2 Macroeconomic Approach to External Debt: The Case of Nigeria

Mohsin Khan, and Simeon Ajayi
Published Date:
May 2000
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S. Ibi Ajayi

One of the greatest problems facing many sub-Saharan African countries is the amount of their external indebtedness. This problem is becoming more acute for a number of reasons. First, the debt is enormous relative to the size of the economy and can lead not only to capital flight but also to the discouragement of private investment. Second, debt-servicing payments absorb a major proportion of annual export earnings. Meeting debt-servicing obligations eats significantly into whatever other facilities can be provided to improve the welfare of the country’s citizens; it therefore has macroeconomic implications. This raises the question of whether a country can grow fast enough to maintain debt obligations and maintain adequate domestic investment. Third, the burden of debt for a large number of sub-Saharan countries threatens not only the execution but also the prospects of success of adjustment programs. Fourth, the current system of debt management has a dire impact on an economy’s overall output. This assumes a significant magnitude when the time expended by chief executives of debtor countries involved in the various phases of rescheduling negotiations is considered.

It has been claimed that debt payments have been neither the fundamental cause of Africa’s slow growth nor the cause of its other difficulties. The debt problem is nevertheless becoming more acute as the proportion of debt payments ineligible for rescheduling is rising rapidly. The implication of this is clear, as discussed previously. In addition, the cost of debt transfer from scheduled debt repayments into lower, manageable payments is growing. The external indebtedness of African countries is an obstacle “to the restoration of the conditions needed for growth” (World Bank, 1988, p. xix).

Sub-Saharan African countries fall into different groups when the issue of debt is discussed. The two most significant groups are the debt-distressed countries and the heavily indebted ones. Experiences differ, however, not only between these groups but also among countries in the same group. It is in this light that an explanation of the debt crisis must necessarily be country specific. Two West African countries, Côte d’Ivoire and Nigeria, belong to the group of 17 heavily indebted countries. The focus of this chapter is on Nigeria.


The broad objectives of this chapter are to

  • analyze trends in and causes of debt accumulation and servicing;

  • determine debt-service ratios and debt-servicing capacity;

  • calibrate a debt viability model and provide appropriate scenarios; and

  • draw policy implications.

Specifically, the chapter will

  • examine Nigeria’s debt, including its size, structure, source, type, and composition;

  • analyze indexes for measuring the debt burden and debt-servicing capacity;

  • distinguish between the internal and external factors influencing external debt accumulation;

  • identify the changes in the international environment necessary to alleviate the debt burden; and

  • examine the relationship between export performance and the debt burden.

General Economic Background

A study on the macroeconomic aspects of debt in Nigeria is not complete without a preliminary discussion of the structure of Nigeria’s economy and political history. The present problems of Nigeria, including the accumulation of debt, cannot be divorced from the structural defects inherent in the economy at independence in 1960 and the political economy of development since independence.

At the time of independence, Nigeria was heavily dependent on agriculture as the mainstay of the economy. Shortly after independence, about 64 percent of GDP originated in the agricultural sector. The contribution of this sector systematically declined, however, until it reached an all-time low of about 17 percent in 1982.

Nigerian oil came vigorously on the economic scene in 1970, when Nigeria became a member of the oil-producing nations. From then on, oil became the catalyst in Nigeria’s growth. Nigeria benefited immensely from the sharp petroleum price increases in 1973–74 and again in 1979–80. By 1976 oil had become the major source of government revenue and the main foreign exchange earner, accounting for over 80 percent of both. Consequently, the relative importance of oil increased at the expense of other sectors.

These revenues provided the basis for significant increases in government expenditure designed to expand infrastructure and improve non-oil productive capacity. Indeed, the large oil revenues “not only provided government with the financial resources to undertake new programs and projects and to expand oil programs, but they affected the very institutions which were to make policy and the nature of centralization of authority and decision making in Nigeria” (Bienen, 1983, p. 2). Pressures on expenditure were exerted from all sides. The creation of more states meant more expenditure on infrastructure. In spite of spending on some important projects, some projects were undertaken without sufficient attention being paid either to their economic viability or to the executive capacity of government (Tallroth, 1987). Of importance in the success (or failure) story is the increase in government expenditure, especially on construction and urban services, which was accompanied by price and wage increases that drastically reduced producers’ incentives in the non-oil tradable sector.

A result of the neglect of agriculture in the first instance, coupled with an appreciation of the currency, the naira, was that agricultural exports fell. Imports became relatively cheaper in the domestic market as a result of the government’s attempt to curb inflation. Nigeria became a major food importer, and its dependence on oil gave it the character of a monoproduct economy.

One of the features of the economy during the oil boom of the 1970s was its high degree of openness. The economy depended heavily on the external sector in its manufacturing development strategy. Consequently, capital-intensive technology and assembly-type industries dependent on imported inputs were stimulated, and Nigeria had a high import-GDP ratio. Indeed, the need to protect a given level of availability of consumer goods became so pervasive that it was difficult to cut expenditures in this area. During most of the 1970s, budgetary expenditures were greater than the fast-rising income from oil.

There occurred a slump in the oil market in 1978. This precipitated an economic downturn despite the fact that the danger of maintaining a monoproduct economy based on exports of an exhaustible resource had been evident earlier. The reawakening in the oil market in 1979–80 was a reassurance that all was not lost. However, the breathing space provided was in the end very short-lived (Ajayi, 1986).

After 13 years of military rule, a civilian regime arrived on Nigeria’s political scene in 1979. The oil market weakened in the 1980s, bringing about a reduction in export earnings. But with the new constitutional system, and with intensification of inappropriate macroeconomic policy (plus a system of tariff protection and import licensing) resulting in a further appreciation of the naira, large external borrowing became inevitable after the country’s foreign exchange reserves had been substantially run down. The large external borrowing of the late 1970s continued, with substantial increases between 1978 and 1983.

The government resorted to austerity measures in 1982 and 1983 but relied heavily on controls and regulations rather than correcting the structural distortions. This worsened the situation. With a new government in power in 1985, policies changed toward a desire to combine austerity with adjustment. Between 1985 and 1986 the external debt increased by about 20 percent. The year 1985 was crucial not only because of the economic malaise afflicting the economy and the urgent need for adjustment, but also because of the national debate surrounding the acceptance of IMF lending. The dramatic fall in oil prices in 1986 increased the urgency of reform, and Nigeria put a structural adjustment program in place in July of that year.

Dimensions of the External Debt Problem

How much does Nigeria owe? There is a general belief among Nigerians that Nigeria does not know how much it owes. In other words, the genuineness of the debts is in dispute. The genuineness is related not only to false claims but also to serious accounting problems with some debt transactions. In its 1986 budget, the federal government made the following statement (Federal Republic of Nigeria, 1986, p. xi):

In respect of external debt management, Government affirms its readiness to honour its obligations to clearly-established creditors, consistent with available foreign exchange resources accruing to the country and with the dictates of national survival. In this respect, Government has decided that no more than 30% of such resources will be taken up in 1986 for external debt servicing. We believe that this is a realistic estimate considering recent revelations in the JMB affair and the foreign exchange scandals with the implication that not all purported external debts would eventually be certified.

Conceptual and Practical Problems

There are both conceptual and practical problems in estimating foreign debt (Krueger, 1987). First, current account deficits can be financed—if only temporarily—by running down reserves or selling foreign assets. To the extent that large payment imbalances are financed in this way, any estimate of the change in debt understates the true rate of increase in the debt. The most appropriate concept for analyzing the sustainability of debt is therefore a net concept. However, only gross data are available in published form.

Second, currency revaluation can significantly affect the amount of debt outstanding. Therefore the increase in debt in a particular year may not necessarily equal the amount of external funds borrowed.

Third, it is important to realize that different types of debts do exist. Debt at concessional terms is different from debt at commercial terms. The rate at which funds are borrowed is also important.

Another conceptual problem of measurement arises from the inconsistency of the debt figures published by official sources. For data published in Nigeria, consistent time series are often not available. What are often found are data series that cannot be meaningfully analyzed on a consistent basis. Publications of the World Bank and the IMF also often have the same defects; for example, the figures for debt sometimes depend on which World Bank publication is being used. Changes in the figures sometimes reflect improvement of measurement standards.

