proposed by the International Monetary Fund (IMF), with about 25 sub-Saharan African countries surpassing this benchmark by 2021 (Sandow et al., 2022).

The massive growth in external debt in sub-Saharan Africa has given rise to well-documented concerns about the detrimental effects on investment and growth, principally the “debt overhang” effect. External debt retards investment while the impediment on investment results from slow economic growth due to external debt shocks (Plos ONE, 2022). Furthermore, there is now considerable evidence that the build-up in debt has been accompanied by increasing capital flight from the region. In other words, sub-Saharan Africa has been simultaneously an importer and an exporter of capital. Capital flight deprives African countries of funds necessary for economic growth and development, and regional financial integration may be required to reduce such flight (Mekongo et al., 2023).

Service delivery by key institutions designed to improve the living conditions of vulnerable groups has been hampered by decaying infrastructure due to poor funding. By cutting expenditure on social and economic infrastructure, governments appear to have constrained private sector investment and growth through lost externalities. This has reduced total investment, since public investment constitutes a significant proportion of total investment in developing countries like Nigeria. It has been found that a 1% increase in external debt servicing correlates with a 0.33% decline in GDP growth, reflecting a paradox in which borrowed funds intended to stimulate growth instead exacerbate fiscal strain (Animasaun & Babayanju, 2024).

External debt arises mainly when a country’s imports exceed its exports, or when a country borrows from wealthier nations and international financial institutions to finance balance of payments imbalances. Such debt, especially when externally sourced, carries significant macroeconomic consequences. Nigeria’s experience with external debt deepened in the early 1980s following the collapse of crude oil prices, which devastated the country’s mono-export economy. In December 2022, Nigeria’s external debt stood at $41.69 billion (N18.70 trillion). By the first quarter of 2024, external debt had risen to $42.12 billion (N56.02 trillion), and by the first quarter of 2025, it had reached $45.97 billion (N70.63 trillion), representing a 26.07% year-on-year increase (DMO, 2025, as cited in IJRISS, 2025).

1.2 STATEMENT OF THE PROBLEM

Nigeria, as one of the developing countries in Africa, has over the years engaged in servicing foreign debts borrowed from international institutions such as the World Bank and the International Monetary Fund (IMF). In examining the theory of debt, the use to which debt is applied as a means of financing government programmes and the changing magnitude of such debt arising from retirement of existing obligations, contracting of new debt, or redemption of high-interest debt for replacement with lower-interest instruments is of critical importance to fiscal sustainability (Yusuf & Mohd, 2023).

Where debt is externally created, the primary burden may be deferred in time since there may be no immediate domestic sacrifice of resources at the point of contracting. However, the servicing of this debt (payment of interest and principal) constitutes a real and growing burden because domestic incomes are reduced by the necessity of transferring resources abroad. Nigeria’s total public debt grew from ₦39.56 trillion ($95.78 billion) in 2021 to ₣97.34 trillion ($108.23 billion) in 2023, while the debt-to-GDP ratio rose from 22.47% in 2021 to 42.34% in 2023 already exceeding Nigeria’s own 40% benchmark (DMO, 2023; 2024, as cited in Debt Dynamics and Fiscal Sustainability in Nigeria, AKSU Journal, 2024). Furthermore, Nigeria’s debt service-to-revenue ratio has escalated beyond 90%, leaving very limited fiscal space for investment in productive sectors (Blanchard & Leigh, 2023; Akpan et al., 2023). It is against this background that this study examines the following research questions:

• What is the basis of Nigeria’s external borrowing and how have these loans benefited the Nigerian economy?

• What is the impact of external debt on the Nigerian economy?

• What are the effects of these loans on macroeconomic variables and social welfare in Nigeria?

• What is the cost-benefit analysis of Nigeria’s foreign borrowing?

1.3 RESEARCH QUESTIONS

This study seeks to answer the following questions:

1. What are the sources of Nigerian external debt?

2. Has external debt impacted positively on the GDP growth rate?

3. What are the effects of foreign debt on the performance of the domestic economy?

4. How have government policies affected the management of Nigerian foreign debt?

5. What factors have hindered the effective management of Nigeria’s foreign debt?

1.4 OBJECTIVES OF THE STUDY

The broad objective of this research is to assess the impact of external debt management on the Nigerian economy, and to identify the various challenges militating against prudent management of foreign loans. The specific objectives are:

1. To determine the various sources of Nigerian foreign debt.

2. To assess the effects of foreign debt on the Gross Domestic Product (GDP) of Nigeria.

3. To analyse the impact of Nigerian foreign debt on the development of the Nigerian economy.

4. To evaluate the effects of government policies on the management and utilisation of foreign loans.

5. To ascertain the factors that have hindered effective management of Nigeria’s external debt.

1.5 RESEARCH HYPOTHESES

H₁: Nigerian external debt has a significant impact on the Gross Domestic Product (GDP) growth rate.

