CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The failure of the market to allocate resources efficiently provided a reason for considering other supplementary mechanisms for allocating resources directly, (e.g. public provision of goods and services) or for considering corrective devices that can interfere with the price mechanism so as to induce the market to function more effectively and efficiently in resource allocation. This has resulted in the intervention of government in the allocation of resources, through the provision of public goods and services. To be able to carry out this role effectively, government has to incur some expenditure. Nigeria, like many developing economies, is plagued by increasing government expenditures, unmatched by government revenues. This has resulted in the need for government borrowing. Government borrowing becomes indispensable when the conventional revenue sources (tax and non-tax) are inadequate in financing government expenditures. Borrowing is needed by the government to cover fiscal deficit in order to boost domestic investment and hence accelerate economic growth and development. Debt connotes a situation in which a borrower collects something from the lender promising to pay equivalent at a later date.

Debt can be of two types: private and public. It is private when the borrower is a private individual and public when the borrower is the government. Public debt can either be sourced internally or externally. Internal source involves the borrowing of funds from the citizens of the Country through the issuing of government securities; while external source involves the borrowing of funds from other countries and, or international organizations like the London Club, Paris Club, the International Monetary Fund (IMF), World Bank, etc. The profile of the Nigerian domestic debt seems to have reached a stage of serious concern to Nigerian policy makers and scholars and constitutes an important element of economic agenda. Nigeria’s oil came on the economic scene in 1970, when Nigeria became a member of the oil producing nations.

From then on, oil became the catalyst element in Nigeria’s growth process. Nigeria benefited immensely from the sharp price increase in 1973/1974 and again in 1979/1980. By 1976, oil had become the major source of government revenue and the foreign exchange earner of over 80 percent in both cases (Ajayi,1991). The economy witnessed a substantial in flow of resources through oil exports. This period was characterized by rapid growth of oil revenue, while the rate of growth of non-oil revenue was relatively low. From barely N634 million in 1970, the federally collected revenue jumped to N15.2 billion in 1980 and leaped by more than a factor of four in 1990 when it stood at about N67 billion. In general, the relative share of oil revenue in total revenue on an annual basis since 1975 has been more than 75 per cent.

The annual average growth of oil revenue and non-oil revenue was 114 and 23 percents respectively; during this period. This recorded growth rate was largely due to the impact of the favorable terms of trade of oil export experienced particularly in 1971 and the period of the first positive oil shock (1973-1974) on government revenue. This led the total revenue to grow by 63 per cent. Consequent upon the large revenue from oil, its relative importance increased at the expense of other sectors. These revenues provided the basis for significant increases in government expenditure designed to expand infrastructure and to improve the non-oil production capacity of the economy.

Nigeria’s journey into domestic debt dates back to 1948 (Gbosi, 1998). It was in that year that the first development stock of five hundred thousand naira (N500, 000) only, was floated in Nigeria. But the first treasury bills and treasury certificates worth eight million naira (N8, 000,000) and twenty million naira (N20,000,000), respectively were issued in 1960 and 1968. The First National Development Program dated (1962-1968) envisaged 50% of planned expenditures to be financed from foreign sources. It turned out that foreign loan constituted only 25% of realized capital investment. Government had to fall back on domestic sources for provision of needed funds to finance development.

1.2 Problem statement

Nigeria’s total domestic debt outstanding stood at only 1.1 billion in 1970. It rose steadily to N8.2 billion in 1980. Thereafter, it sky rocketed to N84.1 billion in 1990. In tune with increased levels of budgetary deficits, the profile of this debt ballooned to about N898.2 billion in 2000 before reaching N1,525.91 billion as at the end of December, 2005. As at October 2010, Nigeria’s domestic debt stood at $21.8 billion having risen from $17.7 billion in 2009. Rapid expansion programs and changes in the macroeconomic environment are some of the factors identified as the major causes of the astronomical increases in Nigeria’s domestic debt level.

This is so as, resources are scarce and governments over the world hardly have enough funds to pay for all that they need, thus borrowing from internal sources becomes a veritable instrument for business transactions. Nigeria has found itself in a situation in which the magnitude of its domestic debt and its servicing obligations is posing serious problems to both the government and the creditors (the public), in the sense that the debts are accumulated at a fairly rapid pace far in excess of the nation’s capacity to repay. This domestic debt crisis had persisted despite some policy measures taken to ameliorate it. The manifestation of this domestic debt crisis is evident in the ever increasing level of unemployment, skyrocketing inflation, capacity under utilization and over dependence on the oil sector among others.

It therefore, seems obvious that Nigeria cannot attain economic development without taking into consideration the effects of domestic debt on the economy. This study intends to assess the effect of domestic debt on Nigeria’s economic performance. The attainment of economic development is paramount to every nation. To be able to achieve this, there is need to have viable macroeconomic policies which refer to actions taken by government agencies responsible for the conduct of economic policies to achieve some desired objectives through the manipulation of a set of macroeconomic variables; one of which is domestic debt.

1.3 Purpose of the study

The purpose of this study is to examine the impact of domestic debt on the economic development of Nigeria from 1981-2012. Specifically the study:

1. to examine the extent of domestic debt in Nigeria from 1981 to 2012

2. to determine the nature of the relationship between domestic debt and economic development

3. to determine the impact of domestic debt on the economic development of Nigeria from 1981-2012

1.4 Significance of the study

The following are the significance of the study:

The results from this study will educate the policy makers and business managers in Nigeria and the general domestic on the impact of domestic debt on the Nigerian economy.

This research will be a contribution to the body of literature in the area of the effects of domestic debt on the Nigerian economy, thereby constituting the empirical literature for future research in the subject area

1.5 Study hypothesis

The study hypothesis is:

HO: the relationship between domestic debt and economic development is not significant

HO2: There is no significant impact of domestic debt on the economic development of Nigeria from 1981-2012

1.6 Scope and Limitations of the Study

The study scope is limited to investigating the impact of domestic debt on the economic development of Nigeria from 1981-2012. Limitation faced by the research was limited time and financial constraint

1.7 Definition of Basic terminologies

Debt: something, typically money, that is owed or due.

Growth: the process of increasing in progress of the nation

Capital: wealth in the form of money or other assets owned by a person or organization or available or contributed for a particular purpose such as starting a company or investing.

Development: the process of developing or being developed.

1.8 Organization of study

The study is grouped into five chapters. This chapter being the first gives an introduction to the study. Chapter two gives a review of the related literature. Chapter three presents the research methodology; chapter four presents the data analysis as well as interpretation and discussion of the results. Chapter five gives a summary of findings and recommendations.

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