AN ANALYSIS OF FOREIGN DEBT ON OUTPUT OF INDUSTRY IN NIGERIA

ACCOUNTING

Abbreviations

ADF Augmented-Dickey-Fuller

ARDL Autoregressive Distributed Lag

CBN Central Bank of Nigeria

GDP Gross Domestic Product

WB World Bank

PPP Purchasing Power Parity

IMF International Monetary Fund

DMO Debt Management Office

Table of Contents

Declaration - - - - - - - - - - iii

Certification - - - - - - - - - - iv

1
Dedication - - - - - - - - - - v

Acknowledgment - - - - - - - - - vi

Abbreviations - - - - - - - - - - viii

Table of Contents - - - - - - - - - ix

List of Tables - - - - - - - - - - xi

List of Figures - - - - - - - - - - xii

Abstract - - - - - - - - - - xiii

CHAPTER ONE - - - - - - - - - 1
INTRODUCTION - - - - - - - - - 1

1.1 Background to the Study - - - - - - - 1

1.2 Statement of the Problem - - - - - - - 3
1.3 Objectives of the Study - - - - - - - 5
1.4 Hypotheses of the Study - - - - - - - 5
1.5 Significance of the Study - - - - - - - 6
1.6 Scope and Limitation of the Study - - - - - - 6
1.7 Organization of the Study - - - - - - - 6

CHAPTER TWO - - - - - - - - - 8
LITERATURE REVIEW - - - - - - - - 8

2.0 Introduction - - - - - - - - - 8
2.1 Conceptual Review - - - - - - - - 8
2.1.1 Debt stock - - - - - - - - - 8
2.1.2 Debt service - - - - - - - - - 8
2.1.3 Debt Management - - - - - - - - 8
2.1.4 Foreign Debt - - - - - - - - - - - 9
2.1.5 Maturity pattern of foreign debt - - - - - - - - 11
2.1.6 Indicators of debt burden - - - - - - - - - 11
2.1.7 Causes of Nigeria's External Debt Problem - - - - - - 12
2.2 Theoretical Review - - - - - - - - 13

2
2.2.1 Dual Gap Theory - - - - - - - - 13
2.2.2 Dependency Theory - - - - - - - - 13
2.2.3 Debt Dynamic Theory - - - - - - - - 14
2.2.4 Keynesian Theory - - - - - - - - 15
2.3 Empirical Review - - - - - - - - 16
2.4 Gap in Literature - - - - - - - - 19

CHAPTER THREE - - - - - - - - - 20
METHODOLOGY - - - - - - - - - 20

3.0 Introduction - - - - - - - - - 20

3.1 Theoretical Framework - - - - - - - 20

3.2 Model Specification - - - - - - - - 21
3.3 Sources of Data - - - - - - - - 22
3.4 Technique of Estimation - - - - - - - 22

CHAPTER FOUR - - - - - - - - - 24
RESULTS AND DISCUSSION - - - - - - - 24

4.1 Descriptive Statistics - - - - - - - - 24

4.2 Pre-estimation Test - - - - - - - - 25
4.2.1. Stationarity Test - - - - - - - - 25
4.2.2. Histogram – Normality Test - - - - - - - 26
4.3 Estimation of Results and Discussion- - - - - - 26
4.4 Summary of Results - - - - - - - - 30

CHAPTER FIVE - - - - - - - - - 32
SUMMARY, CONCLUSION AND RECOMMENDATIONS - - - 32

5.1 Summary - - - - - - - - - 32
5.2 Conclusion - - - - - - - - - 32
5.3 Recommendations - - - - - - - - 33

References - - - - - - - - - - 34

3
 List of Tables

Table 1 Descriptive Statistics - - - - - - - 24

Table 2 Augmented Dickey-Fuller Stationarity Test - - - - 25

Table 3 Long-run Cointegration Test - - - - - 26

Table 4 ARDL Short-run Coefficient Test - - - - - 27

Table 5 ARDL Long-run Coefficient Test - - - - - 27

Table 6 Breusch-Godfrey Serial Correlation LM Test - - - 28

Table 7 Breusch-Pagan-Godfrey Heteroscedasticity Test - - - 29

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Table 8 Stability Test - - - - - - - - - 29

Table 9 Pairwise Granger Causality Test - - - - - 29

5
 List of Figures

Figure 4.1 Histogram Normality Test - - - - - - 26

6
 Abstract

This study examines the relationship between foreign debt and output of industry in Nigeria
using time series data between 1981 and 2022. The study used time series data that output of
industry and debt service ratio are variables of interest. The Autoregressive Distributed Lag
(ARDL) technique was employed in the study. The result revealed that in the short-run foreign
debt is having negative and insignificant relationship on output of industry and debt servicing
ratio is having positive and insignificant relationship on output of industry in Nigeria in the
long-run. Thus, based on these findings, foreign borrowing should only be for investment
purposes to fill the gap left by insufficient domestic investment and savings and also government
and policymakers in Nigeria should take proactive measures to manage and reduce foreign debt
levels, especially through exploring other alternative sources of funding for development
projects.