H₀₁: Nigerian external debt has no significant impact on the Gross Domestic Product (GDP) growth rate.

H₂: Nigerian external debt has a significant effect on multilateral trade.

H₀₂: Nigerian external debt has no significant effect on multilateral trade.

H₃: Nigerian external debt has a significant impact on the rate of inflation.

H₀₃: Nigerian external debt has no significant impact on the rate of inflation.

H₄: Nigerian external debt servicing has significant effects on the balance of payments.

H₀₄: Nigerian external debt servicing has no significant effects on the balance of payments.

1.6 SCOPE OF THE STUDY

The main objective of this study is to assess the impact of external debt management on the Nigerian economy. While the original work covered the period 1994–2005, the analysis is contextualised against the contemporary debt landscape, drawing on recent empirical evidence through 2024. The study also examines the general economic situation of external debt management in Nigeria within the broader sub-Saharan African context.

1.7 LIMITATIONS OF THE STUDY

The researcher acknowledges several challenges encountered in the course of this work, including the high cost of sourcing data and the limitations inherent in relying on secondary sources such as Central Bank of Nigeria Statistical Bulletins, Debt Management Office reports, and academic publications. Despite these limitations, the researcher is confident that they have not materially affected the quality and relevance of the findings.

1.8 SIGNIFICANCE OF THE STUDY

This research is particularly educative in that it exposes aspects of Nigeria’s experience in contracting and servicing external debt. It will enable an assessment of whether Nigeria’s relationships with creditor nations and international financial institutions have been beneficial to the country’s macroeconomic development.

Despite the volume of literature on Nigerian debt servicing, many existing analyses lack rigorous economic grounding. This study contributes to the body of scholarly work by providing a systematic, evidence-based examination of the impact of external debt on the Nigerian economy.

The study provides a documented analysis of the impact of Nigerian external debt management on the economy, drawing on recent empirical evidence from 2022 to 2024.

The findings are intended to be useful to policymakers, business investors, financial managers, the general public, and other developing nations engaged in external borrowing.

1.9 DEFINITION OF TERMS

Gross Domestic Product (GDP): The total monetary or market value of all goods and services produced within a country’s borders in a given period, typically one year. It serves as a broad measure of a nation’s overall economic activity and health (World Bank, 2023).

External Debt: That portion of a country’s total debt that is owed to creditors outside the country, including foreign governments, international financial institutions, and private creditors. It is repayable in foreign currency, goods, or services (IMF, 2023).

Sustainable Debt: The level of debt that allows a debtor country to meet its current and future debt service obligations in full, without recourse to further debt relief or rescheduling, and while maintaining an acceptable rate of economic growth. A country is considered to have sustainable debt when its debt-to-GDP ratio and debt service-to-revenue ratio remain within internationally accepted thresholds (IMF, 2023; Akubuilo & James, 2022).

Debt Overhang: A situation in which a country’s existing debt stock is so large that expected future revenues are insufficient to service the debt, thereby discouraging new investment and retarding economic growth. The debt overhang hypothesis posits that excessive external debt diverts future national income toward debt servicing rather than productive investment, weakening economic expansion (Krugman, 1988, as updated in Manasseh et al., 2022).

Debt-to-GDP Ratio: A key indicator of a country’s debt burden expressed as the ratio of total public debt to gross domestic product. Nigeria’s debt-to-GDP ratio rose from 22.47% in 2021 to 42.34% in 2023, exceeding the country’s own 40% benchmark (DMO, 2024).

Debt Service: The total amount of principal repayment and interest payments due on a debt in a given period. Rising debt service obligations reduce the fiscal space available for investment in infrastructure, health, and education (Udo & Antai, 2024).

Currency Option: A financial instrument that gives the holder the right, but not the obligation, to buy (call) or sell (put) a specified amount of foreign currency at a predetermined exchange rate on or before a set date (Akinsulire, 2002).

Interest Rate Swap: A financial agreement between two parties to exchange interest payment obligations on a specified principal amount for a defined period, typically to manage exposure to interest rate fluctuations (Akinsulire, 2002).

Debt Swap: A transaction in which a creditor exchanges a debtor country’s external debt obligations for equity, local currency, or other assets, often used as a debt relief mechanism for developing countries (Akinsulire, 2002).

Currency Swap: A financial arrangement in which two parties exchange specified amounts of two different currencies at the outset and agree to reverse the exchange at a fixed rate after a defined period (Akinsulire, 2002).

Currency Forward Contract: A binding agreement to buy or sell a specified amount of foreign currency at a predetermined exchange rate on a future date. Unlike futures contracts, forward contracts are non-standardised private arrangements traded over the counter (Akinsulire, 2002).

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