Impact of domestics’ debt on Nigeria economic growth
- Background of the Study
In Nigeria, domestic government debt is defined as debt instrument issued by the federal government and denominated in local currency.
In principle state and local government can also issue debt but they are still limited in their ability to issue debt instrument. Therefore government domestic debt refers to debt instrument issued by federal government and does not include contractor debts and supplier credit by the government.
The beginning of the existing market for domestic debt in Nigeria is the financial reforms introduced by the colonial government in 1958, Ajayi (1989). These reforms to the creation of the central Bank of Nigeria (CBN) and the creation of marketable public securities to finance fiscal deficits According to paragraph 35 of the CBN ordinance 1958, “the bank shall be entrusted with the issue and management of federal government loans publicly issued in Nigeria a upon such terms and condition as may be agreed between the federal government and the Bank”.
The instrument government traded upon in order to borrow fund from then public consist of the following Nigeria Treasury bill Nigerian Treasury certificates Federal government Development stocks Treasury Bonds. Ways and means Advance
Out of these treasury bills, treasury certificate and development stocks are marketable and negotiable while treasury bonds, way and means Advance are not marketable, but held solely by the CBN the three marketable government debt instrument only treasury bills are currently traded in the money market, since treasury certificate was discontinued in 1996, development stock was traded in the capital market but since 1987, the federal government has not issued any new development stock.
Development stock was apparently the first government instrument to be issued. The colonial administrators floated the first registered debt stocks 1951/61 in 1956 (Onyia 1976). It was floated largely to provide development finance either directly to meet the needs of the federal government or as loan on lent the state government.
Treasury certificates was first issued in 1968, it constituted one of the largest securities between 1983-1988, it was first issued to further deepen the domestic money market by increasing short-term investment options available, but it was abolished in 1996 in order to reduce federal government domestic debt service obligations.
In 1989, the monetary authorities at the inception of the auction bid system for flotation of treasury bill and certificate introduced treasury bonds as another instrument in the portfolio of domestic debt. The bond styled as “5 percent federal Republic of Nigeria treasury Bonds” are to carry a fixed interest rate of 5 percent and are wholly held by the CBN.
As a result of the flotation of new issues of treasury bonds and conversion of part of the treasury certificates outstanding treasury bonds accounted for up to 69 percent of total domestic debts as at 1996.
In line with government policy of reducing reliance on monetary financing of deficit, the federal government through Debt management office (DMO) in 2003 raised fund through the capital market by issuing the first FGN bonds, the government was able to raise N27.6 billion out of the N150 billion worth of bond issued representing about 5.4 percent of total domestic debt stock.
Since the early 1960s, the ratio of domestic debt to gross domestic product (GDP) has increased
A decade later by 1974 this ratio went up slightly to 6.9 percent of GDP. But by 1984, the domestic debt to the GDP ratio was over 40 percent, although it declined slightly in the 1990s, it has since 2000 moved upward, (Asogwa 2009)
He further opined that Nigeria has not been alone in experiencing escalating level of government domestic indebtedness but in comparison to other countries in sub-Sahara Africa. Nigeria’s domestic debt to GDP ratio is clearly on the high side.
One can analyze the debt from its size or by considering its different components the evolution of the domestic stock of government debt is measured relative to national output. This is shown by the size of the domestic debt structure both in nominal terms as a percentage of total debt has grown tremendously from N0.23 billion at inception and it stood at N1.86 billion as at 1980.
It was in 1986 at the inception of structural adjustment program (SAP) that the level of external debt for the first time became larger than the level of domestic debt (Asogwa 2009). Ever since then the stock of external debt has consistently been larger than domestic debt. Alison et al (2003) revealed three theoretical reasons often advanced for government domestic debts.
The first is for budget deficit financing, secondly is for implementing monetary policy (buying and selling of treasury bills in the open market operation) and the third is to develop the financial instrument so as to deepen the financial markets
In Nigeria several factors have been advanced to explain the changing domestic debt profile between 1960 to 2003 (Odozi 1996, Rapu 2003) the major factors include high budgets deficits low output growth, large expenditure, high inflation rate and narrow revenue base witnessed in the 1980s. Output growth declined as it recorded annual average value of 5.9 percent in 1980-1984, 4 percent in 1990-1994 and 2.8% in 1998-1999.
(Alison 2003). However growth was recorded in 2003, it is usually expected that as countries expand their output, they also tend to rely more heavily on domestic debt issuance to finance growth. There is thus, a strong cross-country relationship between economic growth and the total size of the debt market.
