a. Explanation of External Debt:

External debt refers to the total amount of financial obligations owed by a country to foreign creditors, which includes loans taken from foreign governments, international financial institutions, and private sector lenders. This debt is typically denominated in a foreign currency and necessitates future repayment in the agreed currency, often used to finance development projects or bridge fiscal deficits.

b. Causes and Adverse Consequences of Rising External Debt in Nigeria:

Causes:

1. Budget Deficits: Frequent budget shortfalls have led the government to rely on external borrowing to finance its spending requirements.
2. Low Domestic Revenue Generation: Insufficient tax revenue and challenges in diversifying income sources increase dependence on foreign loans.
3. Infrastructure Development Needs: The demand for infrastructure to stimulate economic growth compels the government to seek external funds.
4. Fluctuations in Oil Revenue: Nigeria’s reliance on oil means that any drop in oil prices adversely affects revenue, increasing the need for external funds.
5. Currency Depreciation: The devaluation of the naira increases the cost of servicing debt, often requiring more borrowing to manage fiscal obligations.

Adverse Consequences:

1. Debt Servicing Burden: High interest payments consume a significant portion of government revenue, leaving less available for development.
2. Foreign Exchange Constraints: Repayments in foreign currency strain Nigeria’s foreign reserves, risking further currency depreciation.
3. Reduced Sovereign Credit Rating: Increasing debt levels can lead to downgrades by rating agencies, making future borrowing more expensive.
4. Economic Dependency: High external debt can lead to economic dependency on creditor nations and institutions, limiting policy autonomy.
5. Potential for Economic Instability: Uncontrolled borrowing without corresponding economic growth can lead to financial crises.