Domestic Debt and Financial Development in Nigeria
Chapter One
OBJECTIVE OF THE STUDY
The objectives of the study are;
- To ascertain the relationship between domestic debt and financial development
- To ascertain the effect of domestic debt on Nigeria economy
- To suggest what to be done to avoid domestic debt
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
The tradition school of thoughts in finance and economic view leverage as essential for corporate growth. However since the great depression of the late 1920’s and early 1930’s when the Keynesian deficit policy propelled the economies of Western Europe out of depression, public debt (deficit) has been recognized as a veritable instrument for raising aggregate demand, employment and output of all economies both developed and developing. Public debt has consequently gained accelerated prominence among less developed countries. It is seen as a viable strategy for mobilization of the additional resources required to finance their much desired developmental needs. This financing strategy seems justifiable on the grounds that available savings at particular points in time have never matched their desired levels of investment. Jhingan (2008) argued that less developed countries are saddled with complex foreign debt problems, because as poor countries, they have low rates of domestic savings and consequently, investment. As a result, they heavily depend on capital inflows from abroad to finance their appraised developmental needs. In his view, less developed countries significantly lack the essential economic and social overhead capital. They also lack the strategic industries such as iron and steel which are fundamental prerequisites for launching nations into the development process as opposed to the situation in the Soviet Union, where industrialization began on the platform of the iron and steel industries. The above circumstances accordingly, made a strong case for incurring sometimes, external debts with stringent repayment terms. The repayment terms in turn, facilitate the conditions for debt crisis as a greater proportion of the export proceeds of debtor countries would continually be required to service matured external debts. Ultimately, accumulation of external debts leads the less developed countries into huge current account deficits. These deficits are financed by issuance of sovereign bonds by debtor countries, borrowing from foreign banks and international credit institutions as well as foreign private firms. The settlement of the bond obligations consequently imposes a serious debt burden on the less developed economies. Onoh (2007) noted that domestic sources of Nigeria’s public debt include borrowings from individuals and corporate bodies, other tiers of government, deposit money banks, non-bank financial institutions etc. The debts are raised through the issuance of instruments subscribed through the money and capital market. Remarkably, he noted that it was only during 2005 – 2007 fiscal years that Nigeria secured a substantial debt relief and debt restructuring from the Paris and London clubs under the Naple terms. Taking a political view of debt relief in Nigeria, Aina (2005) commented that Nigerian economy has been weakened and will continue to deteriorate on account of the neo-colonial forces of globalization. He stressed that Nigeria lacks the competitive advantage to engage the developed nations in any exchange process. Given this scenario, he viewed Nigeria as a victim of capital flight, mounting debt profile, industrial collapse, over dependence on imported goods, weak currency and high inflation rates. He argued that the country will continue to experience the adverse effects of globalization so long as she continued to open up her economy for external economic relationship. Further, he viewed Nigeria as having reduced access to the markets of the developed nations because of her disadvantaged technological position. Providing a valuable framework for predicting Nigeria’s external debt, Isu (1997) drew from scholars who include Killik, Mehran, Printo and Fajana and adopted the traditional primary causants model in evaluating the determinants of Nigeria’s external debt. Among the five Western traditional causants-productivity index, inflation rate, foreign reserves, balance of payment on current account and population, he found only population as significant in Nigeria. Akujuobi (2007) evaluated the comparative influences of external and domestic debts on Nigeria’s economy. The results indicated negative sign for external debt with insignificant regression coefficient at 0.05 level. Domestic debt showed a positive relationship with Nigeria’s GDP and a significant regression coefficient at 0.05 level. The study called for drastic reduction in the value of external debts taken by Nigeria.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The study adopted ex-post-facto research design. Data for this study consist of 27 years annual observation period (1992-2019). Secondary data were used, and collected from the Central Bank of Nigeria Statistical Bulletin and Debt Management Office. The study used annual data, because quarterly data may not be accessed for some of the variables. Gross Domestic Product (GDP) was employed as the dependent variable to measure economic performance in Nigeria, while Domestic Debt (DMD,) Inflation Rate (INFR) and Interest Rate (INT) were also employed as the independent variables
Model Specification
Model specification involves the determination of the dependent and explanatory variables based on specified theoretical sign and size of the parameters. The analytical technique employed in this study is the Ordinary Least Square (OLS) model. The study adopted regression equation as:
Chapter Four
Data Analysis and Discussion
The descriptive and analytical methods of data analysis were used in testing the hypotheses. And also the analytical technique employed in this study is the regression analysis.
Chapter Five
Conclusion
The study shows that domestic debt has a positive significant relationship with Nigerian finance, as against the null hypotheses. Therefore, the study concludes that the government, policy maker and productive sector should work together to ensure stable economy. This will achieved through the provision of macro-economic environment and appropriate investment incentives. The investors are expected to reciprocate the gesture through commitment to the use of funds and promptly honoring loan obligations. Government through its relevant authorities should design favorable monetary policy that would enable domestic debt to made available for private sector at affordable rate ( this is because low credit or high lending rate will amount to low level of investment which transmit to low output) for massive development of the sector
Recommendation
Government should maintain a bank deposit ratio below 35 percent and resort to increase use of tax revenue to finance its projects. Government should divest all projects which the private sector can handle including refining crude oil (petroleum product) and transportation. The regulatory authorities should provide enabling environment for private sector investors such as tax holidays, subsidies, guarantees and most importantly improved infrastructure. Government should maintain a proper balance between short-term and long-term debt instruments in such a way that long-term instruments dominate the debt market. Even if the ratio of the long- term debt is a multiple of deposit, the economy can still accommodate it so long as the proceeds are channeled towards improving Nigerian investment climate
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