1.1 Introduction
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.
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.
1.2 Background of the Study
Debt is created by the act of borrowing. It is defined according to Oyejide et al (1985) as the resource or money in use in an organization which in not contributed by its owner and does not in any way belong to them. It is a liability represented by a financial instrument or other formal equivalent. In modern law, debt has no precisely fixed meaning and may be regarded essential as that which one person legally owes to another or an obligation that is enforceable by legally action to make payment of money. When a government borrows, the debt is a public debt. Public debts either internal or external are debts incurred by the government through borrowing domestic investments. Debts are classified into two i.e. reproductive debt and dead weight debt. When a loan is obtained to enable the state or nation to purchase some sort of assets, the debt is said to be reproductive e.g. money borrowed for acquiring factories, electricity refineries etc. However, debt undertaken to finance wars and expenses on current expenditure are dead weight debts.
Developing countries, like Nigeria, were characterized by inadequate internal capital formation arising from the vicious circle of low productive, low income and low savings. Nigeria is the world's seventh-largest oil exporter but also one of the poorest. Nigeria's domestic debt has been rising fuelled primarily by escalating fiscal. At the end of 2002, total federal government domestic debt outstanding amounted to 1,166. 0 million and in 2003, it rose to 1,329 million and in 2005, it amounted to 1,525,906 million and in 2006 it rose to 1,753,259, million (source: CBN statistical bulletin (2006).
The dramatic growth in the domestic debt outstanding has raised many doubts about fiscal sustainability of the current economic policy. The concerns about sustainability have also been compounded by those related to the very short maturity of most of the government domestic debt, and also the fact that the central bank of Nigeria (CBN) still remains the dominant holder of federal government domestic debt instrument.
The need to issue domestic debt can arise both from government deficits that are not fully foreign financed sand from implementation of monetary policy. Generally a deficit leads to a change in government net assets. Hence, a budget deficit can be financed by either drawing down assets or incurring new liabilities, either domestic or foreign. The choice between foreign and domestic borrowings, turn depends on cost (interest rates), maturity structure and risks. The terms of foreign borrowings are often more favorable than for domestic borrowing. Since domestic borrowings, carry much higher interest rates and have shorter maturities.
Another advantage of foreign borrowing is that it increases the supply of foreign exchange, which is critical to meet important requirements. One drawback to foreign borrowing is currency risk, which may increase along with foreign indebtedness, given that a growing foreign debt service increases the demand for foreign exchange. Despite the attractiveness of foreign borrowing, governments may still consider domestic borrowing for a number of reasons.
First, the supply of foreign (concessional) financing may be determined by the bid agencies, budgets and their assessment of the economic performance of the recipient country. Secondly international aid is very often linked to project financing and therefore cannot finance a government's recurrent expenditure not supported by donors. Hence, government with large recurrent budget deficits may be forced to tap domestic savings, including through issuance of domest5ic debt, to close their budget gaps.
Economic theory suggests that reasonable levels of borrowing by the federal government are likely to enhance it s economic growth (Pattilo, Ricci and Poirson 2002). When economic growth is enhance (at least more than 5% growth rate), the economy's poverty situation is likely to be affected positively. In order to encourage growth, the federal government buys debt instruments for a specified period of time. The instruments are used to finance government deficits in a non- inflationary and sustainable manner to enhance fiscal discipline and for the management of monetary policies. As escalating debt profile presents serious obstacles to a nation path to economic growth and development.
The cost of servicing public debt (domestic and external) may expand beyond the capacity of the economic to cope, there by impacting negatively on the ability to achieve the desired fiscal and monetary policy objectives. Furthermore, a rising debt burden may constrain the ability of the government to undertake more productive investment programmers' in infrastructure, education and public health.
Many, developing countries resort to domestic borrowing to bridge the domestic resources gap in order to accelerate economic development. It means that the federal government can resort to domestic borrowing provided that the proceeds are utilized in a productive way that will facilitate the eventual servicing and liquidation of debt. Stieglitz (2002) contributed that government borrowings can crowd out investment, which will reduce future output and wages. When wages and output are affected the welfare of the citizens will be made vulnerable.
Soludo (2003) opined that federal government for two broad categories.
- Macroeconomic reasons (higher investment, higher consumption (education and health).
- To finance statutory balance of payment deficits.