Most of the statistics used for this chapter are nevertheless drawn from World Bank publications and denominated in U.S. dollars. Even though some justification can be made for using Nigeria’s official sources, if only to show the magnitudes of change in naira terms given the variation in the exchange rate, there are advantages in using World Bank publications. The first is that some of the statistics used here are not generally available from domestic official sources. When such data exist, they are often not current or consistent. Inconsistent data series make comparisons difficult. Second, international comparisons are easier to make when a common currency such as the dollar is used.

Finally, it is important to recognize attempts made to reduce debt (Frydl and Sobol, 1988). Debt reduction can be brought about through negotiated changes in the terms and conditions of contracted debt. Steps such as debt rescheduling and retiming of interest payments may reduce the amount of interest to be paid in any given year. Other debt reduction mechanisms include debt conversion, debt-equity swaps, and debt buybacks, which reduce the present value of debt-service obligations.

Since April 1986 Nigeria has taken steps to restructure its debt. For commercial banks (multilateral), a total of $4.7 billion was restructured in April 1986 and November 1987. In March 1989, $6.0 billion was restructured. A total of $13.3 billion in debt to official creditors was restructured between October 1986 and March 1989 (World Bank, 1990b).

The Magnitude of Nigeria’s External Debt

Table 1 shows the size of Nigeria’s external indebtedness in both current-dollar and constant-dollar values for the period 1970–88. From 1970 to 1973 Nigeria’s external debt in current dollars grew at very high rates, particularly in 1972–73. The external debt in current dollars fell between 1975 and 1976 but has risen steadily since then. Whereas nominal debt grew by about 44 percent from 1982 to 1983, growth in constant dollars was more pronounced, at about 51 percent. From 1985 to 1986, the growth rate of nominal debt was about 20 percent, but only about 16 percent in constant dollars.

Table 1.Nigeria: External Debt, 1970–88
In Current DollarsIn Constant Dollars
In millions of dollarsChange from previous year (In percent)In millions of dollars1Change from previous year (In percent)
Sources: World Bank (1990a, 1990b); World Bank data; and IMF, International Financial Statistics Yearbook, 1989.

Calculated as the nominal value of external debt deflated by the World Unit Import Value Index, 1985=100 (Dornbusch and Helmers, 1988).

Sources: World Bank (1990a, 1990b); World Bank data; and IMF, International Financial Statistics Yearbook, 1989.

Calculated as the nominal value of external debt deflated by the World Unit Import Value Index, 1985=100 (Dornbusch and Helmers, 1988).

The growth rate of external debt fell between 1975 and 1976, but the debt rose astronomically between 1976 and 1977 and continued rising from 1978 until 1983. Even though the percentage indebtedness increased between 1983 and 1988, it was of a different magnitude. The growth in external debt in constant dollars shows a fairly similar pattern to that in current-dollar terms. To explain the sharp jumps during 1977, 1978, 1980, 1981, and 1983, one needs to recognize developments within the Nigerian economy. The period of the 1970s can be regarded as one of successful growth, and Nigeria benefited from the oil price shock of 1973–74, when the price of oil quadrupled. In 1972–73 and 1973–74 exports grew by 94 percent and 138 percent, respectively. Over the entire 1970–80 period, exports grew annually at an average rate of 41 percent, while imports grew at an annual rate of 35 percent. In 1978, however, there was a glut in the international oil market. Nigeria’s exports fell by about 13 percent, and imports increased by about 64 percent. Given the country’s creditworthiness, it was not difficult to obtain external credit, and borrowing seemed sustainable because of the worldwide inflation and the consequent negative real interest rates.

Between 1979 and 1983 a number of developments affected Nigeria’s level of indebtedness. The civilian regime that came to power in 1979 did not fail to avail itself of the opportunity and attraction of external borrowing. Developments in the external sector also helped increase the debt. Consequent to the second oil price increase in 1979, the stance of macroeconomic policy in the industrial countries changed. The anti-inflationary macroeconomic policy they adopted caused worldwide recession, the highest real rates of interest in the postwar era, and sharply falling prices of commodities (Krueger, 1987). Between 1980 and 1983 the value of Nigeria’s exports fell at an annual average rate of 6.5 percent. In 1981, 1982, and 1983 the value of exports fell by 29, 35, and 16 percent, respectively. In 1980 Nigeria began borrowing from private sources. The share of private borrowing rose to 85 percent in 1980-82, compared with only 31 percent in 1970–72 (Table 2). Debt at floating rates, which was only 0.7 percent of total debt in 1973–75, was 48.6 percent in the 1980–82 period. Simultaneously, the interest rate paid on new commitments rose by 39.5 percent between 1975 and 1978, and by about 11 percent between 1981 and 1983. Between 1975 and 1980, private creditors’ average terms for new commitments also rose by about 67 percent.

Table 2.Nigeria: Composition of Long-Term External Debt Outstanding, 1970–87(In percent of total)
Type of Debt1970–721973–751980–821987
Debt from official sources68.814.644.6
Debt from private sources31.285.455.4
Debt at floating rates0.748.648.8
Source: World Bank (1989b, p. 154).
Source: World Bank (1989b, p. 154).

Structure, Source, Type, and Composition of External Debt

There are various ways of characterizing external debt. First, external debt can be classified on the basis of the status of the donor, generally divided into official and private debts. Official debts are those obtained from national governments or their agencies or from international agencies like the World Bank and the IMF. Private debts consist of those obtained from private creditors and include Eurodollar loans, suppliers’ credit for exports, and loans from private commercial banks.

Another useful classification is the maturity structure of external debt. Short-term debts are those with an original maturity of one year or less. Long-term debts are generally subdivided into public or publicly guaranteed debt and private nonguaranteed debt. Publicly guaranteed external debt is usually defined as the external debt obligation of a private debtor that a public entity guarantees for repayment.

Over the last few years, a number of structural changes have occurred relating to Nigeria’s external debt. Two of these are significant: the composition of external debt outstanding and the terms of borrowing at fixed or floating rates. Table 2 showed the composition of debt outstanding between 1970 and 1987 from different sources. External debt from official sources was about 69 percent, while that from private sources was about 31 percent in 1970–72. In 1980–82, debt from official sources declined to about 15 percent while debt from private sources rose to about 85 percent. This represents a structural change in the sources of funding. As official loans were difficult to obtain, Nigeria found private sources attractive and borrowed from them at floating interest rates. In 1987, debt from official sources fell from its 1970–72 level to about 45 percent, while the share from private sources was about 55 percent.

Another important aspect of Nigeria’s debt relates to the variation in the share of debt at floating rates between 1973 and 1987. Between 1973 and 1975 less than 1 percent of total long-term debt was at floating rates. This share rose to about 49 percent in 1980–82 and stayed at about that level in 1987.

Thus, two significant characteristics of Nigeria’s debt structure are the increase in debt contracted at floating interest rates and the decrease in the share of official loans. One of the macroeconomic implications of floating rates is an ever-rising debt service. This will have great implications for resource use and hence for growth.

External debt can further be broken down into public and publicly guaranteed debt, private nonguaranteed debt, and short-term debt. The significant changes for these groupings occurred in the period 1980–88 (Table 3).

Table 3.Nigeria: Public, Private, and Short-Term Debt, 1980–88
Long-Term Debt
Total External DebtPublic and publicly guaranteedPrivate nonguaranteedTotalShort-Term Debt
(In millions of U.S. dollars)In millions of U.S. dollarsShare (In percent)In millions of U.S. dollarsShare (In percent)In millions of U.S. dollarsShare (In percent)In millions of U.S. dollarsShare (In percent)
Source: World Bank (1989b, 1990b).
Source: World Bank (1989b, 1990b).

As can be seen from Table 3, public and publicly guaranteed debt increased from 79 percent of total debt in 1980 to about 99 percent in 1988. On the other hand, the share of private, nonguaranteed loans declined from about 21 percent in 1980 to about 1 percent in 1988. Short-term debt steadily declined, from 40 percent of total external debt in 1980 to about 20 percent in 1982 and finally to about 6 percent in 1988.

