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ABSTRACT
The research work under review is aimed at the impact of public debt on Nigerian Economy. To investigate empirically the effect of public debt on the growth process of the country, to explore the impact of the cancellation on the Nigerian economic growth, to investigate the politics of the debt forgiveness and the possible effect on Nigerian economy and to examine the effect of debt servicing on the growth of Nigerian economy within the context of a sustainable long term economic growth process and draw policy implication for debt management. The ordinary least square (OLS) is a simple regression used to study the relationship between one variable called the explained or dependent variable called explanatory variable(s). Our Y in here is RGDP while our X variable is EDS, i.e (Y=F(X)) a simple regression equation (i.e. RGDP = F (EDS). Summary, conclusion and recommendation was made that external debts should be contracted solely for economic reasons and not for socio-political reasons, the authorities responsible for managing Nigeria external debt should adequately keep track of the debt payment obligations and the debt should not be used to pass a maximum limit so as to avoid debt overhang and that the Nigeria government should promote exportation of domestic products as a high exchange rate will make our goods more attractive in the foreign market and will increase foreign exchange earnings.
CHAPTER ONE 1
INTRODUCTION 1
1.1 BACKGROUND OF THE STUDY 1
1.2 STATEMENT OF THE PROBLEM 8
1.3 OBJECTIVE OF THE STUDY 10
1.4 RESEARCH QUESTIONS 11
1.5 RESEARCH HYPOTHESIS 12
1.6 SCOPE OF THE STUDY 12
1.7 LIMITATION OF THE STUDY 13
1.8 ORGANIZATION OF THE STUDY 14
1.9 DEFINITION OF TERMS 16
CHAPTER TWO 20
LITERATURE REVIEW 20
2.0 INTRODUCTION 20
2.1 CONCEPT OF PUBLIC DEBT 21
2.2 THEORIES OF PUBLIC DEBT 23
2.3 NIGERIAN PUBLIC DEBT 26
2.3.1 EXTERNAL DEBTS 27
2.3.2 DEBT SERVICING 29
2.3.3 DOMESTIC DEBTS 30
2.4 ECONOMIC IMPACT OF PUBLIC DEBT 31
2.5 CONSIDERATION CONCERNING THE OPTIMUM AND MAXIMUM PUBLIC DEBT RATIOS 32
2.6 IMPACT OF PUBLIC DEBT ON GDP 35
2.7 IMPACT OF PUBLIC DEBT ON INFLATION 37
2.8 STRATEGIES FOR REDUCING PUBLIC DEBT 39
2.9 MEANING OF NIGERIA ECONOMIC 41
2.10 ROLES OF PARIS CLUB 46
2.11 APPROACHES TO SOLVING DEBT PROBLEM 47
2.12 CAUSES OF DOMESTIC DEBT 48
2.13 REASON FOR BORROWING 49
CHAPTER THREE 51
RESEARCH METHODOLOGY 51
3.1 INTRODUCTION 51
3.2 RESEARCH DESIGN 51
3.3 POPULATION OF THE STUDY 52
3.4 METHOD OF DATA COLLECTION 52
3.5 DATA ANALYSIS TECHNIQUES 54
3.5.1 REGRESSION ANALYSIS 54
3.6 DEFINITION OF VARIABLE AND MODEL SPECIFICATION 55
CHAPTER FOUR 57
4.1 DATA PRESENTATION, ANALYSIS AND INTERPRETATION AND DISCUSSION 57
4.2 DATA PRESENTATION 57
4.3 ANALYSIS AND INTERPRETATION 58
4.4 DISCUSSION OF FINDINGS 61
CHAPTER FIVE 63
SUMMARY, CONCLUSION AND RECOMMENDATION 63
5.1 SUMMARY OF THE STUDY 63
5.2 CONCLUSION 63
5.3 RECOMMENDATION 64
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The debt structure of a country affects citizens, institutions of government, privately owned corporate organizations like banks and consequently the economy at large.