Public expenditure as a percentage of GDP increased fro 13 percent in the 1980-1989 periods to 29 7 percent in the 1990-1994 periods.
This increased public expenditure to GDP ratio resulted from fiscal policy expansion embarked upon during the oil boom era of the 1970s. However, as the oil boom declined in the 1980s priorities of government expenditure did not change. Consequently, the fiscal operations of the federal government resulted in large deficits from the average of 0.8 percent of GDP in the 1970-1979 period, the level of 5.1 percent in 1980-1989 and 10.0 in 1990-1994. A very remarkable feature of the government fiscal expansion was the financing averaging 79.2 percent between 1980-2002, since foreign loan was difficult to obtain. cross- country relationship between fiscal deficits (as percentage of GDP) and the size of government debt market confirm that countries with large fiscal deficits have issued more government securities in domestic market (Alison 2003)
The Nigerian 2012 National budget that was presented to the National Assembly contains deficits of N1.1 trillion which has to be financed majorly through domestic debt. As at September 2011, Nigeria domestic debt stood at N5.3 trillion; an equivalent of $34 .4 billion while external debt was $5.6 billion bring the national debt to a total of $40 billion which amounted to 196. Percent of our gross domestic product GDP (Gbosi 1998).
Domestic debt reduction in Nigeria has taken centre stage for conversing realistic pricing of petroleum products in Nigeria as the domestic debt profile has been rising astronomically and consequences as crowding out private sector investment , poor GDP growth etc. Okonjo-Ikeeala (2011).
The fall in international price of crude petroleum in early 1980 caused government revenue to fall as a result of that Nigeria government was forced into borrowing to maintain her expenditure pattern.
The first example of public debt surfaced in the late 17th century in European and became more prevalent with the rise of the modern state, the banking and the credit system that grew out of the industrial revolution (Charles 2000).
In less developed countries, government use public debt as imperative tool to finance its expenditure. Economic growth can be increased by effective and proficient utilization of resources to achieve macroeconomic goal.
The researcher therefore set out to investigate the impact of domestic debt on Nigeria
1.2 Statement of the Problem
Domestic debt can have several implications or effect on the economy, even the debt servicing payment can absorbs a major part of government revenue leaving government with less fund to send on development project.
Nigeria domestic debt has been accused of poor management, in spite of bank’s best endeavor in the prudent management, not much has been achieved.
Nigeria economy has witnessed persistent depression over the years and as a result several measure has been employed by the operations of the economy to reverse the situation and raise new challenges and responsibilities in rationalizing public expenditure and trimming the size of domestic debt stock.
In the light of all these, the following research questions are being raised.
- Is there long run equilibrium relationship between domestic debt and economic growth in Nigeria?
- To what extent does domestic debt impact on economic growth of Nigeria?
1.3 Objective of the Study
The research work is wholly undertaken to analyze the impact of domestic debt in Nigeria.
The research worked toward the following cardinal objectives
- To determines whether there is long run equilibrium relationship between domestic debt and economic in Nigeria.
- To determines empirically the impact of domestics’ debt on Nigeria economic growth.
- Hypothesis of the Study
For the purpose of this study the Null hypothesis of the study is (Ho) while Alternative hypothesis is ( H1)
Ho: There is no long run equilibrium relationship between domestic debt and economic growth.
Hi: There is long run equilibrium relationship between domestic debt and economic growth.
Ho: Domestic debt does not have significant impact on economic growth in Nigeria.
Hi: Domestic debt has significant impact on economic growth in Nigeria.
- Significance of the Study
The study will be of immense value to the government and central bank of Nigeria to properly work toward economic revival at approvable cost, and in the analysis of management domestic debt activities by the central bank of Nigeria. Capital market operators will not be left out in the benefits of this study as they would understood the dire need of their quality services and roles in the emancipation of the Nigeria economy from recurrent recession.
To add to the existing literature of course study.
This study will help to restore the lost confidence of the public as regard to domestic debt and its impact on the Nigerian economy.
- The Scope/Limitation of the Study
The researcher intends to study the effectiveness of domestic debt management by the central Bank of Nigeria.
The scope of the study will be restricted to highlighting the concepts, policies, institutions, strategies achievement, problems and prospects of domestic debt by the Nigerian government.
This study will cover the structure of Nigeria domestic debt before and after the inception of structural Adjustment program (SAP) in 1986. The time period is thirty-two years (1980-2012).
For any research work to be undertaken one is bound to encounter some problems and this research is not an exception. Some of the problems includes dearth of data, time constraint and limited fund posed a serious problem to the research.