Table 4 gives information on the average terms of new commitment for the period of interest. In general, the average interest rate rose between 1971 and 1973. It rose again after a drop in 1974 and continued rising for most of the period between 1978 and 1983. The maturity structure of loans also varied between 1970 and 1988. In the early 1970s the average maturity was about 20 years. This dropped thereafter to an average of 9.7 years between 1978 and 1983 but increased again between 1984 and 1988. In the early 1970s the percentage of loans at concessional rates was higher than in the late 1970s and early 1980s. Also, the share of debt at variable interest rates as a proportion of public debt outstanding and disbursed was less than 3 percent between 1970 and 1977. By 1978 it had risen to about 61 percent. In 1988, the ratio stood at 42 percent, a significant increase from the 1970 level.

Table 4.Nigeria: Average Terms of New Debt Commitments, 1970–88
Interest RateGrant ElementMaturityGrace PeriodConcessional Debt as Share of Total Public DebtVariable-Interest-Rate Debt as Share of Total Public Debt
(In percent)(In percent)(In years)(In years)(In percent)(In percent)
Source: Author’s calculations from data in World Bank (1989b, 1990b).
Source: Author’s calculations from data in World Bank (1989b, 1990b).

To consider these changes, we should discuss the changes in composition between official and private creditors in total debt service, interest payments, principal payments, debt outstanding and disbursed, debt outstanding and undisbursed, commitments, disbursements, net flows, and net transfers. According to the World Debt Tables (World Bank, 1990a, p. xiii), the terms listed above are defined as follows: “Disbursements are drawings on loan commitment during the year specified. Net flows (or net lending or net disbursements) are disbursements minus principal repayments. Net transfers are net flows minus interest payments of disbursement minus total debt service payments.”

In 1974 the share of private creditors in total debt service was 66 percent (Table 5). This rose to 83.5 percent in 1976 but declined thereafter. By 1984, however, it had risen to a peak of 96.2 percent. By 1986 it stood at about 73 percent. Of interest payments due in 1974, about 14.3 percent were paid to private creditors (Table 6). This share declined to about 6 percent in 1978. Between 1974 and 1978 most interest payments were made to official creditors. After 1978 the situation changed. Total interest payments to private creditors and the share paid to them rose substantially, with the latter reaching a peak of about 91 percent in 1982. By 1988 the share stood at about 51 percent.

Table 5.Nigeria: Total Debt Service, 1970–88
In Millions of U.S. DollarsIn Percent of Total
Source: World Bank, World Debt Tables, various issues.
Source: World Bank, World Debt Tables, various issues.
Table 6.Nigeria: Interest Payments, 1970–88
In Millions of U.S. DollarsIn Percent of Total
Source: World Bank, World Debt Tables, various issues.
Source: World Bank, World Debt Tables, various issues.

The share of principal repayments to private creditors was 80 percent in 1974 (Table 7). This rose steadily until 1976, when the share stood at 92 percent. The share fell between 1977 and 1979, after which it started to rise, reaching a peak of 96 percent in 1984. A substantial reduction occurred after 1984, and the private creditor share was only about 37 percent in 1988.

Table 7.Nigeria: Principal Repayments, 1970–88
In Millions of U.S. DollarsIn Percent of Total
Source: World Bank, World Debt Tables, various issues.
Source: World Bank, World Debt Tables, various issues.

Patterns of debt outstanding and disbursed, debt outstanding and undisbursed, commitments, disbursements, net flows, and net transfers (not shown) reveal that in almost all cases the share of private creditors predominated from about the middle or late 1970s.

Nigeria’s external debt by source is shown in Table 8. For the period for which statistics are available, Eurodollar loans became important beginning in 1978, rising to a share of 65 percent in 1982. Table 9 shows a simplified accounting of Nigeria’s external debt by type for the period covered in this study. Trade arrears started exerting a very strong trend in 1982 and formed the largest type of debt by 1984. Until then debt incurred in the international capital market formed the largest component. The table also illustrates the important relationship between bilateral and multilateral external debt. Until 1982, bilateral debt was more important than multilateral debt. By 1982, however, the value of multilateral debt had shot up significantly, and it rose to about three times the size of bilateral loans in 1988. From about 43 percent in 1984, the federal government share of external loans rose to about 84 percent in 1987 (Table 10). The international capital market share of this debt was about 50 percent in 1984; it steadily declined thereafter until 1987, when it stood at 25 percent, but it remained the predominant source. For state government debt, while the international capital market remained the major source, its share declined from about 12 percent of total external debt in 1982 to 10 percent in 1987.

Table 8.Nigeria: External Debt by Source, 1969–82(In percent of total external debt)
Contractor finance22.9820.5217.2511.570.
African Development Bank0.
Soviet Union0.
United Kingdom33.1133.1830.4620.2716.6614.5511.452.923.481.632.041.571.78
United States10.5811.7416.1318.0014.6114.4313.7513.813.673.062.632.051.78
World Bank22.9820.5217.2539.7937.8436.0134.780.0012.3210.179.607.706.99
Eurodollar loans0.
Source: Central Bank of Nigeria, Annual Report and Statement of Accounts, various issues.
Source: Central Bank of Nigeria, Annual Report and Statement of Accounts, various issues.
Table 9.Nigeria: External Debt by Type, 1970–88(In millions of naira)
Debt Type1970197119721973197419751976197719781979
International capital market641.01,027.8
Trade arrears
(unguaranteed state or private loans)350.770.537.318.917.623.222.16.4259.813.9
Source: Central Bank of Nigeria, First Bank Quarterly Review, March 1990, pp. 25–26.
Debt Type198019811982198319841985198619871988
International capital market1,090.21,317.55,474.45,026.56,003.17,726.421,725.340,546.354,563.3
Trade arrears1,891.74,283.46,598.47,438.2102,597.347,593.661,194.2
(unguaranteed state or private loans)11.2175.7669.7522.1312.6477.41,300.01,898.05,898.3
Source: Central Bank of Nigeria, First Bank Quarterly Review, March 1990, pp. 25–26.
Source: Central Bank of Nigeria, First Bank Quarterly Review, March 1990, pp. 25–26.
Table 10.Nigeria: External Debt Outstanding, 1982–87(In percent of total)
International capital market50.2536.9425.6131.2532.9825.06
World Bank3.1825.796.9935.099.295.92
Capital interest on rescheduled debt0.
Refinanced debts and promissory notes0.0014.418.877.3710.0220.47
Accrued interest on letters of credit0.
Letters of credit0.000.000.0035.6520.3724.61
Guaranteed state enterprise loans0.
International capital market11.8310.589.7913.4419.4410.44
World Bank2.872.562.862.341.972.81
Unguaranteed SGS loans7.594.942.412.763.140.93
Unguaranteed private sector loans0.
Payment arrears22.4726.0641.480.000.000.00
Source: Central Bank of Nigeria, Annual Report and Statement of Accounts, various issues.
Source: Central Bank of Nigeria, Annual Report and Statement of Accounts, various issues.

External Debt Burden, Debt-Service Ratios, and Debt-Servicing Capacity

The debt burden of a country inevitably imposes a number of constraints on its growth prospects. The burden of principal and interest payments, for example, drains the nation’s resources and curtails the possible expenditure of resources on other productive ventures. This is even more constraining, considering that the incomes from which debts are to be serviced are very small. This gives rise to three macro-economic problems: earning foreign exchange, finding extra budget resources for debt service, and adjusting to a reduction in spendable resources.

To reduce the debt burden and increase debt-servicing capacity, there is a need for an increase in exports and a reduction in world interest rates, among other things. This raises some basic macroeconomic issues relating to international trade and costs. To the extent that the increasing protectionism of the developed countries prevents entry of developing country commodities into world markets, and rising real interest rates are maintained, the debt burden of many developing countries may not abate. Thus, part of getting out of debt is related to events in the international sector (Ajayi, 1989a).

