THE STRUCTURE OF THE
NIGERIAN DOMESTIC DEBT AND ITS IMPACT ON FOREIGN EXCHANGE EARNING
TABLE OF CONTENT
Cover page
Title page
Approval page
Dedication
Abstract
Acknowledgment
Table of content
CHAPTER ONE
1.0 Introduction
1.1 Background
of the research
1.2 Statement
of research problem
1.3 Objectives
of the study
1.4 Significance
of the study
1.5 Scope of
the study
1.6 Research question
1.7 Limitation
of the study
1.8 Definition
of terms
Reference
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction
2.1 Source of
literature
2.2 Review of
concept
2.3 Review of
related work
2.4 Empirical
studies
2.5 Summary
of review
Reference
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research
method
3.2 Fact
finding method
3.2 Sources
of Data
3.3 Population
of the study
3.4 Sample
and Sampling
3.5 Research
Instrument
3.6 Method of
Investigation
3.7 Method of
Data Analysis
CHAPTER FOUR
Data presentation and analysis
4.1 Data presentation and Analysis
4.2 Discussion
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
5.2 Conclusion
5.3 Recommendation
References
Bibliography
CHAPTER ONE
1.0 INTRODUCTION
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 if not controlled could create some unfavorable
consequences as crowding out private sector investment, poor GDP growth
etc,(Okonjo-Iweala,2011). On the other hand, government has to continue to
finance projects to grow the economy and one viable option of doing so is by
issuing debt instruments. For example, the 2012 national budget presented to
the national assembly contains a deficit of N1.11trillion which has to be
financed majorly through domestic debt. As at September 2011, Nigerian domestic
debt stood at N5.3 trillion, an equivalent of $34.4 billion while external debt was $5.6 billion bringing
the National debt to a total of 40
billion dollar which amounted to 19.6 percent of GDP, (Nwankwo2011) showing
that the debt ratio is still below the internationally unacceptable standard of
40 percent of GDP. However, beyond consideration of maximum acceptable debt-GDP ratio of 0.40
a more critical consideration for economic growth is the country’s absorptive
capacity which might be quite be low a given threshold. Domestic debt is therefore a topic to examine
at this point of national development when unemployment is critically high and
the global economic crisis is far from being resolved.
Domestic debts are debts instrument issues by the
federal government and denominated in local currency. State and local government can also issue
debt instrument, but debt instrument currently in issue consists of Nigerian
treasury bills, federal government development stocks and treasury bonds. Out
of these treasury bills and development stocks are marketable and negotiable,
while treasury bonds; ways and means advances are not marketable but held
solely by the central bank of Nigeria, (Adafu et al 2010). The central bank of
Nigeria (CBN) as banker and financial adviser to the federal government is
charged with the responsibility for managing the domestic public debt. (Alison
et al 2003) reveal three principal reasons often advanced for government
domestic debt. The first is for budget deficit financing, second, is for
implementing monetary policy and the third is to develop instruments so as to
deepen the financial market. Whatever
the purpose, the government should find a way of managing the domestic debt so
that the level of debt is not counter productive. The researcher therefore set
out to investigate the structure and effects of rising domestic debt and for
this purpose, the paper is divided into five sections. Besides the introductory
section, section two, examines the relevant literature exploring the genesis of
public debt financing and its management, section three examines the methodology of investigation,
section four discusses the research
findings and section five raps it up
with summary and policy prescriptions.
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)
Year
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