The debt structure in this context is the magnitude of the domestic debt as well as the magnitude of the external debts. The issue of Nigeria’s public debt became important in recent times especially prior to the period of the debt forgiveness because of its magnitude and the amount which was required to service such debts as well as its attendant possible effects on different operating sector and the economy especially the banking sector and the growth of the economy at large.
As at the month of July 2015, Nigeria external debt was US$ 34 billion of which about $28 billion or 85% was owned to the paris club of fifteen creditors nation.
Apart from external debts, Nigeria’s domestic debt as at 31st December, 2003 was N1.329 trillion as at July 2006 it was N1.5trillion as at July 2005 as reported by the debt management office.
Nigeria’s domestic debt is defined as debt instruments by the federal government and denominated in local currency. It consists mainly of Nigerian treasury bills, Nigerian treasury certificates, treasury bonds, federal government development stocks, and ways and means and recently considered are contractor debts.
According to Alison (2003), Three reason have been advanced for the growing government domestic debt. The first of this is debt incurred from financial budget deficit. The second reason is debt arising from the implementation of monetary policy (the purchase and sale of treasury bills in the open market operation) and thirdly domestic debt incurred to develop the financial sector through the supply of tradable financial instruments so as to deepen financial markets.
Ola and Adeyemo (1998), while explaining the reasons for increasing public debt on the part of the Nigeria government came up with the following reasons:
- Government borrowed to finance emergencies such as natural disasters and economic depression.
- Government borrowed to financial important capital projects such as water clams. Agricultural development projects, river basin development projects.
- Government borrowed to finance current expenditure in anticipation of reasonable revenue collection.
At a point in year 2003 it was estimated that Nigeria needed approximately US $ 3 billion yearly to fully service her external debt apart from her domestic debt and this is considered unthinkable to do as it will result in the economy getting almost grounded. Ola & Adeyemo (1998).
In Nigeria, the genesis of the present existing market for domestic government debt was the financial reforms introduced by the colonial government in 1958 which led to the creation of marketable public securities to finance anticipated fiscal deficits. This is explicitly stated in the central bank of Nigeria ordinance 1985 thus: The Bank shall be entrusted with the issue and management of federal government loans publicly issued in Nigeria, upon such terms and conditions as may be agreed between the federal government and the bank. To the ordinary man, public debt evidenced in budget deficit might not make sense however different governments have used both budget deficit and budget surplus as a means of fostering policy agenda as occasion demands.
In Nigerians like so many developing countries especially between the periods covered by this study including the structural adjustment years to date, the government has assumed an active role in the development of the economy in trying to put in place the infrastructure and institutional superstructure necessary for economic growth and development. This necessitated borrowing from different sources with the aim of putting the funds on various projects believed to have the ability of driving the economy forward in which case they are supposed to be productive loans.
Also, over the years, the ever increasing Nigerian population has put some pressure on the government to spend more on public goods and merit goods. The contribution or provision of infrastructural facilities which is termed total factor productivity and often the responsibility of the nation state has made borrowing on the part of government also inevitable.
Since most of these infrastructures cannot be left in the hands of the private sector judging from the experience of market failures in different countries where this has been experimented, the public sector is then seen as the one better at handily issues of social overheads or infrastructural facilities.
Essentially, the argument for the sector activity is not because of its ability to run systems assigned to it efficiently but that the social marginal benefit derivable from state functions usually far exceeds their social marginal cost even if the ventures are run at a commercial loss.
Nigeria’s total internal and external debt stock stood at N 12.06 trillion or $63.5 billion as at the end of March this year, up from N11.2 trillion or $67.726 billion in December 2014 according to figure released by the debt management office (DMO) this year (2015).
The rise in the naira quantum of the standing debt is mainly due to the devaluation of the naira against the dollar.
According to debt management office (DMO) the total external debt of the federal and states stood at $9.464 billion or N1.864 trillion as against the $9.711 billion as at December 2014.
Federal government domestic debt (DMO) said stood at $43.185 billion as at March 2015 against the figure of N7.9 trillion or $ 47.05 billion in 2014. This gives a grand total of $ 63.506 billion or N12.06 trillion.
