ABSTRACT
The study sought to investigate the impact of disaggregated domestic debt instruments on economic growth of Nigerian. The Augumented Dickey Fuller Test, Multiple linear regression method and granger causality test was applied to annual Nigerian data spanning 1981-2015. The study indicated that treasury bills have a positive relationship and significant impact on economic growth while treasury bonds have a positive relationship and insignificant impact on economic growth. Development stock has a negative relationship and insignificant impact on economic growth. The control variables lending interest rate, inflationary pressure measured by consumer price index and exchange rate all have a negative relationship and insignificant impact on GDP except exchange rate. Money supply has a positive relationship and significant impact on economic growth. The result of the causality test shows that there exists a bidirectional relationship between treasury bills and GDP. The study concluded that the treaury bills and treasury bonds has a positive impact on economic growth in Nigeria. The study futher recommends that in the long run government should find a way to correct persistent budget deficit by diversifying the economy because in the long run both domestic and external debt are not sustainable.
CHAPTER ONE
1.0 Introduction
1.1 Background of the Study
Internal debt or domestic debt is part of total government debt owed to lenders within a country (Reinhart and Rogoff, 2010). Internal debt is a compliment to external debt in government debt profile. Commercial banks and other financial institutions constitute the sources of funds for the internal debts.
Debts are classified into two that is reproductive debts and dead weight debt. When a loan is obtained to enable the state or nation to purchase some assets, the debt is said to be reproductive e.g. money borrowed for acquiring factories, electricity, refineries etc. However, debts undertaken to finance wars and expenses on current expenditure are dead weight debts.
Atuma (2016), argued that a nations rising debt profile and depleting foreign reserve ought to make all levels of government in the country to be more prudent in the management of their domestic and external loans.
Statistics from the Debt Management Office (DMO) shows that Nigeria’s debt has risen from N12.12trn in 2015 to N16.29trn in 2016, representing an increase of N4.17trn. This portends a worsening economic outlook for Nigeria. A breakdown of the debt statistics shows that external debt by the federal and state governments stood at $11.26bn or N3.19trn as at June 30, 2016 but in July 2015, the figure was $ 10.32bn.
Further highlights of the domestic debt status show that the federal government incurred a hefty N10.6trn as at June 2016 as against N4.8trn as at the same time June 2015, representing an increase of N2.21trn or 26.31 percent. The domestic debt of the 36 states and the Federal Capital Territory (FCT) as at June 2016 was N2.6trn. It was N1.69trn in July 2015, an increase of N810bn or 47.93 percent. According to DMO statistics, Federal Government Bonds remain the dominant instrument for borrowing from the domestic market. This accounts for N7.47trn or 70.46 percent of Federal Government’s domestic debt profile, while Nigerian Treasury Bills account for N2.9trn domestic debt profile by the Federal government. Altogether, government will be living in denial if it fails to recognize the profound negative consequences of this rising debt profile. It portends high risk to the economy due present recession.
The need to issue domestic debt arises from government deficit that are not fully foreign financed and from implementation of monetary policy. Generally a deficit leads to change in government net assets. Hence, a budget deficit can be financed by either drawing down assets or incurring new liabilities either foreign or domestic.
The choice between foreign and domestic borrowings, depends on cost (interest rate), maturity structures and risks. The term for foreign borrowings are often more favourable than for domestic borrowings. Since domestic borrowings, bear much higher interest rates and have shorter maturities. 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, government may still consider domestic borrowings 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 recipient country. Secondly, international aids is often linked to project financing and therefore cannot finance a government recurrent expenditure supported by donors. Hence, government with large recurrent budget deficits may be forced to tap domestic savings, including through issuance of domestic debts to close the budget gap.
Considering the economic implication of the nation’s rising debt profile, it becomes a major policy issue requiring extensive public debates and discourse. More importantly, heavy indebtedness of the nation remains one of the major challenges facing most developing countries at the beginning of our 21st century. Indeed high levels of domestic national debts are likely to be deterious for economic growth and development. It is also true that any structured and sustained borrowing cannot achieve economic prosperity.
With the current economic situation, it is imperative that the nation should initiate a comprehensive debt serving plan. In designing the plan, the government need to carefully re–examine the nation’s borrowing culture with its attendant consequences.
1.2 Statement of problem
The gloomy Nigerian debt situation can be traced back to the late 1970s when there was the need to finance the widening deficit gap created by profligate spending. This marked the beginning of the end of the oil boom era which was characterized by reduction of foreign exchange earnings and rising fiscal deficits and external borrowings.
