External Debt Affecting the Banking System
Chapter One
Objectives of the Study
The study will focus on the following objectives:
- 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 debt cancellation on the Nigerian economic growth;
- To investigate the politics of the debt forgiveness and the possible effect on Nigerian economy;
- To examine the effect of debt service on the growth of Nigerian banking system.
CHAPTER TWO
LITERATURE REVIEWAND THEORITICAL FRAMEWORK
Introduction
The management of Nigeria’s debt has been a major macroeconomic problem especially since the early 1980s. For many years now, the country’s debt has been growing in spite of the efforts being made by the Government to manage and minimize its crushing effects on the nation’s economy. Such efforts range from the various refinancing and restructuring agreements to debt conversion programmes and the deliberate allocation of substantial resources towards servicing the debt. Of particular concern to the authorities, is the heavy debt burden it imposes when compared with the country’s debt service capacity.
In recent years, however, some observers have held different perceptions about Nigeria’s capacity or otherwise to service her debt. This is largely because of the Improved income to the country arising from export of crude oil, Nigeria’s major export. Moreover others have argued that bad governance, especially during the military rule, largely accounted for the mismanagement of the Nigerian economy and therefore, the people should bear the brunt. Whatever position one holds, what appears undisputable is the increasingly large debt service requirement which imposes considerable stress on the Nigerian economy even when the improved resource inflow is factored into the country’s cash flows. Indeed, the issue of sustainability of Nigeria’s debt profile continued to be the focus of research and public debate until the recent initiative of the Paris Club of Creditors which appears to address the issue in a more meaningful way. Even then the conditions and adequacy of the debt relief have continued to generate further debate.
It has been generally agreed upon that the rationale for raising both external and internal loan by governments of developing countries has always been to bridge the domestic resources gap in order to accelerate economic development. This has led many African countries including Nigeria to resort to borrowing since early 1970s. Unfortunately, the loans borrowed by Nigeria government over the years have not been put into any productive use to assist the nation and the teaming populace. More and more, the few political class members are getting richer daily at the expense of the teaming populace of the country. However, despite the debt
forgiveness received in year 2006 from the Paris club, Nigeria debt has galloped to a whooping sum of $41 billion (out of which foreign debt accounts for $5.63 billion and domestic debt amounts to $35.5 billion) as at September 2011 as revealed by the Director General of the Debt Management Office (Mr Ibrahim N
wankwo) in the Finance and Investment watch of November 27 to December 4, 2011. With all these, it is regrettable that the entire spectrum of the economy has not been sufficiently active, especially when compared with the economy of similar or lesser aged developing countries. And more unfortunate situation is the bidding for new foreign debt worth $7.9billion by the Nigerian government for the 2012 fiscal year. The nation’s total debt stock rose by N2.63tn ($16.84bn) from N7.53tn ($48.36bn) in March 2013 to N10.162tn ($65.2bn) as of March 31, 2018, indicating a 34.93 per cent rise within a period of one year, data released by the Debt Management Office on Wednesday showed that From December 2013 to March 31, 2018, the country’s total debt stock rose by over N120bn from N10.04tn to N10.162tn, according to the latest statistics.
The statistics showed that the domestic debt component of the Federal Government alone stood at N7.18tn ($46.12bn) as of March 31, 2018. Going by the rebased Gross Domestic Product of $510bn, this means that the debt to GDP ratio of the country stands at 12.79 per cent. The DMO statistics also showed that the external debt of both the states and the Federal Government stood at $9.17bn or N1.43tn. The domestic debt stock of the states, on the other hand, stood at N1.55tn or $9.96bn. This was as of December 31, 2012.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
Research is viewed as a systematic way of finding out about the worth or otherwise of a given subject. It is simply the process of scientific and organized enquiry that aims at providing information and solving identified problems.
Research methodology as we have noted is a combination of sequence of steps that must be followed in the study or research if the discipline are to belong to the family of the science and the subject matter of interest are really to be considered on scientific.
There are many methods of conducting a research and the decision to adopt a particular one in a particular research work, depends not only on the degree of accuracy aimed at, but also on the condition of the area in which its conducted and scope or dimension of the study.
The research has decided to limit the scope of this study to a small sample, so as to get an accurate result. The scope is limited to (100) knowledgeable respondents of my research study. This is to help examine whether public debt has been detrimental or beneficial to the Nigerian Economy.
This chapter therefore gives attention to the sources and method of data collection, sampling techniques, the population from which the sampling is drawn, sample size and the intended method of testing the hypothesis formulated in the research study.
Research Design
For the purpose of this research work, the survey research design method was adopted.
Research design is seen as a carefully articulated set of suggested instructions for effective execution of the research study.
Research design basically serves two functional purposes they are:
- Providing answers to research question and ensure that needed data are collected accurately and economically
- Controls the effect of unneeded variables. It helps to minimize systematic variance and possible errors.
Population of the Study
A population is referred to as any group of people or objects with at least characteristics that differentiate it from other groups.
The population studied in this research work comprises of knowledgeable respondents of Central Bank of Nigeria, Ibadan Branch, Economists, Accountants, Financial Analysts and Students.
Sample for the Study
For the purpose of this study, the researcher made use of a sample size of one hundred (100) respondents which consists of respondents knowledgeable and informed about the subject matter. Since the issue of public debt is a national one which affects every citizen, it is presumed that the selected sample size will do justice to responding appropriately and objectively to my questions.