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 CHAPTER 1
INTRODUCTION
1.1 This Chapter discusses the background to the study, statement of the problem, objectives of
the study, statement of hypotheses, significance of the study, scope and limitation of the
study and organization of the study.

1.2 Background to the Study

Many developing countries resort to foreign borrowing to bridge the domestic resource gap
in order to accelerate economic growth. One major source of aid is foreign borrowing or external
debt. The motive behind external debt is due to the fact that countries especially the developing
ones lack sufficient internal financial resources and this calls for the need for foreign debt. Thus,
foreign debt is a crucial tool the government might use to successfully finance capital formation,
sustain public expenditures, and spur economic growth, especially in situations where it is
challenging to increase taxes and reduce public spending. In the event of an unanticipated and
transient catastrophe, public debt can also be used as a safety net to reduce the need to rapidly
raise taxes to finance higher spending (Bongumusa et al. 2022).

However, it is typically anticipated that developing nations will purchase external debt in
order to complement domestic saving because of a lack of capital (Mercan et al., 2023). Based
on the lack of capital government prefer to borrow money abroad than domestically because
international financial institutions like the International Monetary Fund (IMF) charge interest
rates that are around half as high as those found in the local market (Pascal, 2010). The external
debt can only be advantageous if the borrowed funds are used in the productive sector of the
economy and not for consumption or recurrent expenditure of the recipient government
(Shahzad, et al., 2014).

The industry plays a vital role in the economy, and the activities of the industry are also
vital to the achievement of national socio-economic development goals of providing shelter,
infrastructure and employment (Oladinrin, et al., 2012). The role of industry in the national
economy has been addressed by a number of researchers. According to Khan (2008), the industry
and construction activities are considered to be one of the major sources of economic growth,

8
development and economic activities. Construction and engineering services industry play an
important role in the economic uplift and development of the country. The construction industry
is also a prime source of employment generation offering job opportunities to millions of
unskilled, semi-skilled and skilled work-forces.

In Nigeria, the origin of external debt in Nigeria started in 1958 when a loan of $28
Million was obtained from the World Bank to construct a railway and other developmental
projects (Mbah, Umunna & Agu, 2016). In 1985, the problem of debt servicing began as the total
external debt of Nigeria rose to $19 billion, but the government was able to repay the foreign
creditors (Paris Club) more than $35 billion while the borrowed money was then less than $15
billion. Following the apparent debt overhang in Nigeria, the Obasanjo’s led government in
2003-2007 intensely pursued debt revocation which consequently resulted to a reduction of the
external debt up to $3.4 billion in 2007 (Adedoyin et al 2016).

Nigeria is blessed with human and natural resources having the largest economy in
Africa. It is ranked as the 21st largest economy in the world regarding nominal Gross Domestic
Product (GDP) and 22th most significant in terms of Purchasing Power Parity (PPP). Nigeria is
one of the eleventh largest oil producers on the continent with oil reserve estimated to be 2.28
million barrels per day (362×103 m3/d) and natural gas reserves with over 100 trillion cubic feet
(2,800 km3) however it is important to note that the industry plays a vital role in terms of
infrastructure for all these to be possible. The industry’s contribution to the economy is
dependent on a number of factors. Firstly, the industry sector contributes more when the
economy is growing because it provides a high investment multiplier to other sectors (Bykau and
Khavalko, 2017). However, the contribution of the construction sector to the economy through
the multiplier effect is in the short run (Dlamini, 2012). The industry’s contribution to the Gross
Domestic Product (GDP) is higher in developing countries because the diminishing returns of
capital for investment are not as strong as the developed countries. Specifically, the construction
sector contributes to development when the construction value added is about 4-5 percent of the
GDP (Lopes, et al., 2002).

Hence foreign borrowing can be explained in term of technical management and financial
requirement necessary to support development program and economic growth including growth

9
in particular sectors within the economy such as industry. Against this background, this studies
intend to analyze the relationship between foreign debt and output of the industry in Nigeria.

1.3 Statement of the Problem

Nigeria has witness a high rate of growth of foreign debt since independence. The debt is
invariably to bridge domestic resources gap in order to accelerate economic growth. Such
borrowing is healthy, provided the process are used judiciously for the purpose of which they
were borrowed to facilitate the foreign repayment and equitation of debt. The high level of debt
services payment prevents the country from embarking on larger volume of domestic investment,
which would have enhanced growth and development. With the economic problem facing the
country (Nigeria), federal government saw borrowing as the way out, but unfortunately the
problem continued to multiply as each day pass by, making it more difficult for attaining
sustainable development. Furthermore, debt repayment is costly because it depletes already
scarce financial resources, as a result, the emphasis shifts from growth opportunities to debt
repayment (Abiola and Ogunrinola 2019).