A number of macroeconomic aggregates and debt data are often used to assess the external situation of any given country. These ratios generally offer measures of the cost of, or the capacity for, debt servicing. The following ratios are often used:

  • total debt service to exports of goods and services (referred to here as DSR1);

  • interest payments to exports of goods and services (DSR2);

  • debt outstanding and disbursed to exports of goods and services (DSR3);

  • debt outstanding and disbursed to GNP (DSR4);

  • total debt service to GNP (DSR5);

  • interest payments to GNP (DSR6);

  • reserves to debt outstanding and disbursed (DSR7);

  • total external debt to exports of goods and services (DSR8); and

  • total external debt to GNP (DSR9).

Table 11 shows the trends in these variables for the period 1970–88. The various indexes depict the debt burden and the debt-servicing capacity of Nigeria. The ratio of external debt to income and the ratio of external debt to exports of goods and services are two of the most important indexes. The most convincing evidence of a country’s ability to service foreign debt is the stream of foreign exchange it earns. This is perhaps one of the reasons why “international lenders see the ratio of a nation’s debt to exports as an important debt-burden indicator” (Sweet, 1987, p. 9).

Table 11.Nigeria: Indicators of Debt Burden and Debt-Servicing Capacity, 1970–88(In percent)
Source: Author’s calculations using data in World Bank (1989b, 1990a, 1990b).Note: Variables are defined as follows:
  • DSR1 = ratio of total debt service to exports of goods and services (TDS/XGS)

  • DSR2 = ratio of interest payment to exports of goods and services (INT/XGS)

  • DSR3 = ratio of outstanding and disbursed debt to exports of goods and services (DOD/XGS)

  • DSR4 = ratio of debts outstanding and disbursed to GNP (DOD/GNP)

  • DSR5 = ratio of total debt service to GNP (TDS/GNP)

  • DSR6 = ratio of interest payments to GNP (INT/GNP)

  • DSR7 = ratio of reserves to debt outstanding and disbursed (RES/DOD)

  • DSR8 = ratio of total external debts to exports of goods and services (EDT/XGS)

  • DSR9 = ratio of total external debts to GNP (EDT/GNP).

Source: Author’s calculations using data in World Bank (1989b, 1990a, 1990b).Note: Variables are defined as follows:
  • DSR1 = ratio of total debt service to exports of goods and services (TDS/XGS)

  • DSR2 = ratio of interest payment to exports of goods and services (INT/XGS)

  • DSR3 = ratio of outstanding and disbursed debt to exports of goods and services (DOD/XGS)

  • DSR4 = ratio of debts outstanding and disbursed to GNP (DOD/GNP)

  • DSR5 = ratio of total debt service to GNP (TDS/GNP)

  • DSR6 = ratio of interest payments to GNP (INT/GNP)

  • DSR7 = ratio of reserves to debt outstanding and disbursed (RES/DOD)

  • DSR8 = ratio of total external debts to exports of goods and services (EDT/XGS)

  • DSR9 = ratio of total external debts to GNP (EDT/GNP).

One way of looking at the debt problem is in terms of debt service (interest plus amortization) and interest payments in relation to exports and GNP. There can be no doubt that these and some others to be discussed shortly are indicators of the debt burden (Feeder and Just, 1977). Between 1970 and 1980 Nigeria’s ratio of debt service to GNP (DSR5) averaged about 0.7 percent per year. Since 1980 the rate has been on the increase, reaching about 8 percent in 1988.

When the ratio of debt service to exports (DSR1) is considered, we find two distinct periods: one in which the ratio was less than 8 percent and another in which it was more than 8 percent. The ratio grew to about 39 percent in 1985, representing a very high debt burden. It declined to 13 percent in 1987 but rose again to 29 percent in 1988. In other words, the creditworthiness of Nigeria was in doubt between 1982 and 1986, when this ratio was very high.

Two other significant ratios are the ratios of total external debt to exports (DSR8) and to GNP (DSR9). In 1970 and 1972, the first years of the petroleum earnings surge, the debt-export ratio (DSR8) stood at 42 percent and 32 percent, respectively. It declined thereafter to about 8 percent in 1976 before it started an upward turn, reaching 170 percent in 1983, and 397 percent by 1988. Total external debt as a ratio to GNP (DSR9) was less than 10 percent between 1970 and 1980. Since the early 1980s, this ratio has been rising, reaching a value of 125 percent in 1987. The ratio declined to 107 percent in 1988.

We can compare the performance of Nigeria’s external debt-export ratio and external debt-GNP ratio with that of sub-Saharan Africa as a whole (Table 12). Nigeria’s debt-export ratio was better than that of the region up to the late 1980s, when Nigeria’s relative situation worsened. Whereas the debt-export ratio for sub-Saharan Africa was 352.4 percent in 1987, it was 384.0 percent for Nigeria. Nigeria also had a better debt-export ratio than the average for the 15 heavily indebted poor countries (a group to which it belongs) until 1987, when conditions deteriorated.

Table 12.Debt Burden Indicators for Sub-Saharan Africa and Other Debt-Distressed Countries, 1970–87(In percent)
Ratio of external debt to exports of goods and services
Sub-Saharan Africa65.565.294.1190.9253.6335.6352.4
Countries with recent debt-servicing problems2131.7111.0155.6247.0282.3322.6317.0
15 heavily indebted countries3162.5133.9169.5271.9301.2361.0347.6
Ratio of external debt to GDP
Sub-Saharan Africa14.
Countries with recent debt-servicing problems218.718.834.244.651.151.754.2
15 heavily indebted countries319.618.533.
Sources: Greene and Khan (1989); Greene (1989).


Average for capital-importing countries that experienced external arrears in 1985 or that rescheduled debt during 1984–86.

Average for Argentina, Bolivia, Brazil, Chile, Colombia, Côte d’Ivoire, Ecuador, Mexico, Morocco, Nigeria, Peru, the Philippines, Uruguay, Venezuela, and Yugoslavia.

Sources: Greene and Khan (1989); Greene (1989).


Average for capital-importing countries that experienced external arrears in 1985 or that rescheduled debt during 1984–86.

Average for Argentina, Bolivia, Brazil, Chile, Colombia, Côte d’Ivoire, Ecuador, Mexico, Morocco, Nigeria, Peru, the Philippines, Uruguay, Venezuela, and Yugoslavia.

Although Table 12 expresses external debt as a ratio to GDP, and Table 11 expresses it as a ratio to GNP, the two figures are comparable. Nigeria performed better than the sub-Saharan African countries as a group and better than the 15 heavily indebted poor countries for the periods for which comparable data are available. The data also show that Nigeria’s debt burden is very high.

In order to assess the impact of the debt problem, ignoring the equity issues, one must ask whether the issue of debt is one of liquidity or solvency problems. The liquidity problem refers to the inability of a country to service debts now, in the amount initially contracted, whereas the solvency issue relates to the “question of whether the value of a country’s liabilities exceeds the ability to pay any time” (Dornbusch, 1986a, p. 138). When examined critically, “a solvency problem would mean that the real interest rate on the marginal external loan exceeded the increase in national income made possible by this loan. A liquidity problem would mean that the borrower would be unable to obtain the foreign exchange to make the debt service payments on schedule” (Aliber, 1980, p. 1).

The liquidity and solvency problems raise a number of macroeconomic issues that can be neither ignored nor underrated. The first is whether countries (in both the medium and the long run) can continue to service their debt as contracted and continue to enjoy, at the same time, growth in per capita incomes. The general belief is that this will depend on domestic policies as well as on the scope for effective resource mobilization in terms of both import substitution and export promotion. The extent of a country’s success depends on the world economic environment, particularly monetary policy and fiscal policy, as they affect interest rates and the extent of protectionism in world trade. “It is generally believed that if the real interest rates rapidly turn to low levels and the growth of the world trade is strong and sustained, and protectionism is not an issue, then the debt problems can be solved” (Dornbusch and Helmers, 1988, p. 139).

The second macroeconomic issue is related to the intricate balance between pure economics and politics. Given the interwovenness of the two, to what extent are the level of economic activity and living standards depressed in order to generate the needed foreign exchange for servicing debt?

