Domestic Debt And The Growth Of Nigerian Economy

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Domestic Debt And The Growth Of Nigerian Economy

ABSTRACT

The study investigates the relationship between domestic debt and economic growth in Nigeria. The Ordinary Least Squares Method (OLS), Error Correction and parsimonious models are used to analyze quarterly data between 1994 and 2008. Our result shows that the domestic debt holding of government is far above a healthy threshold of 35 percent of bank deposit as the average over the period of study is 114.98 percent of bank deposit presenting evidence of crowding out of private investments. The study of course affirms that the level of debt has negative effect on economic growth. Government should maintain a debt- bank deposit ratio below 35 percent, resort to increase use of tax revenue to finance its projects and divest itself of all projects the private sector can handle while providing enabling environment for private sector investments such as tax holidays, subsidies, guarantees and most importantly improved infrastructure.

CHAPTER ONE

1.1 Background of the study

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.

1.2 Statement of the problem

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.

1.3 Objectives of the study