As at December 2014, the total debt stock of the federal government and the 36 states of the federation including the federal capital territory amounted to N11.243 trillion or $67.726 billion. States and federal capital territory as at 31st December 2014 had a domestic debt profile of N1.707 trillion or $10.967 billion.
Federal governments domestic debt, on the other hand, stood at $47.05 billion or N7.9 trillion, while those of the states stood at $10.97 billion or N1.708 trillion.
Federal Government domestic debt is made up of N5.370 trillion bonds, N2.885 trillion treasury bills and N271.2 billion treasury bonds.
But as at June 2014, states in the federation had a domestic debt stock of N1.551 trillion or $9.963 billion. The federal governments share or the rising external debt then stood at $6.363 billion.
1.2 STATEMENT OF THE PROBLEM
Due to the problem of debt servicing in Nigerian, it has budgeted the mind of so many scholars particularly as there seem to be no near solution to the problem of debt management, Nigeria is persistent by experience, any high import on debt ratios and cost of policies that may have to be undertaken to generate foreign exchange for debt servicing. The debt service payment are a change on domestic income savings and export income.
Since the debt situation worsened, the amount of resources required for debt servicing payment has gone up to the international monetary fund (IMF) has raised concerns over Nigeria’s rising debt portfolio, warning that the cost of servicing the country’s debt could rise to 35 percent of revenue in the next four years.
According to the 2015 budget, the government will be spending 26 percent of the entire N3.6 trillion budget on servicing debt. The cost of servicing debt has been on the increase in the past three years and the proposed increase in debt service expenditure is 32.4 percent compared to the 20.3 percent increase in the 2014 budget estimate. The IMF in its latest staff report on Nigeria stated that the extent of the debt servicing burden means that prudent management of debt should remain a policy priority.
Given these several rescheduling and yet persistent accumulations of areas and consistently high debt burden ratios, therefore it is obvious that the nations, current debt burden cannot be judged to be sustainable, the fact that a large proportion of debt that is not eligible for rescheduling is rising tast and rescheduling debt will also require large debt repayment makes it difficult for Nigeria to sustain its targeted investments and growing rate. Similarly, interest payment on the debt has been growing faster than the economy (GDP) and this difference in growth rate were to continue for a long time the service existing debt.
The problem is that continuous increases economic growth and consequently the standard of living of the country. Moreover, in adequate debt servicing capacity tends to reduce credit wordiness.
It is on this note therefore, that this study intends to investigate the effect of external debt on the Nigeria debt prepay debt servicing.
1.3 OBJECTIVE OF THE STUDY
This study is aimed at ascertaining the effect of public debt on the Nigerians economy. In specific terms the study intends to examine the public debt trend of Nigeria with special emphasis on the external debt. To investigate empirically the effect of public debt on the growth process of the country, to explore the impact of the cancellation on the Nigerian economic growth, to investigate the politics of the debt forgiveness and the possible effect on Nigerian economy and to examine the effect of debt servicing on the growth of Nigerian economy within the context of a sustainable long term economic growth process and draw policy implication for debt management.
More importantly, this study will seek to identify the sources and causes of debt problems with intention of othering possible solution while ascertaining the outcome of debt relief on the nation’s economy.
1.4 RESEARCH QUESTIONS
Does external public debt impact negatively on economic growth.
Would large debt burden capable of impairing the Nigeria economic performance.
What has been the pattern of Nigeria’s external debt in the past?
What are the politics behind the debt forgiveness and how would it affect the economic?
These and many more are the questions which the research study will seek to provide answers to.
1.5 RESEARCH HYPOTHESIS
The following hypothesis will be subjected to testing to draw logical conclusions.
H0: That the external public debts stocks have no positive impact on the economic growth of Nigeria.
HA: That the public debt stocks have positive impact on the economic growth of Nigeria.
1.6 SCOPE OF THE STUDY
The scope of this study shall cover the public debt trend of Nigeria over the years to date. However, the main focus of this study is an x-ray of the effects of public debt on the growth of Nigerian economy as measured by the gross domestic product. The general overview of the 2005 debt cancellation shall also be examined with certain issues raised and discussed.