Given the discussion on the liquidity or solvency issue of debt, when did it become apparent that Nigeria had a debt problem? What was the nature of the problem, liquidity or solvency? The first question has been answered from the array of indicators previously discussed. Drawing from the literature, there are many ways of assessing whether a liquidity or a solvency problem exists. One of the ways of determining solvency is to calculate an index of solvency (Cohen, 1985). Given the definition of solvency presented earlier, and following Eaton and Taylor (1986) and Krueger (1987), a country is insolvent when it is incapable of servicing its debt in the long run. By this definition, when debt exceeds the expected discounted present value of the borrower’s income stream, the country is insolvent. Most recent authors have focused on export growth as the main variable for measuring the income stream. Thus the simple rule for solvency is that the export growth rate should be greater than the interest rate (Eaton and Taylor, 1986). In other words, if the rate of growth of exports is represented by n, and the interest rate on debt by r, “if r < n then the country’s wealth is, in present value terms, infinite and there is no solvency problem: any fraction, however small, of its revenues can repay any level of initial debt in finite time” (Cohen, 1985, p. 143). From Table 13, the average for the period shows that there is no evidence of insolvency in the period 1970–88; the average for the period is about 9 percent.

Table 13.Nigeria: Solvency and Liquidity Calculations, 1970–88
n – r1External Net Debt (In millions of U.S. dollars)Exports of Goods and Services (In millions of U.S. dollars)Liquidity Difference
(1)(2)(3)(4 = 3 − 2)
Source: Author’s calculations using data from World Bank (1989b, 1990b).

n is growth of exports and r is the interest rate.

Source: Author’s calculations using data from World Bank (1989b, 1990b).

n is growth of exports and r is the interest rate.

Lack of liquidity occurs when a country does not have enough cash on hand to pay current obligations, that is, when the maximal income lies below a debt-service obligation in some particular time period (Eaton and Taylor, 1986). There are many indexes that can be used to gauge the liquidity of a nation, such as the relationship between debt and export earnings. One can also look at the difference between net debt (total indebtedness minus foreign reserves) and export earnings and use this to calculate liquidity. If this is done, we find that Nigeria’s liquidity problem started in the early 1980s (Table 13).1 Indeed, the liquidity problem emerged in 1983, when Nigeria began searching for solutions to its economic problems, culminating in rescheduling and the search for loan accommodation and structural adjustment.

Debt Burden and Export Performance

To examine the relationship between the debt burden and export performance, it is important to remember the well-known stability condition: “If the rate of growth of exports exceeds the interest rate, a permanently positive resources gap can be reconciled with a limited debt/export ratio” (Simonsen, 1985, p. 103).2 In other words, we can calculate the rate of unsustainable borrowing as the excess of the percentage rate of growth of debt over the percentage rate of growth of exports of goods and services.

The calculations in Table 14 reveal an interesting story. They show that unsustainable borrowing occurred in 1973, 1977, 1978, and 1981–83, and from 1986 to 1988. The rates of growth of debt in those years were greater than the rate of growth of exports. The story is similar when we use net indebtedness u*, which is defined as the excess of growth in net external indebtedness over exports. Table 14 shows the relationship between export growth and the interest rate, in an attempt to illustrate that Nigeria’s liquidity problem developed in 1983. The parameter reveals that in the years 1978, 1981–83, and 1986, the country was becoming relatively overindebted.

Table 14.Nigeria: Selected Indicators of Debt and Export Performance, 1970–88
Source: Author’s calculations.Note: Variables are defined as follows:
  • u = unsustainable borrowing defined as the excess of the percentage growth rate of debt over that of exports

  • u* = unsustainable borrowing defined as the excess of the percentage growth rate of net debt over that of exports

  • CD = percentage growth of debt

  • x = rate of growth of exports

  • tc = transfer coefficient defined as the ratio of exports to imports

  • g = (x - i) z—where x is the growth rate of exports, i is the interest rate, and z is the debt-export ratio.

Source: Author’s calculations.Note: Variables are defined as follows:
  • u = unsustainable borrowing defined as the excess of the percentage growth rate of debt over that of exports

  • u* = unsustainable borrowing defined as the excess of the percentage growth rate of net debt over that of exports

  • CD = percentage growth of debt

  • x = rate of growth of exports

  • tc = transfer coefficient defined as the ratio of exports to imports

  • g = (x - i) z—where x is the growth rate of exports, i is the interest rate, and z is the debt-export ratio.

In conclusion, the stability of the debt-export ratio in the long run requires that the rate of growth of exports be higher than the rate of interest on the debt. Thus, of great importance is the “value” of the interest rate at which new loans are contracted when the old ones are being renewed. This parameter is outside the control of borrowers in many cases, because interest rates are determined in the international market, where the debtor country has little say. The other parameter of importance is exports, whose growth can be influenced domestically depending on the macroeconomic policy being pursued, as well as by a favorable international economic environment. An international environment with high growth potential is crucial to promotion of the export sector, as is the absence of protectionism.

Capital Flight and the Real Capacity to Service Debt

Private capital flight in developing countries has received much attention in recent times as a contributor to debt problems. This is particularly true when capital-scarce developing countries borrow heavily in international capital markets. It is generally believed that capital flight is indeed counterproductive.

The macroeconomic argument against capital flight is that it is “a perverse exportation of domestic savings and foreign exchange that given the insufficiency of both in low income countries has consequences that may severely hinder their potential for growth” (Lessard and Williamson, 1987, p. 136). Capital flight intensifies the shortage of foreign exchange and of the savings necessary to finance investment projects; capital held abroad could serve a more useful purpose at home.

The existing literature on the causes of capital flight refers to overvaluation of the domestic currency as the most important macroeconomic factor (Dornbusch, 1985). Others include domestic inflation and interest rates (Cuddington, 1986), the domestic economic growth rate (Conesa, 1987), and external incentives provided by foreign banks and governments (Khan and Ul Haque, 1987). However, for a lot of developing countries capital flight is related more to being in “power” and having access to domestic and foreign money, and it is an issue that goes beyond the straightjacket economics that is often used to explain its magnitude.

The term “capital flight” itself is subject to debate, and there is no precise method of measuring it (Lessard and Williamson, 1987). Three approaches are nevertheless often used: the balance of payments accounts approach, the residual approach, and the increase in the recorded foreign bank deposits owned by the residents of a country (this is usually published by the IMF).

There are no calculated values on the first two approaches for capital flight in Nigeria. Using the IMF statistics, however, the capital flight of the country can be approximated by the cross-border bank deposits of nonbanks by resident depositors.3 This is used herein as the measure of capital flight. These statistics have inherent limitations that may underestimate capital flight, since substantial funds are held in assets other than bank deposits, and some funds are held in bank deposits outside the major reporting financial centers. The nationality of the depositor is also often not known or not reported correctly. In some cases the national identity and name of some foreign depositors are never made public.

Limited as the statistics may seem, they are nevertheless suggestive and point to the magnitude of the problem. Some useful information derived for the period 1981–88 is shown in Table 15. The first observation is that a substantial amount of money is kept abroad that could assist in the implementation of the nation’s macroeconomic policy. Cross-border deposits by Nigerians as a ratio to GNP amounted to 1.3 percent in 1984, and 9.6 percent and 6.8 percent in 1987 and 1988, respectively. If these funds were held at home, they could positively affect the real capacity to service debt.

Table 15.Nigeria: Cross-Border Deposits of Nonbanks by Domestic Residents, 1981–88
In Millions of U.S. DollarsChange from Previous Year In Millions of U.S. DollarsAs Share of External Debt (In percent)As Share of GNP (In percent)
Sources: IMF, International Financial Statistics Yearbook, 1989; and World Bank (1990b).
Sources: IMF, International Financial Statistics Yearbook, 1989; and World Bank (1990b).

