Domestic Debt and the Nigerian Economy

Topics: Public finance, Government debt, Deficit Pages: 11 (4406 words) Published: January 21, 2011
Current Research Journal of Economic Theory 2(1): 22-26, 2010 ISSN: 2042-485X © M axwell Scientific Organization, 2009 Submitted Date: December 17, 2009 Accepted Date: January 10, 2010

Published Date: January 30, 2010

Domestic Debt and the Nigerian Economy
I. Adofu and M. Abula Departm ent of Eco nom ics, Kogi S tate University, A nyigba, Nigeria Abstract: The study investigates the empirical relationship between domestic debt and economic grow th in Nigeria. Using OLS regression techniques and the time series data from 1986 – 2005, the study explored the relationship betw een d ome stic deb t and economic growth in Nigeria. Our result shows that domestic debt has affected the growth of the economy negatively. In the light of the findings, the study recommend that Government domestic borrowing should be discouraged and that increasing the revenue base through its tax reform programames should be encouraged. Key w ords: Budget deficit, debt profit, domestic de bt, econom ic growth a nd pub lic expenditure INTRODUCTION The beginning of the existing market for government borrowing in Nigeria is the financial reforms introduced by the colonial government in 1958. These reforms saw to the creation of the Cen tral Bank of Nigeria (CBN) and the creation of Marketable Public Securities to finance fiscal deficit. According to paragraph 35 of the Central Bank of Nigeria (CBN) Ordinance 1958, the bank shall be entrusted with the issue and management of Federal Government Loans pu blicly issued in Nigeria upon such terms and conditions as may be ag reed w ithin the Federal Government and the Bank. Since the early 1960s, the ratio of do mestic government to Gro ss Dome stic Product (GDP) increased. A decade later by 1974 this ratio went up slightly to 6.9% of GDP. But by1984, the domestic debt to GDP ratio was over 40%. Although it declained slightly in the 1990s, it has since 2000 moved upward, Asogwa (2005). He further opine d that, N igeria has not been alone in experiencing escalating lev els of government do mestic indebtedness, but in comparison to other countries in subSaharan Africa, Nigeria’s dom estic debt to G DP ratio is clearly on the high side. One can analyz e the evolution of the domestic debt from its size or by considering it’s different componen ts. The stock of gov ernmen t debt is measu red relative to national output. This is shown by the size of the dom estic debt structure both in nominal terms as a percentage of total deb t has grown tremendously from N0.23 billion at inception and it stood at N1.86 billion as at 1980. It was in 1986, at the inception of the Structural Adjustment Programame (SAP) that the level of external debt for the first time becomes larger than the level of dom estic debt. Ever since then, the stock of external debt has consistently been larger than do mestic debt. Alison et al. (2003) revealed three theoretical reasons often adva nced for gov ernm ent do mestic debts. The first, is for budget deficit financing, secondly, is for implementing monetary policy (buying and selling of treasury bills in the open market op eration) and the third is to develop the financial instruments so as to deepen the financ ial mark ets,. In Nigeria, seve ral factors have been adv ance to explain the changing domestic debt profile between the1960s to date. The major factors include – high budget deficits, low output growth, large expenditure growth, high inflation rate and narrow revenue base witnessed since the 1980s. Output growth declined as it recorded annual average values of 5.9% in 1980-1984, 4% in 1990–1994 and 2.8% in 1998–1999 period respectively. How ever, grow th was recorded in 20 03. It is usually expected that as countries expand their output, they also tends to rely more heavily on domestic public debt issuance to finance gro wth. There is thus a strong crosscountry relationship between economic growth and the total size of the debt market. Public expend iture as a percentage of GDP...
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