External loan of US$28 million was first sourced from World Bank in 1958 to finance railway
construction in Nigeria. By December 2016, external debt stood at $11.41billion. Nigeria’s total
debt profile as of December 31, 2018, now stands at N24.387tn with foreign debt at ₦7,759.20
Billion equivalent to $ 21,620,807,845.32. The figure swelled by 12.25 per cent from ₦21.725tn
in 2017 to N24.39tn in 2018. The debt rose by N2.66tn from December 31, 2017 to December
31, 2018, the Debt Management Office said. According to the Punch NG newspaper published
April 5, 2019:

“Speaking at a press briefing in Abuja on Thursday, Director General of DMO, Patience Oniha,
said the funds were borrowed to fund projects, to finance budget deficit and to refinance
maturing obligations. Particularly, she said, some foreign debts are used to refinance treasury
bills because of the short tenor of the bills, adding that borrowing from abroad had also helped to
stabilize the local currency in the last two years”

Despite the huge amount of debts which the country has continued to incur over the years, with
the aim of achieving economic growth and sustainable development; low standard of living is
still prevalent in the country (Aiyedogbon and Ohwojasa, 2012). Also, it is obvious that purpose
10
for which these funds were sourced end up not bearing any results. Hence, this studies to
investigate the impact of this foreign aid on the real sectors of the economy particularly the
output of industry in Nigeria. In this study, foreign debt is used in place of external debt.

According to the IMF African Department Director Abebe Selassie in Marrakech, Morroco on
the 13th October 2023, Nigeria has a total debt of US$113.4billion (N87.3trillion). He said total
debt position is manageable and does not present any risk to the economy if compared to
Nigerian GDP. What the country need to do is to improve tax revenue from non-oil sector of the
economy.

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 (Nwagwu, 2014). This study intends to check whether this
foreign debt in the first place has any meaningful effect on output of industry in Nigeria.

1.4 Objectives of the Study

The fundamental objective of the study is to examine THE EFFECT OF FOREIGN DEBT ON
ECONOMIC GROWTH IN NIGERIA. Hence, the highlighted objectives are:

i. To estimate the effect of foreign debt on output of industry in Nigeria.

ii. To investigate the causal relationship between foreign debt and output of industry in
Nigeria.

1.5 Research Hypothesis

The research hypothesizes are:

H0: There is no significant effect between foreign debt and output of industry in Nigeria.

H1: There is a significant effect between foreign debt and output of industry in Nigeria.

H0: There is no causal relationship between foreign debt and the output of industry in Nigeria.

H1: There is a causal relationship between foreign debt and the output of industry in Nigeria.

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1.6 Significant of the Study
The significant of this study is to benefit the researcher and several groups including government
and policy maker particularly in the following ways.

i. It will benefit policy maker in formulating policy on foreign debt management in

Nigeria.

ii. It will help the present researcher and further researchers to investigate the place of
foreign debt on economic growth particularly in relation to the output of industry in
Nigeria.

1.7 Scope and Limitation of the study

The study will focus on analyzing the relationship between foreign debt and output of industry in
Nigeria. For this study, time series data ranging from 1981-2022 was adopted. The time period
chosen for this research was based on the availability of data for the research.

1.8 Organization of The Study

The study shall consist of five chapters, chapter one shall contain overview of the study
statement of the problems, the objective which the study seeks to achieve, the research
hypothesis and the significance of the study, organization of the entire study. Chapter two shall
consist of a review of related literature which consists of the conceptual, theoretical and
empirical review of the study conducted on the area of focus. Chapter three consist the method of
data collected for the study, the techniques used in analyzing these data. Chapter four shall
contain the presentation and analysis of the data, chapter five shall consist of conclusion drawn
from the findings and recommendations.

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13
CHAPTER 2

LITERATURE REVIEW

Introduction
2.1 This chapter looks at the conceptual and the theoretical as well as the empirical review of the
study.

2.2 Conceptual Review

2.2.1 Debt stock

Debt stock refers to the total value of the debt that a nation owes to all lenders. Debt stock is a
separate category from debt service payments, which are the payments that a nation makes on its
debt. According to the Debt Management Office (DMO) Nigeria's External Debt Stock as at
June 30th, 2023 amounted $113.42bn.

2.2.2 Debt service

Debt service is the cash that is required to cover the repayment of interest and principal on a
debt for a particular period. If an individual is taking out a mortgage or a student loan, the
borrower needs to calculate the annual or monthly debt service required on each loan.

2.2.3 Debt management

A debt management plan is an agreement between a debtor and a creditor that addresses the
terms of an outstanding debt. Debt management plans help reduce outstanding, unsecured debts
over time to help the debtor regain control of finances. The Debt Management Office (DMO)
Nigeria is a government agency established to centrally coordinate the management of Nigeria's
debt.

14
 2.2.4 Foreign Debt
A country’s gross external debt is the liabilities that are owed to nonresidents by residents.
Foreign debt is money borrowed by a government, corporation or private household from
another country’s government or private lenders.

