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Impact of COVID-19 on External Debt in Nigeria

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Abstract

External debt is very important for the growth of any economy. It is basically used for augmenting the revenue of a country and to finance, sometimes, long-term capital project, for which domestic debt cannot be adequate. The COVID-19 pandemic came up with increase in government expenditure and fiscal deficit. This may not be unconnected to COVID-19 induced expenditure like buying of COVID-19 test kit, evacuation of Nigerian nationals in different parts of the World, to mention but a few. The current effort investigates the effect of COVID-19 on external debt in Nigeria. Vector Autoregressive Model was employed as the estimation technique after testing for the stationarity of the variables. It was found that past external debt, exchange rate and fiscal deficit are the major determinants of external debt in Nigeria. The study also found out that COVID-19 exerts a weak influence on external debt in Nigeria. The study therefore recommend the urgent need of the government in switching and streamlining discretionary spending in order to make resources available to fund the COVID-19-related economic effect.
Lapai Journal of Economics Volume 5, No.2; 2021
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Lapai Journal of Economics; Volume 5, No.2; 2021
Print ISSN: 2659-028X
Online ISSN: 2659-0271
Published by Department of Economics, IBB University Lapai, Niger State, Nigeria
Impact of COVID-19 on External Debt in Nigeria
Saidat Oluwatoyin Onikosi-Alliyu1, Rafiu Ayobami Mustapha1, Yinka Mustapha
Yusuf 2, Hawau Ronke Shuaib2
1Department of Economics, Faculty of Management Sciences, Al-Hikmah
University
2Department of Economics, Faculty of Social Sciences, University of Ilorin
Correspondence Email: onikosialliyus@yahoo.com
DOI: 10.5281/zenodo.6348997
Abstract
External debt is very important for the growth of any economy. It is basically used
for augmenting the revenue of a country and to finance, sometimes, long-term
capital project, for which domestic debt cannot be adequate. The COVID-19
pandemic came up with increase in government expenditure and fiscal deficit. This
may not be unconnected to COVID-19 induced expenditure like buying of COVID-
19 test kit, evacuation of Nigerian nationals in different parts of the World, to
mention but a few. The current effort investigates the effect of COVID-19 on
external debt in Nigeria. Vector Autoregressive Model was employed as the
estimation technique after testing for the stationarity of the variables. It was found
that past external debt, exchange rate and fiscal deficit are the major determinants
of external debt in Nigeria. The study also found out that COVID-19 exerts a weak
influence on external debt in Nigeria. The study therefore recommend the urgent
need of the government in switching and streamlining discretionary spending in
order to make resources available to fund the COVID-19-related economic effect.
Keywords: COVID-19, External Debt, Vector Autoregressive
JEL Classification: F34, I18
1. Introduction
Foreign borrowing is usually contracted to achieve two major macroeconomic
objectives. These include increase in investment or consumption as well as
financing temporary balance of payment deficit (Akinwunmi & Adekoya, 2018).
As a result economy indulges in external borrowing to accelerate economic
development and bridge the gap between national revenue and expenditure. Foreign
borrowing leads to increase in growth rates of employment and income,
technological progress through the improvement in domestic investment and
income thereby leading to higher consumption and savings levels. This will
consequently leads to increase in export and imports.
Lapai Journal of Economics Volume 5, No.2; 2021
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However, financing economic development through foreign borrowing imposes an
instantaneous obligation of interest rates payments which has to be made in foreign
exchange (Onikosi-Alliyu, 2015). To meet this contractual foreign debt service
responsibility or obligation, external loans must be capable of generating additional
foreign exchange through investment. Hence, excessive foreign loans or borrowing
for inappropriate recurrent purposes will generate debt service obligations that will
constrain future economic policy as well as economic growth (World Bank, 2020).
Moreover, Coronavirus disease, 2019 (COVID-19), is a newly identified virus that
first made it appearance in a food market in Wuhan, China, in the late 2019. The
virus has accounted for millions of confirmed cases globally, as well as deaths
(WHO, 2020). The novel virus spreads rapidly across the globe, with confirmed
increase in cases and fatality rate on a daily basis, as it is easily transmitted through
air and human interaction. To curb the spread of this virus, severe measures such as
compulsory lockdown and border closure were embarked on by the whole world
(Ibn-Mohammeda, 2020). These measures have consequently disrupted the
economic activities all over the globe. Hence, the challenges of COVID-19 on
public health transcend into crucial economic crisis within a very short time.