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF DATA
Introduction
This chapter presents, analyses and interprets the primary data for this research, This data formed the basis for a test of hypothesis.
The data collected is on the effect of public debt on the growth of Nigeria’s economy. The statistical methods used in the analysis of the data are frequency distribution tables (Descriptive statistic) and the correlation co-efficient.
Correlation tests were carried out to determine the strength of relationship or association of variables.
In order to confirm the validity of these tests, two hypothesis were formulated as shown in chapter one and significance of the results were checked for acceptability or rejection.
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Introduction
This chapter discusses the findings in details and summary of the research study. An attempt has been made in this research to trace the genesis, trend, and structure of the country’s debt as well as the factors that prompted the accumulation of the debt and its effects on the economy. As a result of the findings on this research study, conclusions are drawn and recommendations are subsequently made in order to proffer a solution to the research problem. Also included in this chapter is area of further research for the purpose of further exploiting the research study.
Summary of Findings
It can be deduced from the data gathered on the field through the administration and analysis of questionnaires, interviews and the findings of the tested hypothesis that public debt has been a burden to the economy of Nigeria. This findings is consistent with the conclusions of other literatures, research findings and diverse publications.
From the presentation and analysis of the data gathered, it was revealed that GDP which was used to represent the Nigerian economy has a negative relationship with debt stock (DSK) meaning that an increase in DSK will lead to a decrease of GDP. However the result shows that there is a significant relationship between the economic growth and public debt, meaning that the growth rate of the Nigerian economy relies strongly on the extent of Nigeria’s debt profile.
Conclusion
Sustainable economic growth is of predominant concern for all economies, especially for the developing economies which commonly face burgeoning fiscal deficits mainly driven by higher levels of debt servicing, particularly external debt servicing and widening current account deficits.
The major objective of the study was therefore to analyze the effect of debt burden (both internal and external) on the growth of Nigerian banking system. Nigeria has relied much on both external and internal debt to finance its development projects in the past two decades ago which put her debt profile so high.
Findings of this paper suggests that developing countries need to mobilize enough resources so that they can, not only meet their debt service obligations on time and have an access to tap the external resources, but also have resources to mobilize their private investment. Public debt, if not sustainable, may adversely affect the economic growth. It has an adverse effect on the behavior of private investment, and leads to crowding out. Developing economies, therefore, need to channelize their external resources in a way that it can help in creating new opportunities for investment and attract more investors to their countries. Openness, affects positively to the level of investment suggesting that higher level of exports will not only decrease the public and publicly guaranteed debt to exports earnings ratio but will also help in promoting the private investment in Nigeria.
Recommendations
Base on the above findings, we therefore recommend that Nigeria should not borrow now either internally or externally. It is important to add that, much as the current effort of the Paris Club is highly commended, the Club should indeed do more than it has promised by ensuring total write-off of Nigeria’s debt if any is still remaining. Nigeria has paid for more than it has borrowed from the Club over the years. The bulk of the outstanding debt arose from capitalization of interest and penalty charges that fell due on the initial debt. It will be healthy if the government strive to finance budget deficit by improving on the present revenue base rather than resulting to domestic borrowing. This can be achieved by improving its revenue sources and efficient pursuit of tax reforms.
The rise in debt profile of Nigeria is attributed to government extra budgetary activities, which most often are not used for the intended project. Commitment to budget should be encouraged for fiscal discipline on the part of the government and its agencies. The government and the Debt Management Office (DMO) should drawn up guidelines to limit the growth of future debt. Effective mechanism should be put in place to ensure that any new borrowing is judiciously utilized to contribute to economic growth.
The place of corruption in public debt in Nigeria is central. Most often, borrowed fund are either misapplied or embezzled. In this regard, government effort at curbing corruption should be sustained.
Finally, it is important to stress the need for the Government to sustain existing macroeconomic policies including prudent debt management policy, if the ugly experience of the past would not be repeated. Growth- friendly structural policies including infrastructure, trade, tax and social policies and regulatory frameworks that affect economic incentives for private investments and production should be adopted and sustained while the fight against corruption should also be sustained. These policy measures are currently being implemented and there is no doubt about Government’s Commitment. The Government of Nigeria needs all the support to achieve these goals.
The major policy recommendations are as follows
- Government should maintain a Debt to GDP ratio of below 30 percent if procuring debt is unavoidable and resort to increase use of tax revenue to finance its projects as it is our believe that tax revenue is far from the optimum.
- Government should divest itself of all projects which the private sector can handle including refining crude oil (petroleum product) and transportation but 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 proceed is channeled towards improving Nigerian investment climate.
- Government should strive to finance budget deficit by improving on the present revenue base rather than resulting to domestic borrowing. This can be achieved by improving its revenue sources and efficient pursuit of tax reforms.
- The government and the Debt Management Office (DMO) should drawn up guidelines to limit the growth of future debt
Areas of Further Research
This research study have been comprehensively carried out to justify the topic and has also to a reasonable extent contributed to the existing body of knowledge. However, it should be borne in mind that, this research can be further explored. Attention should be given to the following suggested research areas:
- The relationship between public finance and public debt
- The relationship between annual budget and public debt especially the area of deficit budget.
- Economic diversification as a means to curb the menace of public debt.
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