TABLE OF CONTENTS
List of tables viii
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of problem 5
1.3 Objectives of the study 6
1.4 Research Questions 6
1.5 Research Hypotheses 6
1.6 Scope of the study 7
1.7 Significance of the study 7
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Conceptual framework 8
2.1.1 Sources of external debt 10
2.1.2 Forms of foreign aid/external debt 12
2.2 Theoretical framework 14
2.2.1 Debt-cum-growth model 14
2.2.2 Threshold school of thought (Debt laffer curve) 14
2.2.3 Profligacy theory 15
2.2.4 Harrod-Dormar theory 16
2.2.5 The two gap model 16
2.2.6 The three gap model 17
2.3 Empirical review 17
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research design 25
3.2 Sources of data 25
3.3 Method of data analysis 25
3.4 Model specification 25
3.5 Description of variables 26
3.6 Description of dependent variable 26
3.7 Analytical procedure 27
CHAPTER FOUR: DATA ANALYSIS AND PRESENTATION
4.1 Data presentation and analysis 28
4.1.2 Test of hypothesis 28
4.1.3 Hypothesis 1 28
4.1.4 Hypothesis 2 32
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of study 35
5.2 Summary of findings 35
5.3 Conclusion 35
5.4 Recommendations 36
5.5 Suggestion for further research 37
1.1 Background to the Study
According to Wikipedia (2018) External debt is the total debt a country owes to foreign creditors. The debtors can be the government, corporations or citizens of another country. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank.
Most developing countries of the world are regarded as being poor not because they don’t have the resources but because bulk of their resources (income) are being channeled to meeting the consumption needs of their people with little or nothing left for savings. Hence low savings rate brings about low investments rate and low investments rate results to low growth rate.
Therefore, poverty at the beginning through low savings, low investments and low growth leads to poverty again (poverty trap). For this reason, developing countries are left with no option than to result to external borrowings and foreign assistance (foreign aid) to bridge the saving- investment gap with the intention to achieving economic growth and poverty reduction.
Official development assistance (ODA), more commonly known as foreign aid, consists of resource transfers from the public sector, in the form of grants and loans at concessional financial terms, to developing countries. Many studies in the empirical literature on the effectiveness of foreign aid have tried to assess if aid reaches its main objective, defined as the promotion of economic development and welfare of developing countries (Sandrina, 2005).
On the other hand, the act of borrowing creates debt. Debt therefore, refers to the resources of money in use in an organization which is not contributed by its owners and does not in any other way belong to them, it is a liability represented by a financial instrument of other formal equivalent (Udoka and Ogege, 2012).
REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework
External debt is the total debt a country owes to foreign creditors, complemented by internal debt owed to domestic lenders. The debtors can be the government, corporations or citizens of that country. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank. Note that the use of gross liability figures greatly distorts the ratio for countries which contain major money centers such as the United Kingdom due to London’s role as a financial capital. Contrast with net international investment position (Wikipedia 2018).
According to the International Monetary Fund, “Gross external debt is the amount, at any given time, of disbursed and outstanding contractual liabilities of residents of a country to nonresidents to repay principal, with or without interest, or to pay interest, with or without principal”.
In this definition, the IMF defines the key elements as follows:
Outstanding and actual current liabilities
Debt liabilities include arrears of both principal and interest.
Principal and interest: When the cost of borrowing is paid periodically, as commonly occurs, it is known as an interest payment. All other payments of economic value by the debtor to the creditor that reduce the principal amount outstanding are known as principal payments. However, the definition of external debt does not distinguish between principal payments or interest payments, or payments for both. Also, the definition does not specify that the timing of the future payments of principal and/or interest need be known for a liability to be classified as debt.
Residence: To qualify as external debt, the debt liabilities must be owed by a resident to a nonresident. Residence is determined by where the debtor and creditor have their centers of economic interest—typically, where they are ordinarily located—and not by their nationality.
Current and not contingent: Contingent liabilities are not included in the definition of external debt. These are defined as arrangements under which one or more conditions must be fulfilled before a financial transaction takes place. However, from the viewpoint of understanding vulnerability, there is analytical interest in the potential impact of contingent liabilities on an economy and on particular institutional sectors, such as the government.
Generally, external debt is classified into four heads: public and publicly guaranteed debt; private non-guaranteed credits; central bank deposits; and loans due to the IMF.