Debt management office (DMO) annual report indicates that domestic debts had increased from 5.966 trillion ($ 37.11 billion) at the end of the first quarter of 2012, to 6.153 trillion ($38.89 billion) at the end of the second quarter ended June 30 2012. This represented increase of 187 billion or three percent over the figures recorded in the previous quarter.
Statistics from the DMO annual report have shown that the Federal Government spent 1.02 trillion to service its domestic debt in the year 2015. This comprises of 25 billion spent on repayment of the principal and 933.13 billion on interest payment within the year. As at December 2015, Nigeria total public debt stock stood at 12.6 trillion compared to 11.25 trillion in 2014. The difference represents an increase of 12 per cent (or 1.37 trillion) within one year period. External debt accounted for 2.11 trillion or 16 per cent of the total debt while domestic debt took the remaining 10.49 trillion or 83.25 per cent. Out of this amount, the federal government domestic debt was 8.54 trillion.
The trend analysis shows a continued rise in FGN’s domestic debt service payment from 537.39bn in 2011 to 1018.13bn in 2015 (DMO annual report), which was attributed to the increase in domestic stock, as well as the higher interest rate which led to increase in the cost of borrowing from the domestic market.
The need to attain macroeconomic stability and sustainable growth has been the reason for increased federal government borrowing. However, debt finance has been largely focused on unsustainable fiscal deficits. Such borrowings from CBN amounts to the injection of high borrowed money into the system, which has serious adverse implication on price and exchange rate stability.
Similarly, it crowds out private sector from the credit market, thereby stalling investment and output growth. Also the deficit budgeting, is not the critical issue of concern, rather it is the size, source of financing and the quality of expenditure. The borrowed money must be prudently utilised in the execution of productive projects in order to enhance the capacity for repayment of both the principal and interest element as they fall due. A debt problem would naturally result when the resources that should have been employed for the execution of the productive projects in order to enhance the capacity for repayment of the principal and interest element as they fall due are not utilized. Rather such debts are employed in the finance of debts.
Large debt service payment impose a number of constraints on a country’s growth prospects. It drains countries limited resources and curtails financial and other resources for domestic development needs. Large debt servicing obligation and debt burden depress investment and growth. Given the problems of debt finance in Nigeria, this research seeks to address the following questions:
What is the effect of domestic debt on economic growth in Nigeria?
What is the causal relationship between domestic debt and GDP in Nigeria?
1.3 Objectives of the study
The broad objective of this study is to examine the domestic debt management and its influence on economic growth in Nigeria. The specific objectives are to;
Determine the effect of domestic debt on economic growth in Nigeria;
Determine the relationship between domestic debt and GDP in Nigeria (casuality).
1.4 Hypothesis
H0 : Domestic debt has no significant effect on economic growth in Nigeria.
H0 : There is no causal relationship between domestic debt and GDP in Nigeria.
1.5 Significance of the study
The study is important because it will help to know the amount of domestic debt of the country and proffer solution on how to control the debt of the country based on the findings and recommendations of this work. It will stand to help the policy makers, government, researchers and the students of related discipline. The research work will serve as a guide to policy makers to enable them in making and implementing appropriate laws that will guide the rate at which money is borrowed from within the country and also negotiate the maturity period to limit the extent of domestic debt. This is implementing proper policies. This work is relevant to government in the area of debt management. Thus, it will help the government to know the organisations whose maturity period are longer and also charge rate of interest and then borrow from them so that the loan can be repayable as and when due. This will also benefit the researchers and the students of related discipline by serving as a reference material primarily geared towards expanding the boundaries of knowledge.
1.6 Scope of study
The study will focus on the Nigeria’s domestic debt and its impact on the economy. The study will cover the period of 1981-2015. This period is particularly pertinent for the study and the nation’s economic history because it covers a period of deficit financing and budgeting as well as recessionary period involving sharp decline in general societal aggregate demand which emanated as a result of low level of savings in Nigerian economy which necessitate the undesirable macro-economic problems and economic distress and fluctuations which may come up inform of economic glut (dumping of unsold stocks of goods due to lack of patronage by the consumer, that is low or no effective demand of the commodities or stock of the goods by consumers).
1.7 Limitations of the study
The researcher was faced with the challenges of acquiring secondary data on some variables and as such these variables were exempted from the model.
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