According to Ezirim (2005) the type of external debt reflects the purpose for which it was
incurred such as:

i. Trade Arrears: trade debt arises when a country trades with other countries and is unable
to pay, either partly or wholly for the goods and services supplied.
ii. Balance of payment support loans: the overall economic transactions between a country and the
rest of the world, classified into current, financial and capital accounts constitutes the BOP
position which could be favorable when there is a surplus or unfavorable when there is a deficit.
Persistent unfavorable BOP may inform government’s decision to seek for BOP support loans
and such loans are in the form of capital inflow and other accommodations provided by
multilateral institutions and bilateral agreements.
iii. Project-tied loans: investments which have good potentials and prospects of accelerating
economic growth and development may lead government into contracting project-tied loans.
iv. Loans for socio-economic needs of the people such as infrastructure, health, education, and other
social amenities may necessitate government borrowing to finance them.

Nigeria have contracted a number of debt obligations from external sources, some of which are:

i. Paris Club of Creditors

This club represents only government guaranteed creditors/ insured component. When the
recipient nation’s government is unable to pay the foreign exchange equivalent of the domestic
currency cover paid by the importer, it becomes government debt owed to creditors’ nations. The
first Paris Club meeting was held in 1956. Such meetings are scheduled to discuss repayment
problems and reach debt relief agreements for debtor nations.

ii. London Club of Creditors

15
These are mainly uninsured and unguaranteed debts extended by their commercial banks to
nationals of debtor nations. Members of the club are commercial banks mainly in industrialized
countries. The first London Club meeting was convened in 1976. Such meetings are held to
discuss repayment problems and restructuring agreements.

iii. Multilateral Creditors

These are international institutions funded by member nations. They include the World Bank,
International Finance Corporation (IFC), The International Development Association (IDA),
Multilateral Investment Guarantee Agency (MIGA), International Monetary Fund (IMF),
African Development Bank (ADB), The European Investment Bank (EIB), The International
Fund for Agricultural Development (IFAD).

iv. Promissory Note Creditors

These are uninsured trade credits, arising mainly from trade arrears accumulated. The debts were
refinanced by the issuance of promissory notes to the creditors.

v. Bilateral and Private Sector Creditors:

A bilateral credit is provided by the government or another. Such credits are intended for
development purposes in the recipient countries. Private sector credits are usually short term,
extended by commercial banks, individual foreign supplier and institutional investors in the form
of suppliers or buyers credits.

2.2.5 Maturity Pattern of Foreign Debt

Ezirim (2005) classified foreign debt by maturities into short-term, medium-term and long-term.
Short-term maturity does not exceed a year while medium-term maturity is such that is more
than a year to five years and long-term maturity exceeds five years. The structure of the maturity
pattern of the debts of a country determines the relative ease with which interests and principal
payments are made. Paris and London Clubs, maturity of promissory notes, debts owed to
bilateral and multilateral creditors, and restructuring agreements are usually medium-term to
long-term. Trade debt and credits from suppliers are short term.

16
2.2.6 Indicators of Debt Burden
A debt burden is a large amount of money that one country or organization owes to another and
which they find very difficult to repay. The following are indices for debt burden:

i. External debt stock to Gross Domestic Product (GDP)

ii. External debt service to Gross Domestic Product (GDP)
iii. External debt stock to Export
iv. External debt service to Export.

2.2.7 Causes of Nigeria's External Debt Problem

Numerous factors contributed to the increased size of Nigeria's external debt which by the end of
2000, stood at US$29 billion. The major factors include the rapid growth of public expenditure,
particularly that on capital projects, borrowing from the international community at non-
concessional interest rates, decline in oil earnings from the late 1970s and the dependence on
imports, which contributed to the emergence of trade arrears. By 1986, short and medium-term
loans constituted about 85.0 percent of the total debt stock. The above developments resulted in
the bunching of debt service, thus compounding the debt situation.

2.3 THEORETICAL REVIEW

2.3.1 Dual-gap Theory

The theory includes the dual gap analysis which explained that development is a function of
investment and that such investment which requires domestic savings is not sufficient to ensure
that development take place. There must be the possibility of obtaining from abroad the amount
that can be invested to fill the gap. In national income accounting, an excess of investment over
domestic saving is equivalent to excess surplus of import over export.

Income = consumption + import + savings

Output = consumption + export + investment

17
Income = output

Then Investment – Saving = Import – Export

The basis of dual gap analysis assures that there is a country that requires saving and investment,
goods import to achieve a particular rate of growth. If the available domestic savings fall short of
the level necessary to achieve the target rate of growth, a savings-investment gap is said to exist,
on a similar note, if the maximum import requirement needed to achieve the growth target is
greater than the maximum possible level of export, then this is an export-import of origin
exchange gap. Furthermore, the theory explains that the need level of external sought funds
means to equilibrate the excess of import over export; this is the basic assumption of the dual gap
theory.