Some interesting aspects of these figures must be mentioned. Nigerian cross-border deposits of nonbanks by Nigerian residents fell between 1981 and 1982, between 1983 and 1984, and between 1987 and 1988. Between 1986 and 1987 they rose by $620 million, but they fell by $350 million between 1987 and 1988. These fluctuations are very difficult to explain. One explanation is that some of the deposits went into real estate or other investments abroad. Another explanation, however, is that, consequent to the adjustment of the exchange rate in 1986, some of the funds that were moved between 1986 and 1987 returned to Nigeria to take advantage of the depreciated naira.

Debt Viability: Growth-cum-Debt Model Scenario

The behavior of the indicators of debt burden under varying assumptions also requires analysis. How do some indicators of debt behave under different assumptions or scenarios? To answer this question we use the growth-cum-debt model developed by Solis and Zedillo (1985), the details of which are in Appendix I. The model uses a simple growth dynamic equation of the type

Dt = Dt-1 (1 + γ),

where Dt = total external debt, and γ is a constant that is varied in each scenario.

The equations solved are Equations (4) and (9) in Appendix I for different possible paths for Dt and rt. The value of γ is varied in the scenario from -0.05 to 0.07. Three possible values of the interest rate (r = 0.04, 0.08 and 0.10) are used.

Assuming various values for the reciprocal of the incremental capital-output ratio (σ) and for different rates of interest r, simulations were run for the period 1989–95. The indicators used are labeled as DB1, DB2, and DB3, where

DB1 = the debt-GNP ratio

DB2 = the interest-export ratio

DB3 = the resource transfer.

The variables DB1, DB2, and DB3 are further defined as

where D is external debt and rt is the interest rate. The results are shown in Table 16.

Table 16.Nigeria: Results of the Growth-cum-Debt Model
r = 0.04
r = 0.08
r = 0.10
Source: Author’s calculations.Note: Calculations are based on an incremental capital-output ratio (σ) of 0.40.
Source: Author’s calculations.Note: Calculations are based on an incremental capital-output ratio (σ) of 0.40.

Considering first the high-interest-rate scenario (r = 10 percent), zero growth in the external debt is consistent with an average growth rate of GNP of about 1.9 percent. The debt-GNP ratio (DB1) would fall to 139.6 percent, which is still very high. The debt-service ratio (DB2) would be about 32.8 percent, and the resource transfer (DB3) would be negative at 14.2 percent.

We can also examine the scenarios for the cases where r = 8 percent and r = 4 percent. A zero growth in external indebtedness when r = 4 percent is consistent with a 2.2 percent growth rate of GNP and a reduction of the debt-GNP ratio to 140.6 percent. The resource transfer would continue to be negative, at 5.7 percent of GNP; the debt-service ratio DB2 would be 13 percent.

When the interest rate is 8 percent, the following picture emerges. Zero growth in the external debt is consistent with an average GNP growth rate of 1.96 percent. The debt-GNP ratio will fall to 139.9 percent. The resource transfer (which is negative) is more than twice the value observed when r = 4 percent.

In terms of this model, a doubling of the interest rate has the same effect on growth of GNP. Only about 0.19 percent is lost when the interest rate is increased to 8 percent from 4 percent, and only about 0.09 percent is lost when the interest rate is increased to 10 percent from 8 percent. This is perhaps not too surprising since the effect of a rise in interest rates is divided between consumption and saving (Solis and Zedillo, 1985). The rise in the interest rate has larger impacts in terms of DB2 and DB3, which in all cases are higher. Thus variations in interest rates have effects on debt burdens and debt-service capacity.

Although a zero growth rate for external debt is not only optimistic but somewhat unrealistic, it nevertheless gives a base for the purpose of comparison. Similarly, by taking σ = 4 percent, a very productive economy is assumed. There is perhaps a need to be optimistic in view of various adjustments taking place in the Nigerian economy and the need to put a lid on Nigeria’s past extravagance. It is within this context that the model analyzed is meaningful.

Causes of External Debt Accumulation

There is no shortage of literature on the causes of the developing country debt crisis. It is often said that the debt accumulation has been brought about by the overambitious attempts of many governments to speed up growth, prompted by international creditors who were also overly generous. Many creditors overstated the potential capabilities of the debtor countries to meaningfully absorb and pay for debts. Commenting on the origin of the debt crisis in 1982, Dornbusch and Fischer (1985) concluded:

Imprudent borrowing policies in the debtor countries and imprudent lending by commercial banks had a chance encounter with extraordinarily unfavorable world macroeconomic conditions that exposed the vulnerability of the debtors and the creditors.

In the same vein, Guttentag and Herring (1985) blame the commercial lenders and their regulators. Different authors have emphasized different aspects of the debt crisis. For example, Cline (1985) focuses on the global macroeconomic considerations, and Sachs (1985) stresses not only the importance of the global shocks but also the country-specific factors. Greene (1989) combines both external and internal factors in his description of the causes of sub-Saharan Africa’s debt.

One prominent aspect in all these views is that the sources of debt accumulation and the reaction to it differ from one developing country to another. However, there are common themes, such as budget deficits, misaligned exchange rates (generally overvaluation), economic mismanagement, deteriorating terms of trade, and rising real interest rates. Although these are intertwined, the causes of debt accumulation generally fall into two categories: domestic factors (usually merged under the general term of poor performance of macro-economic policy) and external factors. The division into these two seemingly watertight compartments is not correct, however. Indeed, external factors do impinge crucially on what happens domestically. The same is true of internal (domestic) factors. As Khan and Knight (1983, p. 830) point out, “external factors such as changes in terms of trade may also exert a systematic influence on the real effective exchange rate so that it is not always a reflection of domestic factors alone.”

External Factors

A host of external factors, including oil shocks, rising interest rates, and declining terms of trade, are key elements responsible for debt accumulation. When the price of oil increased substantially between 1973 and 1974, Nigeria benefited and public expenditure was expanded sharply. When the price of oil fell, expenditures were not reduced commensurately; the buoyant economy arising from previous periods gave a high credit rating to Nigeria, allowing it to borrow heavily in the period 1978–79. When the second oil shock came in 1979, the industrial countries adopted an anti-inflationary policy stance. The period 1979–82 was one of recession, resulting in a declining value of exports from 1981 to 1983 at a much faster rate than that of imports. Indeed, Nigeria’s terms of trade by 1977 and 1988 were, respectively, 46.2 percent and 59.9 percent below their 1980 level. Borrowing was necessitated by declining export earnings and increasing import requirements. Nigeria’s import substitution strategy depended on importation of raw materials, equipment, machinery, and food.

Interest rates rose in the 1980s, affecting Nigeria in particular since it made significant use of commercial borrowing. As discussed earlier, the share of private borrowing rose to 85 percent in 1980–82. Similarly, debt at floating rates rose to about 49 percent of total debt in the same period, and interest rates on new commitments also rose, by about 11 percent between 1981 and 1983.

Growth in industrial countries has both direct and indirect effects on developing economies. It has a direct impact by increasing demand for exports from developing countries. Thus, rapid growth in the industrial world pulls up the growth of these economies. A healthy international environment is a sine qua non for strong economic growth, particularly in the developing world (Ajayi, 1989a). The indirect effect is on the terms of trade of developing countries (Khan and Knight, 1983).

In summary, the external factors contributing to Nigeria’s debt crisis were

  • the cumulative impact of world price shocks—the first resulting in an expansionary policy necessitating heavy borrowing, and the second in restrictive fiscal and monetary policies and thus in rising real interest rates;

  • a decline in the terms of trade; and

  • liberal lending policies of the international commercial banks.

Domestic Factors

The problems posed by the external factors were exacerbated in most cases by the adoption of wrong macroeconomic policies. Two such domestic errors were those attributed to fiscal irresponsibility and exchange rate misalignment. These often led to large fiscal deficits, excessive monetary expansion and consequent inflation, excessive reliance on external sources of funding, overvalued currencies, and poor project profiles.