The emergence of COVID-19 coupled with the fall in the price of oil crowned the
fiscal challenges of the country through significant shortfall in revenue and induces
COVID-19 expenditures. To cushion the effect of the pandemic Nigerian
government came up with different fiscal and monetary policies through massive
stimulus packages for her citizen such as, health costs, COVID-19 test kit, stimulus
packages for businesses, and enlarged social support for susceptible households
(Anderm et.al 2020)
Nigeria being an oil-dependent economy, one of the direct consequences or effect
of COVID-19 is the reduction in federal government revenue through its impact on
oil prices. Oil prices fell by 45 percent to around USD 30 per barrel in the first
quarter of 2020 (Akanni & Gabriel 2020). Another factor contributing to persistent
drop in international oil and gas prices during covid-19 pandemic was the sharp
drop in global oil and gas consumption, which owned to the fact that major
production and manufacturing activities in the world's major industrial capitals
came to a halt as a result of the coronavirus pandemic, with the resulting economic
implications on the increase.
The effect of COVID-19 on economy at the country level perspective is highly
desirable and inevitable because of its importance to policy direction (Olubusoye
and Ogbonna, 2020). While studies have dealt with notable areas like the effect of
COVID-19 on macroeconomic issue like inflation, economic growth, investment
etc, its effect on external debt had not been empirically tested, hence, one major
pertinent question that needs to be answered is; what is the effect of the corona
virus pandemic on external debt in Nigeria? Therefore the current effort is to
empirically investigate the impact of COVID-19 pandemic on external borrowing
in Nigeria using a quarterly data that spanned from 2010 through 2020 and to study
the determinants of external debt in Nigeria during COVID-19 pandemic. To do
this the paper is divided into five sections. Section one introduces the title, followed
Lapai Journal of Economics Volume 5, No.2; 2021
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by literature review in section two, section three explains the methodology, section
four present the results analysis, while section five concludes the study.
2. Literature Review
The theoretical literature on the determinants of external debt is mainly discussed
under the theory of ‘dual-gap’ theory propounded by Harrod (1939), Domar (1946),
Chenery and Strout (1966), and Bacha (1990). These models emphasized that the
output gap, fiscal deficit and trade balance constraints are the major reason for
contracting external debt. Empirical studies like Greenidge, Drakes and Craigwell
(2010), Anwan, Rajun and Rashin (2015) Beyene and Kotoss (2020) among others
have conducted research on the determinants of external debt in different countries.
Greenidge, et.al. (2010) investigated the determinants of external public debt in the
Carribean community using a panel and cointegration estimation technique. The
study found out that the major determinants of external debt in Carrabian countries
are output gap, export, real effective exchange rate, real cost of borrowing and
fiscal gap. Anwan, et. al. (2015) also examined the determinants of external debt in
Pakistan using Cointegration and Autoregressive techniques for the period of 1976
to 2010. They concluded that Fiscal deficit, nominal exchange and trade openness
are the major determinants of external debts in Pakistan. In recent time, Beyene and
Kotoss (2020) found that the major determinants of external debt are the savings-
investment gap, fiscal deficit, trade deficit and debt service in Ethiopia.
In Nigeria, Adamu and Rasiah, (2016) investigated the determinants of external
debt for the period of 1970 and 2013 using Cointegration and ARDL techniques.
Their study concluded that oil price, gross domestic savings and external service
payment are the major determinants of external debt in Nigeria. They also
concluded that exchange rate and fiscal deficit contributes to external debt
accumulation in Nigeria. In the same regard, Sa’ad, Umar, Waziri and Maniam,
(2017), also conducted research on external debt determinants for the period of
1973 through 2017. They found out that only gross domestic product is significant
in both the short run and long run analysis. The study also revealed that the
coefficient of error correction was significantly different from zero. Moreover,
researchers have key in into the study of the impact of COVID-19 since its
emergence in the world. Ozili (2021) used a textual approach to analyse the
impending COVID-19 global debt problem for low and medium income
economies. According to the study, during the COVID-19 pandemic, the debt
burden of low and middle-income nations increased to $8.4 trillion by the end of
2020. The study recommends that multilateral organisations should allow impacted
members to access their contribution money, support the G20 Debt Service
Suspension Initiative, and advocate for debt relief. Geda (2021) demonstrated the
socioeconomic impact of the COVID-19 pandemic on a tiny mineral-dependent
African economy like Zambia through descriptive analysis. It focuses on GDP and
sectoral GDP growth, employment, and the external sector in particular. The
findings suggest that the recovery of the global economy is critical for small
countries that rely on a single (or a few) key commodities for their growth and
development. The study also showed that there is a shortage of fiscal headroom to
cope with COVID 19's economic effects without causing macroeconomic
Lapai Journal of Economics Volume 5, No.2; 2021
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instability, such as indebtedness and the inability to service debt that has already
been incurred.
