1.1 BACKGROUND OF STUDY
“Since the collapse of the oil boom in 1981, the Nigerian economy has undergone considerable strains and stresses. The pressure has been evident in the persistent deficits in balance of payments, low external reserves, deficit in government finances, mounting external debts etc”.( Central Bank of Nigeria,1992)
The inherent weakness in the structure of the economy as reflected in the over-dependence on foreign exchange earnings from oil, undue dependence on imports for its productive base in the face of declining foreign exchange earnings and weak terms of trade led to a situation in which government sought to bridge the domestic financial gap with external borrowing.
Until recently that the Nigerian government negotiated and secured about $18b debt relief from the Paris club of creditors, this external borrowings which was supposed to place the economy in a sound footing for economic recovery assumed an alarming proportion without noticeable improvement in the economy.
According to Sanusi (1988), ”the emergence of the glut in the international crude oil market in 1978 with the attendant strains on the balance of payments, external reserves and government finances, Nigeria, for the first time had recourse to borrow in large chunks and shorter maturities from the International Capital Market (ICM) at higher and variable interest rates”. A number of ICM jumbo loans were negotiated in 1978 and 1979 for balance of payments support purposes, and for the establishment of a domestic steel industry.
Stressing further, Sanusi (1988), opines that many more such ICM loans were raised especially as funds from bilateral and multilateral institutions became increasingly inadequate to meet the needs of governments. Consequently, ICM loans rose rapidly from $1.0billion in 1979 to $5.5billion in 1982 and to $23.5billion in 1987, when it constituted 40.2 percent of total external debt.
In the same period, state governments joined the bandwagon of external borrowing. By 2005, Nigeria’s external debt stock stood at $34billion, at a time when the total volume of exports from which to service the debt had dwindled by over a half in real terms. Such huge external debt stock with the associated debt service hampered economic growth and employment through principally putting a limit on imports as well as the development of infrastructure, which are critical for domestic productive activities.
Ojo (1989), states that, “it is no exaggeration to claim that Nigeria’s huge external debt was one of the hard knots of the Structural Adjustment Programme (SAP) introduced in 1986 to put the economy on a sustainable path to recovery”. The corollary of this statement is that if only the high level of debt service payments was reduced significantly, Nigeria would have been in a position to finance a large volume of domestic investment which would enhance growth and employment, but more often than not, a debtor has only very limited room to manage a debt crisis to advantage.
Only recently, owing to the unbearable burden of the debt stock, the Nigerian government initiated a debt relief agenda that led to an $18billion debt forgiveness from the Paris club.