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The Impact
Of Internal Debt On Economic Growth And Development In Nigeria
ABSTRACT
The fall in
international price of crude petroleum in early 1980’s caused government
revenue to fall. As a result, government of Nigeria was forced into borrowing
(both internal and external) to maintain her expenditure pattern. The objective
of this study is to focus on investigating the impact of internal debt on
Economic growth and development in Nigerian. Economic arguments alone are not
sufficient to explain this behavior, therefore an analysis was carried out
using the OLS method to determine the impact of internal debt on economic
growth and development in Nigeria. The result confirmed the existence and of a
significant negative effect of domestic debt on economic growth, through low
productivity and low output. Productive is low in Nigeria as a result of huge
amounts that has been drawn out of the economy inform of domestic debt. As a
result of the government borrowing from the economy, the internal sector is
negatively, through lo productivity and output.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Debt is
created by the act of borrowing. It is defined according to Oyejide et al
(1985) as the resource or money in use in an organization which in not
contributed by its owner and does not in anyway belong to them. It is a
liability represented by a financial instrument or other formal equivalent. In
modern law, debt has no precisely fixed meaning and may be regarded essential
as that which one person legally owes to another or an obligation that is
enforceable by legally action to make payment of money. When a government
borrows, the debt is a public debt. Public debts either internal or external
are debts incurred by the government through borrowing domestic investments.
Debts are classified into two i.e. reproductive debt and dead weight debt. When
a loan is obtained to enable the state or nation to purchase some sort of
assets, the debt is said to be reproductive e.g. money borrowed for acquiring
factories, electricity refineries etc. However, debt undertaken to finance wars
and expenses on current expenditure are dead weight debts.
Developing
countries, like Nigeria, were characterized by inadequate internal capital
formation arising from the vicious circle of low productive, low income and low
savings. Nigeria is the world’s seventh-largest oil exporter but also one of
the poorest. Nigeria’s domestic debt has been rising fuelled primarily by
escalating fiscal. At the end of 2002, total federal government domestic debt
outstanding amounted to 1,166. 0 million and in 2003, it rose to 1,329 million
and in 2005, it amounted to 1,525,906 million and in 2006 it rose to 1,753,259,
million (source: CBN statistical bulletin (2006).
The dramatic
growth in the domestic debt outstanding has raised many doubts about fiscal
sustainability of the current economic policy. The concerns about
sustainability have also been compounded by those related to the very short
maturity of most of the government domestic debt, and also the fact that the
central bank of Nigeria (CBN) still remains the dominant holder of federal
government domestic debt instrument.
The need to
issue domestic debt can arise both from government deficits that are not fully
foreign financed sand from implementation of monetary policy. Generally a
deficit leads to a change in government net assets. Hence, a budget deficit can
be financed by either drawing down assets or incurring new liabilities, either
domestic or foreign. The choice between foreign and domestic borrowings, turn
depends on cost (interest rates), maturity structure and risks. The terms of
foreign borrowings are often more favorable than for domestic borrowing. Since
domestic borrowings, carry much higher interest rates and have shorter
maturities. Another advantage of foreign borrowing is that it increases the
supply of foreign exchange, which is critical to meet important requirements.
One drawback to foreign borrowing is currency risk, which may increase along
with foreign indebtedness, given that a growing foreign debt service increases
the demand for foreign exchange. Despite the attractiveness of foreign
borrowing, governments may still consider domestic borrowing for a number of
reasons. First, the supply of foreign (concessional) financing may be
determined by the bid agencies, budgets and their assessment of the economic
performance of the recipient country. Secondly international aid is very often
linked to project financing and therefore cannot finance a government’s
recurrent expenditure not supported by donors. Hence, government with large
recurrent budget deficits may be forced to tap domestic savings, including
through issuance of domest5ic debt, to close their budget gaps.
Economic
theory suggests that reasonable levels of borrowing by the federal government
are likely to enhance it s economic growth (Pattilo, Ricci and Poirson 2002).