2.3.2 Dependency Theory

Dependency theory states that the poverty of the countries in the periphery is not only because
they are not integrated or fully integrated into the world system, as it is often argued by free
market economists, but because of how they are integrated into the system. From this standpoint
a common school of thought is the Bourgeoisie scholars, who are of the view that the state of
underdevelopment and the constant dependence of less developed countries on developed
countries are as a result of their domestic mishaps. They believe this issue can be explained by
their lack of close integration, diffusion of capital, low level of technology, poor institutional
framework, bad leadership, corruption, mismanagement, etc. (Momoh & Hundeyin, 1999). The
proponents of this School of Thought see the underdevelopment and dependency of the third
world countries as being internally inflicted rather than externally afflicted. To this school of
thought, a way out of the problem is for third world countries to seek foreign assistance in terms
of aid, loan, investment, etc, and allow undisrupted operations of the Multinational Corporations
(MNCs).

18
2.3.3 Debt dynamics Theory
In theoretical explanation of foreign debts and economic activities are the “Debt Dynamics”
which states that the solvency of a country in relation to external debts is associated with the rate
of growth of the real interest rate on debts and the GDP. Under this approach, the government
can be considered to be operating within its budget constraint as long as the expected fiscal
policy stance keeps the debt-to-GDP ratio on a stable (or declining) path. Similarly, Eaton
defined debt dynamics as the condition that 'debt in any period cannot exceed the present
discounted value of the borrowing country's stock of wealth, or future income stream', he
therefore suggests that 'all sovereign borrowers are probably solvent in the sense that the
discounted present value of their national resources exceeds the value of their national debt.

2.3.4 Keynesian Theory

The traditional school of thoughts in finance and economic view leverage as essential for
corporate growth. However, since the great depression of the late 1920’s and early 1930’s when
the Keynesian deficit policy propelled the economies of Western Europe out of depression,
public debt (deficit) has been recognized as a veritable instrument for raising aggregate demand,
employment and output of all economies both developed and developing. Public debt has
consequently gained accelerated prominence among less developed countries. It is seen as a
viable strategy for mobilization of the additional resources required to finance their much desired
developmental needs. This financing strategy seems justifiable on the grounds that available
savings at particular points in time have never matched their desired levels of investment.
Jhingan (2007) argued that less developed countries are saddled with complex foreign debt
problems, because as poor countries, they have low rates of domestic savings and consequently,
investment. As a result, they heavily depend on capital inflows from abroad to finance their
appraised developmental needs. In his view, less developed countries significantly lack the
essential economic and social overhead capital. They also lack the strategic industries such as
iron and steel which are fundamental prerequisites for launching nations into the development
process as opposed to the situation in the Soviet Union, where industrialization began on the
platform of the iron and steel industries. The above circumstances accordingly, made a strong
case for incurring sometimes, external debts with stringent repayment terms. The repayment
terms in turn, facilitate the conditions for debt crisis as a greater proportion of the export

19
proceeds of debtor countries would continually be required to service matured external debts.
Ultimately, accumulation of external debts leads the less developed countries into huge current
account deficits. These deficits are financed by issuance of sovereign bonds by debtor countries,
borrowing from foreign banks and international credit institutions as well as foreign private
firms. The settlement of the bond obligations consequently imposes a serious debt burden on the
less developed economies. Many theories on debts as its use as developmental tools have been
propounded while in the contrast other theories have also shown the negative effect of external
debts.

2.4 EMPIRICAL REVIEW

Chidubem (2023) in a study on the impact of external debt on economic growth in Nigeria from
the period of 1981-2022. The study was built on multiple regression, and the focus variables are
real gross domestic product as dependent variable while external debt, exchange rate, inflation
rate and domestic debt are the independent variables. Ordinary Least Square (OLS) technique
was used in estimating the relationship between dependent and independent variable. The result
indicated that external debt has a negative relationship with economic growth in Nigeria that has
no significant effect. The Granger causality test result shows that there is no causal relationship
between external debt and economic growth in Nigeria. The study recommends that cost of
governance should be reduced so as to enable proper utilization of the available funds for
development purposes and an enabling environment must be created to enhance investment in
the Nigerian economy.

According to the research findings of Ejumegu (2019) on the impact of foreign debt on real
sector performance in Nigeria from 1981 – 2018. According to the study agriculture gross
domestic product, industry gross domestic product, construction gross domestic product, trade
gross domestic product and services gross domestic product have positive relationship with
foreign debt. It also shows that foreign debt contributes significantly to the real sector of Nigeria.
The study recommends that foreign borrowing should only be for investment purposes to fill the
gap left by insufficient domestic investment and savings.