Olamide and Maredza (2021) used the ARDL technique on time series data from
1990 to 2019 to study a pre-COVID-19 depiction of the current scenario in South
Africa regarding the foreign debt-GDP relationship. The authors also
discussed what was known about the debt-GDP concept prior to the COVID 19
epidemic. This is likely to act as a springboard for future research into South
Africa's mounting debt during and after the pandemic. According to the findings,
corruption, inflation, and external debt payment have negative effects on economic
growth, but investment has a favorable impact. External debt had a beneficial short-
term impact on growth but a detrimental long-term impact. As a result, they urge
that, in addition to targeting tax evaders and avoiders for higher government
revenue, public institutions be improved and strengthened. Akomolafe et.al (2020)
studied the impact of COVID-19 on the economy of Nigeria using a historical
approach. The demand and supply shocks were considered and the study found out
that the new shocks caused by COVID-19 pandemic have caused a significant
downturn of the economy in Nigeria. Adam et.al. 2020 estimated the economic cost
of COVID-19 in Nigeria using a simulation approach. They concluded that during
the lockdown Nigeria’s gross domestic product suffered 34.1% loss due to COVID -
19 from the services sector while agricultural sector suffered 13.1 per cent loss in
output. Olubusoye and Ogbonna (2020) studied the impact of COVID-19 on some
macroeconomic variables such as Oil-price exchange rate, all share index inflation
and output growth using a simulation approach. They concluded that COVID-19
has negatively impacted on all the aforementioned variables. Olusanya et al (2020)
studied the impact of COVID-19 and Nigeria economy and found out that COVID-
19 is negatively related to macroeconomic variables. Also the country’s budget
estimate is also negatively affected, given the large changes between the budget
assumptions and stance during the COVID-19 pandemic. Consequently, more than
50% of the country’s budget would have to be funded by external borrowing, hence
increasing the debt burden of Nigeria further.
Based on an examination of secondary information and the use of a discursive
method, Ejiogu, Okechukwu, and Ejiogu (2020) explored the Nigerian
government's fiscal response to the COVID-19 pandemic as well as the economic
and social consequences. Their study is of the view that, increased borrowing to
implement COVID-19-related economic and social initiatives has considerably
reduced Nigeria's budgetary capacity. To them, some measures bring short-term
economic respite to the poor and small enterprises, while other interventions and
policy gaps have the propensity to have a large detrimental impact on firms,
consumers, and unemployment. The researchers gave a detailed description of the
Nigerian government's fiscal response to the COVID 19 outbreak, as well as the
economic and social consequences of that response.
3 Methodology
This study is to investigate the impact of COVID-19 on external debt in Nigeria.
Quarterly data set spanning from 2010 to 2020 was used, and the data set for all the
variables was obtained from Central Bank of Nigeria statistical bulletin various
Lapai Journal of Economics Volume 5, No.2; 2021
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isssues except oil price obtained from World Development Indicator. The External
Debt Stock is measured as a share of GDP, Oil Price measured as crude oil price
per barrel, Exchange Rate measured as Official exchange rate (Exchange rate of
Nigerian Naira to U.S. Dollar), External Debt service payment measured as debt
service as a percentage of exports, Fiscal Deficit measured as Government fiscal
deficit as a share of GDP, and Dummy variable with the quarter affected by
COVID-19 captured as one while other periods were captured by zero. This study
estimates the model by using a quarterly series data regression after testing for the
unit root and cointegration status of the variables, the study employed
Autoregressive Distributed Lag method of analysis to investigate the effect of
COVID-19 on external debt. The study adapted the model of Adamu and Rasiah
(2016). The empirical model for this study is therefore specified as:
exd =             ……………… 1
where exd is external debt stock, oilp refers to oil price, exr stands for Exchange
rate, edsp represent External debt service payments, def is Fiscal deficit, Dummy is
dummy variable for COVID-19 such that        0
4. Results
Unit Root Test Result
The study employs the Augmented Dickey-Fuller’s unit root test to understand the
properties of the data set and hence, choose appropriate method of analysis. The
result is presented in Table 1:
Table 1: Unit root test results
Variable
At level
At First Difference
Critical Value
Order of Integration
LOG(EXD)
2.207695
-5.357259
-2.938987
I(1)
LOG(EDSP)
-1.736556
-6.699554
-2.941145
I(1)
LOG(DEF)
1.252877
-6.264286
-2.941145
I(1)
LOG(EXR)
-0.153822
-5.996695
-2.936942
I(1)
LOG(OILP)
-0.324579
-3.872002
-2.936942
I(1)
Source: Authors Computation
The result presented in Table 1 shows that all the variables are stationary at first
difference i.e all variables are integrated of order 1. These results, therefore, justify
the use of Vector Autoregressive method of estimation.
