Impact of External Debt on Fiscal Stability - Case Study Example

Following nearly 16 years of military rule, a new constitution was adopted in 1999, and a peaceful transition to civilian government was completed. The president faces the daunting task of rebuilding a petroleum-based economy, whose revenues have been squandered through corruption and mismanagement, and institutionalizing democracy. In addition, the NEW administration must defuse longstanding ethnic and religious tensions, if it is to build a sound foundation for economic growth and political stability.

Despite some irregularities, the April 2003 elections marked the first civilian transfer of power in Nigeria's history. (Country Profile: Nigeria, Cia.gov)The 1981 oil glut caused the economy to suffer from price distortion and an overvalued currency. Heavy dependence on importation left the government unprepared to deal with a prolonged period of depressed international oil prices. The sharp decline in oil prices affected domestic production, leading to deterioration in the balance of payments and government finances.

The government financed the shortfalls by borrowing, drawing down on external reserves, and amassing debts on external trade payments.The president had shown greater commitment to implementing liberal economic reforms in his second and last term in office but still faces a huge task if he is to turn around the corruption-ridden, heavily indebted, and oil-dependent economy. Mr. Obasanjo may also pursue controversial reforms, such as constitutional changes, to shake up Nigeria's crisis-prone political system.

However, these are likely to be resisted by powerful groups with vested interests in maintaining the status quo. Given the background of ethnic and religious divisions, widespread poverty, and political disillusionment, there is a risk that the reform drive could destabilize the country if not properly managed. However, assuming that the president is able to navigate Nigeria's turbulent political waters and achieve some progress with reform-against the background of ongoing growth in the oil and gas sector.