THE STRUCTURE OF THE NIGERIAN DOMESTIC DEBT AND ITS IMPACT ON FOREIGN EXCHANGE EARNING.

THE STRUCTURE OF THE NIGERIAN DOMESTIC DEBT AND ITS IMPACT ON FOREIGN EXCHANGE EARNING.

Chapter one

Introduction

Domestic debt reduction in Nigeria has taken centre stage in discussions about realistic petroleum product pricing in Nigeria, as the domestic debt profile has risen astronomically and, if not controlled, could have unfavourable consequences such as crowding out private sector investment, poor GDP growth, and so on (Okonjo-Iweala, 2011). On the other hand, the government must continue to support projects that will help the economy thrive, and one reasonable alternative is to issue debt.

For example, the 2012 national budget presented to the national legislature includes a deficit of N1.11 trillion, which will be financed primarily through domestic debt.

As of September 2011, Nigerian domestic debt stood at N5.3 trillion, or $34.4 billion, while external debt was $5.6 billion, bringing the total national debt to 40 billion dollars, or 19.6 percent of GDP (Nwankwo2011), indicating that the debt ratio remains below the internationally unacceptable standard of 40% of GDP.

However, above the maximum tolerable debt-to-GDP ratio of 0.40, a more important concern for economic growth is the country’s absorptive capacity, which may be fairly low at any given threshold.

Domestic debt is thus an important topic to investigate at this stage of national development, when unemployment is alarmingly high and the global economic crisis is far from over.

Domestic debt is a financial instrument issued by the federal government and denominated in local currency. State and municipal governments can also issue debt instruments, however the debt instruments now in circulation include Nigerian treasury bills, federal government development stocks, and treasury bonds.

Treasury bills and development stocks are marketable and negotiable, however treasury bonds and ways and means advances are not marketable and are held entirely by the Nigerian Central Bank (Adafu et al 2010).

The central bank of Nigeria (CBN), as banker and financial adviser to the federal government, is in charge of managing the country’s domestic debt. (Alison et al 2003) identify three common explanations for government domestic debt.

The first is for financing the budget deficit, the second is for implementing monetary policy, and the third is to provide instruments to deepen the financial sector. Whatever the reason, the government should develop a means to manage domestic debt so that the level of debt is not detrimental.

The researcher consequently set out to explore the structure and implications of rising household debt, for which the report is divided into five sections. Aside from the introductory section, section two examines the relevant literature on the origins of public debt financing and management, section three examines the methodology of investigation, section four discusses the research findings, and section five concludes with a summary and policy recommendations.

1.1 Background of the Study

Borrowing creates debt. According to Oyejide et al. (1985), it is described as a resource or money used in an organisation that was not supplied by the owner and does not belong to them in any way.

It is a responsibility represented by a financial instrument or another formal equivalent. In modern law, debt has no exact definition and may be defined as something which one person legally owes to another or an obligation that is enforceable by legal action to pay money.

When a government borrows, the debt is considered public debt. Public debts, whether internal or external, are debts incurred by the government through domestic investment borrowing.

Debts are classed into two types: reproductive debt and deadweight debt. When a loan is acquired to allow a state or nation to purchase assets, the debt is referred to as reproductive debt.

For example, money borrowed to acquire factories, electricity refineries, etc. However, debts incurred to finance wars and current expenditures are considered dead weight.

Developing countries, such as Nigeria, had inadequate internal capital development as a result of the vicious circle of low productivity, low income, and low savings.

Nigeria is one of the world’s poorest countries, as well as the seventh-largest oil exporter. Nigeria’s domestic debt has been increasing, owing mostly to mounting fiscal deficits.

At the end of 2002, total federal government domestic debt outstanding was 1,166. 0 million, which increased to 1,329 million in 2003, 1,525,906 million in 2005, and 1,753,259 million in 2006 (source: CBN statistical bulletin (2006).