Lag Length Selection
The study moves further to test for the lag length of the variables. The result is
presented in Table 2
Table 2:: Lag Length Selection
Lag
AIC
SC
0
-0.368742
-0.063974
1
-2.615017*
-2.266711*
2
-2.567353
-2.175509
3
-2.565151
-2.129768
4
-2.514278
-2.035357
Source: Authors Computation
Lapai Journal of Economics Volume 5, No.2; 2021
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Using Akaike Information criterion the result indicates that the lag length of the
variables is order one as presented in Table 2
VAR Result
The VAR result for external debt is presented in Table 3:
Table 3: VAR Result
LOG(EXD)
LOG(EXR)
LOG(EDSP)
LOG(OILP)
DEF
DUMMY
LOG(EXD(-1))
0.933714
0.070216
0.551636
-0.208465
-302.0029
0.023782
(0.04196)
(0.04831)
(0.41778)
(0.10022)
(184.195)
(0.11047)
[ 22.2501]
[ 1.45343]
[ 1.32040]
[-2.08008]
[-1.6395]
[ 0.21528]
LOG(EXR(-1))
0.249439
0.772977
0.390957
0.353627
-429.6955
0.155098
(0.07784)
(0.08961)
(0.77490)
(0.18589)
(341.648)
(0.20490)
[ 3.20465]
[ 8.62630]
[ 0.50452]
[ 1.90235]
[-1.2577]
[ 0.75693]
LOG(EDSP(-1))
-0.010542
-0.040572
-0.045917
-0.010392
-114.7137
0.013516
(0.01724)
(0.01985)
(0.17168)
(0.04118)
(75.6909)
(0.04540)
[-0.61132]
[-2.04369]
[-0.26746]
[-0.25233]
[-1.5155]
[ 0.29775]
LOG(OILP(-1))
0.017804
-0.096011
0.398361
0.979772
81.93900
-0.021692
(0.03318)
(0.03819)
(0.33028)
(0.07923)
(145.617)
(0.08733)
[ 0.53667]
[-2.51387]
[ 1.20614]
[ 12.3662]
[ 0.56270]
[-0.2483]
DEF(-1)
6.55E-05
-8.59E-05
-0.000382
-2.77E-05
0.006310
0.000319
(3.8E-05)
(4.4E-05)
(0.00038)
(9.1E-05)
(0.16680)
(0.00010)
[ 1.72469]
[-1.96420]
[-1.01093]
[-0.30563]
[ 0.03783]
[ 3.19113]
DUMMY(-1)
0.039569
0.022934
0.048543
0.628814
34.47210
0.832653
(0.05872)
(0.06760)
(0.58457)
(0.14023)
(257.731)
(0.15457)
[ 0.67389]
[ 0.33927]
[ 0.08304]
[ 4.48413]
[ 0.13375]
[ 5.38674]
C
-0.695481
1.118623
-4.188069
-0.464158
4694.895
-0.707918
(0.37168)
(0.42789)
(3.70027)
(0.88765)
(1631.42)
(0.97844)
[-1.87117]
[ 2.61429]
[-1.13183]
[-0.52291]
[ 2.87780]
[-0.7235]
R-squared
0.993058
0.969178
0.504860
0.905400
0.760941
0.636495
Adj. R-squared
0.991833
0.963739
0.417482
0.888706
0.718754
0.572347
Source: Authors Computation
The result indicates that the past realization of external debt is associated with
93.37 per cent increase in external debt. Going by the t-statistic the effect is highly
significant at 5 per cent significant level. External debt service payment (EDSP)
has a negative impact on external debt. This simply means increase in external debt
service will lead to non-association with accumulation of external debt, though the
impact is not significant. In addition the coefficient of exchange rate is significantly
positive as expected. A one percent increase in exchange rate will lead to about
24.94 percent increase in external debt. Oil price also exerts a positive insignificant
impact on external debt. This simply means that a percentage increase in the price
of oil will lead to increase in external debt. This is contrary to apriori expectation.
The differential Intercept coefficient of COVID-19 is positive but statistically not
significant. The coefficient of determination indicates that 99.2 per cent variations
were explained by the dependent variables. F-Statistic shows that the model is of
good fit.
Lapai Journal of Economics Volume 5, No.2; 2021
7
Diagnostic Test
Table 4: Residual Serial Correlation Test
VAR Residual Serial Correlation LM Tests
Lags
LM-Stat
Prob
1
47.90900
0.0885
Probs from chi-square with 36 df.