When economic growth is enhance (at least more than 5% growth rate), the
economy’s poverty situation is likely to be affected positively. In order to
encourage growth, the federal government buys debt instruments for a specified
period of time. The instruments are used to finance government deficits in a
non- inflationary and sustainable manner to enhance fiscal discipline and for
the management of monetary policies. As escalating debt profile presents
serious obstacles to a nation path to economic growth and development. The cost
of servicing public debt (domestic and external) may expand beyond the capacity
of the economic to cope, there by impacting negatively on the ability to
achieve the desired fiscal and monetary policy objectives. Furthermore, a
rising debt burden may constrain the ability of the government to undertake
more productive investment programmers’ in infrastructure, education and public
health.
Many, developing countries resort to
domestic borrowing to bridge the domestic resources gap in order to accelerate
economic development. It means that the federal government can resort to
domestic borrowing provided that the proceeds are utilized in a productive way
that will facilitate the eventual servicing and liquidation of debt. Stieglitz
(2002) contributed that government borrowings can crowd out investment, which
will reduce future output and wages. When wages and output are affected the
welfare of the citizens will be made vulnerable.
Soludo
(2003), opined that federal government for two broad categories.
a) Macroeconomic reasons (higher investment,
higher consumption (education and health).
b) To finance statutory balance of payment
deficits.
This implies
that the economic indulges in debt to boost the economic growth. He is also of
the opinion that once an initial stock of debt grows to a certain threshold, servicing
them becomes a burden and countries find themselves in a wrong side of the
economy’s development, with debt
crowding out
investment and growth. The sharp increase in the domestic debt stock, over the
years was attributable largely to the failure to embark on necessary
adjustment, particularly at the time of declining revenue that resulted in
growing fiscal deficits and further domestic debt accumulation. The bulk of
domestic debt has been in short term treasury securities with maturities of
less than one year. Nigeria’s debt burden has grave consequence for the economy
and the welfare of the citizens. The servicing of domestic debt has severely
encroached on resources available for socio-economic development and poverty
alleviation. Nigeria’s domestic debt has been rising over the years. Table 1
below shows data on Nigeria’s domestic debt has increased steadily under
Obasonjo’s Administration, it increased by almost 50% between 2000 and 2002. It
is confirmed from an analysis of the data that, during the entire period, a
majority of the domestic debt was held in short term instruments, the 91-day
Treasury bills constituted over 57% of total domestic and approximately 63% in
2002. The rest of the public domestic debt stock has been generally held in treasury
bonds and development stocks. The CBN has been ascertained the leading holder
of domestic debt. In 199, the CBN held 65% of the total domestic debt, in 2000
its percentage share was 57.9 while in 2001, and its share rose to 66.9%.
However, its share fell to 46% in 2002.
Also because of the short-term nature of the domestic debt, an amount
equivalent to 20% of the GDP comes due for payment every three months. The
government strategy has been to borrow the same amount to pass off the maturing
debt and interest due. CBN, as the under writer of government securities, has
stood ready to absorb the under subscribed amount of securities in the weekly
primary actions.
Table
1: Nigeria: Federal Government Domestic
Debt Outstanding 1998-2002 (in million of Naira)
1998
1999
2000
2001
2002
Total
404
794.8
898.2
1,016.9
1,169.9
By
Instrument
Treasure
Bills
221.8
361.7
465.5
584.5
430.6
Treasure
Certificate
0
0
0
0
0
Development
Stock
2.6
2.4
2.1
1.8
1.6
Others
133.4
0
0
0
0
By Holders
Banking
Sector
489.2
765.1
855.9
919.2
980.0
Central Bank
435.1
522.8
713.9
719.9
519.8
Commercial
Bank
49.5
26.1
132.7
199.3
460.2
Merchant
Bank
4.6
16.2
9.3
0
0
Non-Bank
Sector
48.2
29.7
42.3
97.8
186.0
Sources:
Central Bank f Nigeria, Annual Reports and statistical Bulletin (2006).
The share of
domestic debt public has been on an increasing trend. Domestic debt was only a
minor component of total public debt until 2006. With the final exit from Paris
club debt domestic debt became the larger share of total public debt, at around
80%.
Domestic
Debt Ratios 2001-2006(%)
2001
2002
2003
2004
2005
2006
Domestic
Debt
24.30
23.72
23.81
22.30
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