Fiscal irresponsibility in this case refers to the size of the government fiscal deficit allowed. Within a Keynesian model, fiscal policy is the main instrument used to shift the economy from one equilibrium position to another. This view is based on the concept that “it is feasible for the fiscal authority to control, at each point in time, the size of the fiscal balance so as to bring it close to what the government wants it to be” (Muns, 1984, p. 117). How the deficit is financed determines to a large extent the impact that it will have on the economy. In general, an increase in the deficit tends to raise domestic absorption and worsen the current account (Khan and Knight, 1983). When the deficit is financed by borrowing from abroad, external indebtedness is increased. Although this indebtedness may be beneficial, there can be problems when loans carry high interest rates, when loans are not used to finance productive expenditures, or when long-run projects are financed with short-term loans (Tanzi and Blejer, 1984).

Nigeria opted to undertake many projects and used its access to the capital market to support “white elephant” projects of doubtful viability. These are projects that have either no income streams to guarantee repayment of loans or a serious mismatch of loan maturities and expected profitability. Nigeria also borrowed funds to maintain consumption in the face of deteriorating export earnings.

In addition to expansionary fiscal policy and borrowing for consumption, Nigeria pursued policies that further weakened its external position in the first half of the 1970s. With growing fiscal deficits coupled with increasing private credit demand, there was a rapid expansion of the money supply, which contributed to higher inflation. Nigeria did not depreciate its currency during the period under consideration; the currency inevitably became overvalued. The extent of overvaluation has been variously put between 80 percent and 84 percent in the period 1970–84. Overvaluation can result from expansionary monetary and fiscal policies (aimed at maximizing growth) and from governmental industrial promotion strategies imposing high duties and quotas or bans on imports of industrial goods that compete with those produced by domestic industries (Ajayi, 1986). The behavior of the real exchange rate—the outcome of changes in the nominal exchange rate and the domestic and foreign rates of inflation—is a reflection of the way exchange rate policy and demand-management policies are coordinated (Khan and Knight, 1983). When the currency is overvalued, demand for imports is raised at the expense of exports. Thus, an appreciated currency, in addition to affecting the fiscal position, affects the current account balance and, ultimately, the magnitude of external borrowing required to finance the deficit on the current account.

Government policy (such as negative real interest rates) that deters saving not only encourages capital outflows, but also contributes to debt accumulation because external financing is needed to bridge the gap. All these domestic factors increase borrowing needs and lower the earnings from exports, and in the process reduce the ability to meet the rising debt-service obligations.

In summary, there were some changes in the international economy that could not have been anticipated by Nigeria’s policymakers. These included the sharp increases in nominal and real interest rates, the duration and severity of the worldwide recession, and changes in the terms of trade resulting from the oil price increase of 1979, culminating in declines in commodity prices. Internal factors also played substantial roles. Nigeria had poor macroeconomic policy management in the early 1970s and particularly in the late 1970s, which would have resulted in problems even without the external surprises.

When it would have been appropriate to adjust, in the late 1970s and early 1980s, foreign exchange reserves were instead run down, and later heavy external borrowing took place, to avoid adjustment. The unrealistic nature of macroeconomic policy (resulting in overvaluation) and the inappropriateness of trade regimes discouraged export growth. The issue of the changed external environment was not properly addressed at the appropriate time, and domestic policy exacerbated the situation.

Empirical Estimates of the External and Internal Factors

The preceding section identified and analyzed the internal and external factors influencing Nigeria’s debt accumulation. This section gives the analysis some empirical content, and this is done in two stages. The first stage follows the work of Krueger (1987), attempting a quantitative assessment of the following:

  • the extent to which Nigeria borrowed in an unsustainable manner in the 1970s (this could be due to trade policy that did not support growth in export earnings to sustain additional debt, and/or to unsustainable macroeconomic policies);

  • the extent to which the downturn of the early 1980s resulted in an altered world economic environment that fueled debt accumulation and the debt burden; and

  • the extent to which Nigeria undertook policy reforms designed to avert imminent problems.

It should be emphasized here that although the contributory factors may be arbitrary, they nevertheless allow us to identify the origin of the debt crisis.

The analysis uses data on growth rates of export earnings and the deviation of export earnings from share-weighted world trade and debt. These figures are then used to estimate the unsustainable portion of the debt buildup for the 1970s and 1980s. The unsustainable portion is apportioned between deviations in country performance from average world trade performance and unsustainable macroeconomic policy. The shift in world conditions is added as an additional factor for the 1980s.

For the analysis, world exports are broken down into fuel and non-fuel exports in world markets. Constant share-weighted world trade was calculated on the basis of the 1976–78 shares of fuel and nonfuel exports in world markets. It is therefore possible to compare actual growth rates with constant-share growth. Thus, if actual growth performance is greater than the constant-share growth (represented by a minus sign), the impact of trade policy is positive. If the converse is true, that is, if constant-share growth is greater than actual performance, the country’s trade policy was inadequate for it to maintain its share of world markets (see Krueger, 1987, p. 174). The results for 1970–79 and for 1979–82 are presented in Table 17.

Table 17.Nigeria: Debt Buildup, 1970–82(In percent)
Average Annual Change
Growth of World exports127.90.6
Country’s exports48.6–7.2
Country’s debt99.626.5
Excess debt from Unfavorable export performance–20.7–7.8
Macroeconomic policy71.7–1.4
Debt-export ratio at end of period34.3299.43
Sources: Author’s calculations from data in World Bank (1989b, 1990b); World Bank, World Tables, various issues, and Krueger (1987).Notes: Growth rates are calculated on an end-point basis.

Weighted by the 1976–78 fuel and nonfuel export shares for Nigeria.

Refers to 1979.

Refers to 1982.

Sources: Author’s calculations from data in World Bank (1989b, 1990b); World Bank, World Tables, various issues, and Krueger (1987).Notes: Growth rates are calculated on an end-point basis.

Weighted by the 1976–78 fuel and nonfuel export shares for Nigeria.

Refers to 1979.

Refers to 1982.

Although Nigeria had a rising share of the petroleum market and fast growth in exports, the data show that, for the period 1970–79, the rate of growth of debt exceeded that of exports. This meant that Nigeria had macroeconomic policies that led to an accumulation of debt in excess of what was sustainable as judged by the export performance of the country. For the entire period, the net effect was 51.0 percent, indicating that macroeconomic policy coupled with inadequate trade policy led to a rate of borrowing that was not sustainable.

For the period 1979–82, the international economy deteriorated. There was a rapid decline in world export growth from 27.7 percent to 0.6 percent. Nigeria was not able to maintain the growth of debt to its exports, and neither trade performance nor macroeconomic policy offset the decline in the global economy. Thus, instead of adjusting to the changed international environment, the situation deteriorated because of it and was worsened by internal economic policies. By 1982 the debt-export ratio had risen significantly.

The second method uses regression analysis to estimate the internal and external factors in the debt crisis.4 The model has the following general form:



DSRi=the debt-export ratio or the debt-GNP ratio
TOT=the terms of trade
CGDP=the growth rate of income in industrial countries
FRRI=the foreign real interest rate
FPY=the fiscal position of government, defined as revenue minus expenditure divided by GDP or GNP
T=a linear time trend
REER=the real effective change rate index (developed in Appendix II).

In some regressions the growth rate of the terms of trade (CTOT) was used, and in others the fiscal balance itself (FP) rather than its ratio to GDP or GNP. Some regressions used logarithms of the terms of trade (LTOT and LCTOT) or real effective exchange rate (LREER) variables.

An improvement in the terms of trade or an increase in the growth rate of the industrial countries should lead to an improvement in the debt-export ratio. An increase in the foreign real interest rate would tend to worsen this ratio, just as an appreciation in terms of the real effective exchange rate would. The time trend variable, on the other hand, captures the influences of other external environmental factors such as trade barriers. Given the definition of the fiscal position, an increase in the ratio of government revenue minus expenditure to income means an improvement in the fiscal position. It is expected that a deterioration of the fiscal position will have a negative impact on these ratios.

In estimating the equations, various forms of the independent variables were used. In some cases the fiscal performance level was replaced with the fiscal surplus or deficit of the government (FP). The results of the estimations using the general equation incorporating both internal and external factors are shown in Tables 18 and 19.