Akingunola et al, (2023) determined that despite, the external loans the Nigerian government
has been receiving all this while, Nigeria continues to record a high rate of unemployment

20
among the active labor force, high poverty rate, low per capita income, inadequate power, and
water supply, inadequate social amenities, bad road network, high budget deficit, high rate of
corruption in all government parastatal. In the study foreign debt and Infrastructural development
in Nigeria, the study examined the effect of foreign debts on Nigeria's infrastructural
developments. The study made use of Auto-regressive Distributed Lag (ARDL), using annual
time series from 1983- 2019. The long-run coefficient reveals that foreign debt have a negative
and positive insignificant and significant effect on infrastructure in Nigeria, while the control
variables of foreign direct investment have a positive and negative significant effect on
infrastructure in Nigeria

The findings give credence to the dual gap theory postulation, that external debt is a
phenomenon that can improve the level of growth of an economy. Conclusively, the study
recommends that government should make sure that the foreign debt received from international
organizations is used for the infrastructural development in the country and proffer policies and
innovations that will help in recovering the foreign debts in the country.

Ejigayehu (2013) also analyzed the effect of external debt on the economic growth of eight
selected heavily indebted African countries (Benin, Ethiopia, Mali, Madagascar, Mozambique,
Senegal, Tanzania and Uganda) through the debt overhang and debt crowding out effect with
ratio of external debt to gross national income as a proxy for debt overhang and debt service
export ratio as a proxy for debt crowding out. Panel data covering the period 1991-2010 was
used. The empirical investigation was carried out on a cross-sectional regression model with tests
for stationarity using Augmented Dickey Fuller tests, heteroscedasticity and ordinary regression.
The concluding result from estimation showed that external debt affects economic growth
through debt crowding out rather than debt overhang. In their study on external debt relief and
economic growth in Nigeria.

Ekperiware and Oladeji (2012) examined the structural break relationship between external debt
and economic growth in Nigeria. The study employed the quarterly time series data of external
debt, external debt service and real GDP from 1980-2009. An empirical investigation was
conducted using the chow test technique of estimation to determine the structural break effect of
external debt on economic growth in Nigeria as a result of the 2005 Paris Club debt relief. The
result of their findings revealed that the 2005 external debt relief caused a structural break effect

21
in the relationship between external debt and economic growth. Based on these findings they
concluded that the external debt relief made available resources for growth-enhancing projects.

2.4 Gap in Literature

It was found after reviewing various scholarly research works that research had been carried out
to examine the relationship between foreign debt and economic growth in Nigeria. However,
most of the studies focused on the effect of foreign debt on the volume of capital formation and
other researchers narrowed their scope to real sector performance in Nigeria; there is little or no
research on the effect of foreign debt on output of industry in Nigeria. This research is thus
covering the period of 1981-2022.

22
CHAPTER THREE

RESEARCH METHODOLOGY

3.1 INTRODUCTION
This chapter of the study deals with methodological analysis of the nexus between foreign debt
and the growth of the construction industry in Nigeria (1981-2022). This includes a detailed
description of the methodology employed, theoretical framework, model specification, technique
of analysis, measurement of variables, data sources and method of data analysis.

3.2 Theoretical framework

The theoretical framework used in this study is the dual gap theory, the theory includes the dual
gap analysis which explained that development is a function of investment and that such
investment which requires domestic savings is not sufficient to ensure that development take
place. There must be the possibility of obtaining from abroad the amount that can be invested to
fill the gap. In national income accounting, an excess of investment over domestic saving is
equivalent to excess surplus of import over export.

Income = consumption + import + savings

Output = consumption + export + investment

Income = output

Then Investment – Saving = Import – Export

3.3 Model Specification

The model is adapted from a simple Macroeconomic debt growth model employed by Ojo
(2012) the model is specified as:

RGDP = ƒ (EXD, DSR, EXR) -------------------------------------- (1)

23
where: RGDP = Real Gross Domestic Product

EDS= External Debt

DSR = Debt Service Ratio

In line with Ojo (2012) the model for this study shall be modified as:

IND = ƒ (DSP, EXD) ----------------------------------------------(2)

Transforming equation (2) into its linear econometric form, we obtain

INDt= β0+ β1 EXDt + β2 DSRt + μt -------------------------------(3)

where: IND= Industry output

DSR= Debt Services Ratio

EXD= External Debt

β0= Constant (intercept)

term β1 and β2 = coefficient parameters of the explanatory variables

μ= Stochastic error term

t= time series notation

3.4 Data sources

The research adopts a quantitative approach, utilizing time-series data collected from the
World Development Indicators covering the period of 1981 to 2022 on Nigeria’s external debt
stock, debt service ratio, and industry output.
3.5 Estimation Technique
To investigate the nexus foreign debt and the output of industry in Nigeria covering the period
(1981–2022), an Augmented Dickey Fuller (ADF) unit root test will be conducted in order to
determine the data order of integration to avoid spurious regression. The stationarity test
determines the use of Auto-regressive Distributive Lag (ARDL)

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25
CHAPTER FOUR

RESULTS AND DISCUSSION

4.1 DESCRIPTIVE STATISTICS

Descriptive statistics are measures used to describe and summarize the main features and
patterns of a data set.