Source: Authors Computation
Table 4 shows the Residual Correlation LM test result. This is used to test for
absence or presence of serial correlation in the model. Null hypothesis of no serial
correlation is accepted as the probability value is greater than 0.05 level of
significance. We then conclude that error terms are not serially correlated and
therefore, there is absence of serial correlation among variables in the model.
Table 5 Heteroskedasticity Test
VAR Residual Heteroskedasticity Tests
Chi-sq
df
Prob.
242.0488
210
0.0639
Source: Authors Computation
The Heteroskedasticity Test presented in Table 5 confirms that the model is stable
given the Stability Test Result
-20
-15
-10
-5
0
5
10
15
20
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
CUSUM 5% Significance
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
CUSUM of Squares 5% Significance
The result of the stability tests which is based on CUSUM and CUSUM squared
stability test is presented in figure 2 and 3. Both graphs indicated that the model
passes the stability test and hence the residual is stable. This is because the trend
line is in between the two critical lines as seen in the figure 2 and 3 above.
The variance decomposition is presented in Table 6. The result shows that in the
short run external debt contributes 100 per cent to itself while all other variables are
strongly exogenous. However, the contribution of external debt continues to
decrease in the long run. By the tenth period, the contribution of external to itself
reduced to 48.53 percent. Log of exchange rate also contributes to external debt by
3.99 per cent in the short run to variable and it continues to increase in the long run.
In fact, the percentage of contribution increased to 26.10 in the tenth period. This
simply corroborates the positive influence of exchange rate on external debt in
Nigeria. All other variables including COVID-19 indicate weak influence on
external debt in Nigeria.
Lapai Journal of Economics Volume 5, No.2; 2021
8
Table 6 Variance Decomposition of log of EXD
Period
S.E.
LOG(EXD)
LOG(EXR)
LOG(EDSP)
LOG(OILP)
DEF
DUMMY
1
0.0541
100.000
0.0000
0.0000
0.0000
0.0000
0.0000
2
0.0745
89.7958
3.9885
1.6101
0.0160
4.2189
0.3703
3
0.0905
78.9816
9.0527
4.9683
0.0109
5.4790
1.5072
4
0.1050
68.9439
14.4652
6.9887
0.1115
6.5290
2.9614
5
0.1187
60.7848
19.3088
8.1945
0.6108
7.1108
3.9899
6
0.1320
54.9305
23.2542
8.6132
1.8198
7.1758
4.2062
7
0.1453
51.2476
26.096
8.3728
3.8692
6.6824
3.7312
8
0.1595
49.3186
27.603
7.5985
6.6128
5.7639
3.1026
9
0.1761
48.6033
27.573
6.4728
9.5893
4.7328
3.0282
10
0.1964
48.5386
26.064
5.2371
12.1699
3.9752
4.0143
Source: Authors Computation
Discussion of Result
The result of exchange rate is in line with studies like as Adam and Rasiah (2016)
and Anwan et.al (2015) that showed that exchange rate is an increasing function of
external debt. The coefficient of the fiscal deficit conforms to the apriori
expectation by being positive and it has significant impact on external debt at 10
per cent significant level. This shows that a percentage increase in fiscal deficit will
lead to about 0.00006 percent increase in external debt. This results corroborates
the study of Adamu and Rasiah (2016), Anwan et. Al and Greenidge et al (2010).
This result clearly supports the fact using external borrowing to finance fiscal
deficit would always lead to accumulation of external debts due to extra outflow
from the country’s increase in debt repayment service. On COVID-19 the
differential coefficient was an increasing but insignificant function of external debt.
This effect shows that the increase in external debt may not be connected to
COVID-19 in Nigeria.
5. Conclusion and Recommendation
This study empirically studies the determinants of external debt and the effect of
COVID-19 on external debts in Nigeria using a quarterly data set from 2010-2020.
The study adopted VAR model as the best estimation method after testing for unit
root and orders of integration. Based on the findings, the study concluded that past
external debt stock fiscal deficit, exchange rates are the major determinants of
external debt accumulation in Nigeria. The study also concluded that COVID-19
has no significant contribution to external borrowing in Nigeria. The policy
implication of these findings is that the policy makers should ensure that while
solving the problem of COVID-19, close monitoring and transparency should be
ensured on the external borrowing. In addition, the study suggested that the
government should restructure and consolidate discretionary spending in order to
free up resources to fund the COVID-19-related economic effect. The domestic
post-pandemic policy should also focus on ensuring the confidence of investors by
restoring fiscal sustainability.
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