This implies that the economic indulges in debt to boost the economic growth. He is also of the opinion that once an initial stock of debt grows to a certain threshold, servicing them becomes a burden and countries find themselves in a wrong side of the economy's development, with debt crowding out investment and growth. The sharp increase in the domestic debt stock, over the years was attributable largely to the failure to embark on necessary adjustment, particularly at the time of declining revenue that resulted in growing fiscal deficits and further domestic debt accumulation. The bulk of domestic debt has been in short term treasury securities with maturities of less than one year. Nigeria's debt burden has grave consequence for the economy and the welfare of the citizens. The servicing of domestic debt has severely encroached on resources available for socio-economic development and poverty alleviation. Nigeria's domestic debt has been rising over the years.
It is confirmed from an analysis of the data that, during the entire period, a majority of the domestic debt was held in short term instruments, the 91-day Treasury bills constituted over 57% of total domestic and approximately 63% in 2002. The rest of the public domestic debt stock has been generally held in treasury bonds and development stocks. The CBN has been ascertained the leading holder of domestic debt. In 199, the CBN held 65% of the total domestic debt, in 2000 its percentage share was 57.9 while in 2001, and its share rose to 66.9%.
However, its share fell to 46% in 2002. Also because of the short-term nature of the domestic debt, an amount equivalent to 20% of the GDP comes due for payment every three months. The government strategy has been to borrow the same amount to pass off the maturing debt and interest due. CBN, as the under writer of government securities, has stood ready to absorb the under subscribed amount of securities in the weekly primary actions.
1.3 Statement of Problem
The need to finance rising government expenditure has been identified to the rapid increase in the stock of Nigeria’s domestic debt. A recent study by (Abbas and Christerisen 2007) analyzing optimal domestic debt level in low income countries like (Nigeria) and emerging markets between 1999 and 2004 found out that moderate level of marketable domestic debt as a percentage (GDP have significant positive effect on economic growth. The study also provide evidence that debt level exceeding 35 percent of total bank deposits have negative impact on the economic growth.
The money borrowed was not utilize for the benefit of the citizens and for the growth of the Nigerian economy due to the corrupt practices, bad policies and mismanagement of funds by some selfish Nigerians in government. The effect of the global crisis of the Nigerian economy was no doubt reflective on the capital market, with the withdrawal of investment by foreign investors and the crash in the price of crude oil, thereby resulting in the fall in share price in the stock market, and other effect of the banking sector and the economy at large.
Nigeria’s foreign economic relations revolve around it role in supplying the world economy with oil and natural gas, even as the country seeks to diversify its exports harmonize tariffs in line with a potential customs union sought by the economic community of West African states (ECOWAS), and encourage inflows of foreign portfolio and direct investment. In October 2005, Nigeria implemented the ECOWAS common external tariff, which reduced the number of tariff bonds. Prior to this revision, tariffs constituted Nigeria’s second largest source of revenue after oil exports. In 2005 Nigeria achieved a major breakthrough when it reached an agreement with the Paris club to eliminate its bilateral debt through a combination of write-down and buybacks. This research therefore will attempt to investigate and proffer solution to:
- The effect of domestic debt, principal portion of economic growth.
- The effect of the cost of servicing domestic debt on foreign exchange earnings.
- The effect of domestic debt instrument on economic growth.
- The effect of domestic debt on Gross Domestic product (GDP).
1.4 Aim and Objectives of Study
The aim of the study is to investigate the Impact of Nigeria's Domestic Debt on Foreign Exchange Earnings. In achieving this aim, the specific objectives were laid out as follows:
- Investigate the effect of the cost servicing domestic debt on budget and economic growth.
- Investigate the effect of domestic debt on the principal portion on economic growth.
- To investigate the effect of domestic debt instruments on economic policies (monetary and fiscal policies).
- To investigate the effect of domestic debt on foreign exchange earnings.
1.5 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
H0: There is a negative relationship between domestic debt instruments and the foreign exchange earnings.
H1: There is a positive relationship between domestic debt instruments and the foreign exchange earnings.
Hypothesis Two
H0: There is a negative relationship between the cost of servicing domestic debt, and economic growth.
H1: There is a positive relationship between the cost of servicing domestic debt, and economic growth.
1.6 Scope of the Study
This research is based on domestic debt and the foreign exchange earnings, the extent of study will be limited to Nigerian domestic debts.
1.7 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this project work. There were lots of information needed from the staffs of this institution to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
- Research material: availability of research material is a major setback to the scope of the study.
- Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
1.8 Significant of the Study
The study of domestic debt on foreign exchange earnings will immensely enable creditors in the economic system to identify the level of risk that is prevalent in the granting of debt loan and its recovery.
Some businesses in Nigeria rely on loans to enable their business survive. This fact has made it imperative to undertake this study and to minimize the effect of debt in the Nigeria economy.
Finally, this study is not only intended to highlight domestic debts in the Nigerian economy but also to boost studies in the area and to serve as encouragement to other students to carry out further research in this field.
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