TABLE 4.1: DESCRIPTIVE STATISTICS

Variables Obs Mean Std deviation Jarque-Bera Probability

IND 42 10941.04 15709.99 31.88720 0.0000

EXD 42 34.44896 29.89835 6.163074 0.045889

LNDSR 42 20.95689 0.860026 0.657117 0.719961

Source: Authors compilation using E-views 10.

Table 4. 1 shows the descriptive statistics of the variables in the model with output of industry
having mean of 10941.04 and probability of 0.0000 as the dependent variable in the model while
external debt is having mean of 34.44895 and probability of 0.045889 and debt servicing ratio is
having mean of 20.95689 and probability of 0.719961 as independent variable. Therefore, the
variables are normally distributed given the Jarque-Bera statistics which is greater than 0.05 with
the exception of industrial output and external debt which are less than 0.05 with 42
observations.

26
4.2 Pre-estimation Test

4.2.1 Stationarity (Unit Root) Test

Table 2: Unit Root Test

LEVEL FIRST DIFFERENCE

Variables Adf stat. 5% c.v Prob. Adf stat. 5% c.v Prob. Rem.

IND 3.426019 -3.523623 1.0000 -3.791714 -3.526609 0.0274 I(1)

EXD -2.316583 -3.523623 0.4160 -6.072132 -3.526609 0.0001 I(1)

LNDSR -2.595508 -3.523623 0.0843 -5.736501 -3.526609 0.0001 I(1)

Source: Author’s compilation using E-View 10

Tables 4.2 indicate the unit root test using Argument Dickers Fuller (ADF) which shows that the
variables are significant at level and at first difference because their probability are greater than
0.05 and negative at 5% critical value.

4.2.2 Histogram – Normality Test

Figure 1: normal distribution test

27
Figure 1 shows the histogram – normality test. The result indicates that the residuals of the
variables in the model are not normally distributed since the probability value of Jarque-Bera
statistic is 10.91816 with a P value 0.004257. Therefore, it seems that the error in the variables
do not follows the normal distribution.

4.3 ESTIMATION OF RESULTS AND DISCUSSION

TABLE 4.3: LONG-RUN COINTEGRATION TEST
F-Bounds Test

t-stat. Value Sig. 1(0) 1(1)

F-Stat. 17.51372 10% 2.63 3.35

K 2 5% 3.1 3.87

1% 4.13 5

Source: owner’s compilation using E-views 10.

Table 4.3 shows the long-run cointegration test indicating the F-Bounds test which reveals that
the F-statistics value is 17.51372 at various percentages of significance. At 10% it indicates that
it is 2.63 at level and 3.35 at first difference, at 5% it indicates that it is 3.1 at levels and 3.87 at
first difference, and at 1% it is 4.13 at levels and 5 at first difference. Thus, it means that there is
cointegration at 1%.

TABLE 4.4: ARDL SHORT-RUN RESULTS

Variables Coefficient Std. Error T-stat. Prob.

EXD -0.114591 12.82516 -0.008935 0.9929

LNDSR 464.3135 394.1946 1.177879 0.2464

CointEq(-1)* 0.160399 0.018431 8.702587 0.0000

Source: Author’s Compilation

28
Table 4.4 shows the result of ARDL short-run coefficient test between foreign debt and output of
industry in Nigeria. The results indicate that external debt is having negative and insignificant
relationship on output of industry and debt servicing ratio is having positive and in significant
relationship on output of industry in Nigeria in the short-run. And there is no adjustment to long
run equilibrium if there is short run disequilibrium in the model.

TABLE 4.5: ARDL LONG-RUN RESULTS

Variable Coefficient Std. Error t-stat. Prob.

EXD 0.714412 80.01283 0.008929 0.9929

LNDSR -2894.735 2460.017 -1.176713 0.2468

C 60890.46 50431.51 1.207389 0.2349

Source: Author’s compilation using E-views 10.

Table 4.5 shows the long-run ARDL test which indicate that all the variable are insignificant
because their probability is greater than 0.05. Also, external debt is having positive and
insignificant relationship on output of industry and debt servicing ratio is having negative and
insignificant relationship on output of industry in Nigeria in the long-run.

TABLE 4.6: BREUSCH-GODFREY SERIAL CORRELATION LM TEST

F-Stat. Prob. F (2, 35) Obs*R2 Prob. Chi-Square (2)

0.852851 0.4349 1.905257 0.3857

Source: Author’s compilation using E-views 10.

Table 4.6 shows the Breusch-Godfrey Serial Correlation LM Test which indicate that: F-
Statistics is 0.852851, F-Probability is 0.4349, R-Square is 1.905257 and Chi-Square is 0.3857.
This indicates that there is no serial correlation.

TABLE 4.7: BREUSCH-PAGAN-GODFREY HETEROSCEDASTICITY TEST

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 F-Stat. Prob. F (3,37) Obs*R2 Prob. Chi-Square (8)

6.109584 0.0017 13.58207 0.0035

Source: Author’s compilation using E-views 10.