Table 18.Nigeria: Empirical Results for the Debt-Export Ratio
VariableRegression 1Regression 2Regression 3Regression 4
Source: Author’s calculations.Note: t-statistics are in parentheses. Asterisked variables are significant above the 5 percent level.
Source: Author’s calculations.Note: t-statistics are in parentheses. Asterisked variables are significant above the 5 percent level.
Table 19.Nigeria: Empirical Results for the Debt-GNP Ratio
VariableRegression 1Regression 2Regression 3Regression 4
Source: Author’s calculations.Note: t-statistics are in parentheses. Asterisked variables are significant above the 5 percent level.
Source: Author’s calculations.Note: t-statistics are in parentheses. Asterisked variables are significant above the 5 percent level.

From the tables we find in general that a worsening of the terms of trade worsens the debt-export ratio, as does a rise in the foreign real interest rate. A fall in the growth of industrial countries has the same effect. We would expect an improvement in the fiscal position to have a positive effect on this ratio. The significance of the time trend variable in all cases indicates that other variables not included in the regression analysis are very important. The goodness of fit of all the equations is good, however.

One cannot directly ascertain the relative importance of the variables included in the equations from their coefficients. Therefore beta coefficients are used, with the advantage that these measure the change in the explained variable (in standard deviation units) for a unit change in each explanatory variable (in standard units), holding other variables constant. These coefficients are presented in Table 20 for the debt-export ratio and in Table 21 for the debt-GNP ratio. The tables show (leaving out the time trend and constants) that the most important variables are the real effective exchange rate and the terms of trade, in all equations except one where fiscal performance is more important.

Table 20.Nigeria: Value of Beta Coefficients, Debt-Export Ratio
VariableRegression 1Regression 2Regression 3Regression 4
Source: Author’s calculations.
Source: Author’s calculations.
Table 21.Nigeria: Value of Beta Coefficients, Debt-GNP Ratio
VariableRegression 1Regression 2Regression 3Regression 4
Source: Author’s calculations.
Source: Author’s calculations.

The results reported herein lend credence to the earlier findings that domestic policies have played an important role in the debt burden and other economic problems afflicting Nigeria. It should be emphasized that linkages exist between the domestic and external factors in the analysis, and that there is a very thin line between domestic and external variables.

Summary and Policy Implications

This chapter has analyzed the external debt of Nigeria within a general macroeconomic framework recognizing the specific nature of Nigeria’s debt. A number of significant findings of this work can be highlighted:

  • Structural changes took place in the composition of external debt outstanding. Whereas the preponderance of external debt outstanding came from official sources between 1970 and 1972, the share of private sources of external debt became important in the 1980s. By 1987 the share of external debt from private sources was 55 percent. Whereas less than 1 percent of total long-term debt was at floating rates between 1973 and 1975, that share stood at 49 percent in 1987. Thus the significant characteristics of Nigeria’s debt structure are an increase in debt contracted at floating rates and a decrease in the share of official loans.

  • Nigeria’s debt-export ratio has been on the high side since the 1980s. That ratio was better than that of the rest of the subcontinent until the late 1980s, when the Nigerian situation worsened.

  • Nigeria’s accumulation of external debt can be directly traced to both domestic and external causes. The domestic causes include poor macroeconomic policies arising from fiscal irresponsibility, exchange rate misalignment (generally overvaluation), and economic mismanagement. The external causes include deteriorating terms of trade and rising real interest rates. It is difficult, however, to separate these factors into watertight compartments because of interlinkages.

  • Empirical analyses demonstrate that Nigeria had macroeconomic policies that led to the accumulation of debt in excess of what was sustainable as judged by its export performance. It has been found that, for the entire period, macroeconomic policy coupled with inadequate trade policy led to a rate of borrowing that was not sustainable. When the international economy deteriorated in 1979–82, neither Nigeria’s trade performance nor its macroeconomic policy offset the negative impact of the decline in the global economy.

The two main lessons to be drawn from this analysis are the need to pay off indebtedness and the need to restore the path of growth and development. Paying off present debt is important, but the policy question is whether, given the existing level of debt and the payments arising from it, growth can be restored and sustained in the near future. Thus the issue of debt forgiveness, debt reduction, and interest rate reduction should be given serious consideration. Although the 1988 Toronto summit was important (even though the resulting cash flow relief has not been significant for the highly indebted countries), the initiatives are commendable, and further attempts in this direction can be beneficial.

The current solution to debt is said to rest on three pillars:

  • a favorable international economic environment;

  • strong and sustained adjustment efforts by countries that are heavily indebted; and

  • an adequate flow of external financing.

It is generally believed that the restoration of sustained economic growth requires a proper mix of these three pillars. In the international economic environment, there is a need to eliminate trade restrictions, for example by decelerating or eliminating nontariff barriers. An open international trading system should be emphasized and action taken on the high real cost of external debt. High interest rates are likely to worsen the debt-servicing problems of highly indebted countries.

The extent, composition, and dimension of Nigeria’s external debt raise a number of policy issues. The debt burden imposes a number of constraints on the country’s growth prospects. The major macroeconomic problems are the need to earn foreign exchange and to find extra budget resources for debt service and adjust to a reduction in spendable resources.

To reduce the debt burden and increase debt-servicing capacity, an increase in exports and a reduction in world interest rates are required. Thus, two important external policy areas in this respect are real interest rates and protectionism.

Although the analyses above seem to emphasize the external sector, a larger role needs to be assigned to domestic policy. A cautious macro-economic policy that avoids inflation and currency overvaluation should be adopted, and, in addition or as part of the package, borrowed funds must be used productively. The present structural adjustment program aims at expanding the productive base, removing infrastructural bottlenecks, and eliminating public sector inefficiency.

To restore investment to the levels needed for sustainable growth, the evolution of appropriate domestic policy to increase saving and promote investment will be required. Thus, policies that foster saving habits and remove impediments to investment will be necessary. Foreign investment, although beneficial, will only be forthcoming if the economic environment is suitable and if political stability exists. More reliance on domestic saving in the future will be needed, given the increasing stagnation in international capital flows to indebted countries.

Appendix I. The Debt Viability Model

The model used to estimate debt viability is the growth-cum-debt model described in the text (Solis and Zedillo, 1985).

The level of output is given by


Equation (1) becomes

Given the following identities:


Let the saving function be

Using Equation (4), investment can be expressed as

Equations (4) and (9) were solved for a number of possible paths of D and rt. The rule used for Dt is the dynamic equation

Dt = Dt-1 (1 + γ).

Appendix II. The Real Effective Exchange Rate

There are many methods of deriving the real effective exchange rate. One of the methods uses trade weights (exports plus imports), and it can use varying trade weights or specific-year trade weights. A specific year is chosen as the base in the latter case.

Another method uses import weights, which again can be done using varying import weights or specific-year import weights. Both of these methods capture the relationship between a country and its trading partners.

This chapter defines the real effective exchange rate as


Eit=price of domestic currency in terms of the ith trading partner at time t
Ei0=price of domestic currency in terms of the ith trading partner in the base period
CPIf=consumer price index of the foreign country at time t relative to the base period
CPId=consumer price index of the home country relative to the base period
Wi=weight of the trading partner included in the calculation of the index (the weights used are 1980 import weights) for seven of Nigeria’s major trading partners.

We have two exchange rate measures defined as follows:

The additional variable WPIf is the wholesale price index of the foreign country.


It is assumed that only foreign earnings are used to meet debt obligations.

If Z=D/X,x=X˙/X and g = G/X, where Z is the debt-export ratio, x is the growth of exports, and g stands for the resource gap as a proportion of exports, then

If Z is kept unchanged over time, this equation implies a sustainable resource gap:

g = (x - i) Z,

which is positive for x > i. In this case the resource gap can be sustained indefinitely without the country being pushed into a position of relative overindebtedness.

I thank Mohsin Khan for directing me to this source of statistics.

This section has benefited immensely from a different but similar analysis by Khan and Knight (1983) and also subsequent discussion with Mohsin Khan. In what follows, we use DSR8 and DSR9, the debt-export ratio and the debt-GDP ratio, respectively.

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