It needs to be emphasized that the empirical investigation of the effect of public debt on the economic growth of Nigeria is restricted to the period between 1980 and 2014. This restriction is unavoidable because of the need to focus on the development in the public debt profile while the overall debt burden would remain contained under stress, the interest burden would increase further by an additional four percent of revenues bringing the total burden to around 40 percent of revenues.
Consequently, to ensure sufficient space to financial desired investment, the authorities should continue to follow a prudent approach to borrowing remain vigilant to the trade offs between cost and risk, and ensure the proceeds from borrowing is managed to secure the maximum return on investment.
1.7 LIMITATION OF THE STUDY
The major challenge in this project is the in ability to get enough secondary sources of data. This is because of the nature of the research which has been stated above. Also, research on a topic like this requires enough time for a comprehensive research work but with the time limit available, it will not be possible together so much data and information as required.
Despite this limitation, the researcher took adequate pain to do justice to this research. Limitation is significant constraints encountered in the course of this study which are:
Time: The study was constraints by normal and research work for assessment is subjected to the time limit.
ACCESSIBILITY: One of the major problem encountered was assess to information concerning the area of study.
FINANCE: The success of any academic exercise depend so much on the availability of money. In this work study, this was a major constrain since the extent of this work have been carried out or could not.
1.8 ORGANIZATION OF THE STUDY
The organization of this study contains five chapters. Chapter one talks about the background of the study, meaning that severally many writers have recent times shifted their attention to issues relation to debt management in developing countries especially those in the field of economic they have tried to analyze various implications of debt burden, which are vital to policy formulation.
Chapter two discuss literature review theoretical frame work. This, simple means that when research is being conducted it is normally impacted to review the work already done by previous researcher, such critical consideration of others work set interracial the theoretical background of this research work.
Chapter three discuss the research methodology meaning to achieve the set objectives of this research only secondary data were employed source of data include central bank of Nigeria (CBN) publication, annual reports from the federal office of statistics. Test books, journal magazines and newspapers.
Chapter four talks about data presentation that is data collected on gross domestic product (GDP) at current market prices and the public debt (PD) comprising domestic public debt (DPD) and external public debt (EPD) during the period 2000 – 2009 is to bulleted and presented below the ease analysis.
Chapter five talks about conclusion and recommendation meanly to discuss about the findings from the analysis to shows that the debt burden has a great influence on the Nigeria economy. This was manifested in the test of overall significance where calculated value proud to be less than the tabulated value are critical value.
1.9 DEFINITION OF TERMS
The following terms are clearly defined as they will be used in the research.
PUBLIC DEBT: This is borrowings of government which can be internal of external in other works, it is the aggregate of domestic and foreign debt.
EXTERNAL DEBT: This is simply defined as the borrowings from foreign lenders. It is usually denominated in foreign currency.
DEBT: A sum of money or other property owned by one person or organization to another which comes into being through raising loan capital.
INTERNAL DEBT: This is regarded as debts obtained from local citizens or institutions.
DEBT MANAGEMENT: It is a muti-face concept that involves debt strategy, debt contraction, recording monitoring and servicing.
GROWTH: This is defined as an increase in the Gross Domestics Product or per capital income of a country.
BUDGET DEFICIT: This is a situation where the estimated expenditure exceeds the estimated revenue.
ECONOMIC: This is the study of the production and consumption of goods and transfer of wealth to product.
DEBT RELEIF: The act of freeing an individual, country organization, from debt. Distress to reduce and renegotiate its delinquent debt in order to improve or restore liquidity and rehabilitate so that it can confined its operations.
DEBT REFINANCING: When a firm raises money for working capital or capital expenditures by selling bonds bills or notes to individual and or restitution investors in return for rending the money the individual or institution become indictors and receive a promises that the principal and interest on that debt will be repaid.
GROSS DOMESTIC PRODUCT (GDP): This is the money value of final good and servant product within the country by both citizens and foreigners within a period of time usually one year. Computer user specifics another type that is actually connected.
DEBT BURDEN: Debt burden is the cost of servicing debt for consumers it is the lost of interest payments on debt the debt burden will be higher on credit cards and loans with high.
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