Table 4.7 shows Breusch-Pagan-Godfrey Heteroscedasticity Test indicate that: F-Statistics is

6.109584, F-Probability is 0.0017, R-Square is 13.58207 and Chi-Square is 0.0035, meaning
there is heteroscedastic.

TABLE 4.8: STABILITY TEST

Value Df Probability

t-statistic 0.487652 36 0.6288

F-statistic 0.237805 (1,36) 0.6288

Source: Author’s compilation using E-view 10.

Table 4.8 shows the stability test which indicate that: T-Statistics and F-Statistics at value are
having 0.487652 and 0.237805 respectively with degree of freedom of 36 and (1, 36) and
Probability of 0.6288 respectively, showing the presence of stability in the model.

Table 4.9: Pairwise Granger Causality Test

Null Hypotheses Obs. F-stat. Prob.

EXD does not Granger Cause IND 40 0.06592 0.9363

IND does not Granger Cause EXD 0.50306 0.6090

LNDSR does not Granger Cause IND 40 0.12556 0.8824

IND does not Granger Cause LNDSR 1.68867 0.1995

Source: Author’s compilation using E-view 10.

30
Table 4.9 shows the result of causality test using the Granger Causality test. The result indicates
that there is no causal relationship between output of industry and other independent variables
(external debt and debt servicing ratio) and as such, the null hypothesis is not rejected

4.4 SUMMARY OF RESULTS

The descriptive statistics of the variables in the model with output of industry having mean of
10941.04 and probability of 0.0000 as the dependent variable in the model while foreign debt is
having mean of 34.44895 and probability of 0.045889 and debt servicing ratio is having mean of
20.95689 and probability of 0.719961 as independent variable. Therefore, the variables are
normally distributed given the Jarque-Bera statistics which is greater than 0.05 with the
exception of industrial output and external debt which are less than 0.05 with 42 observations.
The unit root test using Argument Dickers Fuller (ADF) which shows that the variables are
significant at level and first difference.

The long-run cointegration test indicating the F-Bounds test which reveals that the F-statistics
value is 17.51372 at various percentages of significance. At 10% it indicates that it is 2.63 at
level and 3.35 at first difference, at 5% it indicates that it is 3.1 at levels and 3.87 at first
difference, and at 1% it is 4.13 at levels and 5 at first difference. Thus, it means that there is
cointegration at 1%.

The result of ARDL short-run coefficient test between foreign debt and output of industry in
Nigeria. The result indicate that foreign debt is having negative and insignificant relationship on
output of industry and debt servicing ratio is having positive and in significant relationship on
output of industry in Nigeria in the short-run.

The long-run ARDL test which indicate that all the variable are insignificant because their
probability is greater than 0.05. Also, foreign debt is having positive and insignificant
relationship on output of industry and debt servicing ratio is having negative and insignificant
relationship on output of industry in Nigeria in the long-run.

The result of causality test using the Granger Causality test. The result indicates that there is no
causal relationship between output of industry and other independent variables (external debt and
debt servicing ratio) and as such, the null hypothesis is not rejected

31
32
CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary
The industrial sector is a vital component of Nigeria's economic diversification efforts,
encompasses various industries crucial for job creation and technological development. Foreign
Debt however, is essential in order to secure capital formation especially in cases where it is
difficult to increase taxes in order to generate revenue.

In summary, the dynamics relationship between foreign debt and industrial output in Nigeria
according to the research findings indicate that foreign debt is having negative and insignificant
relationship on output of industry and debt servicing ratio is having positive and in significant
relationship on output of industry in Nigeria in the short-run.

5.2 Conclusion
In conclusion, the analysis of foreign debt on the output of industry in Nigeria has shown
that foreign debt is having negative and insignificant relationship on output of industry and debt
servicing ratio is having positive and in significant relationship on output of industry in Nigeria
in the short-run. Through the use of ARDL analysis, it was determined that there is a negative
relationship between foreign debt and industrial output. This suggests that higher levels of
foreign debt are associated with lower levels of industrial output in Nigeria. The result indicates
that there is no causal relationship between output of industry and other independent variables
(external debt and debt servicing ratio).

5.3 Recommendation
As Nigeria continues to rely on external borrowing to finance various development
projects and address budget deficits, it is important to consider the potential negative effects of
foreign debt on the industrial sector. Thus, it is recommended that the government and
policymakers in Nigeria take proactive measures to manage and reduce foreign debt levels,

33
especially through exploring other alternative sources of funding for development projects.
Foreign borrowing should only be for investment purposes to fill the gap left by insufficient
domestic investment and savings.

Additionally, efforts should be made to improve the efficiency and productivity of the
industrial sector to mitigate the adverse effects of foreign debt on industrial output, addressing
the challenges and leveraging opportunities is crucial for sustainable growth in this vital sector.

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