ASSESSMENT OF DOMESTIC DEBT AND ITS IMPACT ON THE NIGERIAN ECONOMY (1980 - 2020)

ASSESSMENT OF DOMESTIC DEBT AND ITS IMPACT ON THE NIGERIAN ECONOMY (1980 - 2020)

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Background to the study

Citizens, government institutions, privately held corporations such as banks, and the economy as a whole are all affected by a country's debt structure. The total of domestic and international borrowings is referred to as the public debt. Dewett and Navalur (2010) describe public debt as a government's borrowing from inside or outside the nation, from private people or groups of persons, or from banks and non-banking financial organizations. Debt is defined by the International Monetary Fund (IMF) as an obligation owed to others that is represented by a financial instrument or other formal equivalent. Debt is also defined by the World Bank (2012) as the quantity, disbursement, and ongoing contractual obligations of citizens of a nation to non-residents to repay principal with or without interest, or to pay interest with or without principal.

Because the market fails to allocate resources efficiently, other supplementary mechanisms for allocating resources directly (e.g. public provision of goods and services) or corrective devices that interfere with the price mechanism to induce the market to function more effectively and efficiently in resource allocation are being considered. As a consequence, the government has intervened in resource allocation via the provision of public goods and services. To be able to fulfill its role successfully, the government must spend money. Nigeria, like many other emerging countries, is beset by rising government spending that is outstripping government income. As a consequence, government borrowing has become necessary. When traditional income streams (both tax and non-tax) are insufficient to fund government expenditures, borrowing becomes necessary. The government needs to borrow to fund its budget deficit in order to increase domestic investment and, as a result, promote economic growth and development. According to Dewett and Navalur (2010), debt refers to a scenario in which a borrower receives something from a lender in exchange for agreeing to pay the lender the same amount at a later period.

Egbetunde (2012) asserted that developing countries, such as Nigeria, are urged to borrow to supplement their limited pool of capital and close the domestic savings-investment gap. If the borrowed money are successfully reinvested and properly utilized for profitable projects, it will assist to accelerate the country's growth and, as a result, improve the quality of life of its citizens.

Nations may need to borrow for a variety of reasons, one of which is to smooth out and conceal budgetary imbalances. This may entice investors and, as a result, speed up the economic process and growth (Adam et al, 2016). The economy as stated by Amakom, (2003) is anticipated to expand as a result, and the debts incurred will be paid off on time. Growth will affect per capita income, which is a prerequisite for poverty reduction, if this cycle is maintained and repeated over time.

In contrast to the above predictions, Akhanolu, Babajide, & Akinjare, (2018) stated that Nigeria's public debt seems to have reached worrisome proportions with nothing to show for it on the ground. The rising amount of public debt has become a critical component of the economic agenda. Nigeria seems to have found itself in a position where the size of its debt and capacity to pay it is causing significant difficulties for the government. Debts seem to be accruing at a very fast rate, considerably beyond the country's ability to repay them. Despite governmental efforts intended at putting the seeming debt crisis under control, it has persisted. It has also brought with it an ever-increasing degree of unemployment, higher inflation, under-utilization of capacity, and over-dependence on the oil industry, among other things. Simply stated, without a clear and apparent economic growth path, stability, and progress, Nigeria's debt load is growing. It has become clear that she will not be able to achieve the required degree of economic growth unless she first considers the economic implications of her debt load (Akhanolu et al., 2018).

1.2 Statement of the problem

In 1970, Nigeria's entire domestic debt was just 1.1 billion Naira. It gradually increased to N8.2 billion in 1980. Following that, it soared to N84.1 billion in 1990. The profile of this debt grew to about N898.2 billion in 2000 before reaching N1,525.91 billion at the end of December 2005, in line with rising fiscal deficits. Nigeria's domestic debt was at $21.8 billion in October 2010, up from $17.7 billion in 2009. Rapid growth plans and changes in the macroeconomic environment have been cited as significant reasons of Nigeria's domestic debt level's stratospheric rise (Debt Management Office, 2009).

As a consequence, Nigeria's indebtedness has gone beyond the acceptable boundaries needed to achieve targeted objectives and create debt-free or less burdened products, which would improve the economic process and, as a result, reduce poverty levels. Nigeria's debt has been increasing over time, according to recent financial data. According to the Debt Management Office, debt stock stood at N7.421 trillion as of June 2014, bringing total public debt to N8.5 trillion (excluding state government debts, which stood at N1.6 trillion as of December 2013) and N7.42 trillion as of June 2014, compared to N7.18 trillion as of the first quarter of 2014, representing a 3.3 percent increase in the first half of 2014. This trend has persisted, with debt reaching 12.58 trillion and 12.83 trillion in 2017 and 2018, respectively. The debt amount rose to N25.70 trillion in 2019 and N32. 9 trillion in 2020, respectively (DMO, 2020).

Despite her continued fondness for loans, Nigeria's economy is still marked by low per capita income (one of the lowest in the world), high unemployment rates, a dwindling economy, insufficient basic amenities, poor infrastructural development, and declining GDP growth rates, and it was recently ranked as the world's poverty capital (Akhanolu et al., 2018). Furthermore, the Nigerian economy fell into an unnecessary recession between 2016 and 2017, a result of bad borrowing management. The federal government's dependence on borrowing from the banking sector, particularly the Central Bank of Nigeria (CBN), to fund its huge and unsustainable budget deficits has had an unfavorable impact on the Nigerian economy's growth. This has slowed Nigeria's progress toward macroeconomic stability and long-term economic growth. Furthermore, it has blocked the private sector from accessing the credit market, delaying investment and production growth (Akhanolu et al., 2018).

Rapid growth plans and changes in the macroeconomic environment have been cited as significant reasons of Nigeria's domestic debt level's stratospheric rise. As a result of the scarcity of resources and the fact that governments across the globe barely have enough money to pay for all they need, borrowing from internal sources has become a viable option for commercial operations. Nigeria has found itself in a position where the size of its domestic debt and service commitments is causing significant difficulties for both the government and the creditors (the general people), in the sense that the debts are piling up much faster than the country's ability to repay them. Despite certain policy initiatives aimed at alleviating the domestic debt problem, it has persisted. The effects of this internal debt problem may be seen in rising unemployment, soaring inflation, underutilized capacity, and over-dependence on the oil industry, among other things.

As a result, it seems clear that Nigeria would not be able to achieve economic growth without taking into account the impacts of domestic debt on the economy (Ewubare, Nteegah, & Okpoi, 2017). This study is designed to unravel how Nigeria's ever-increasing public debts have influenced the country's economy for the period 1980 to 2020, due to the identified continuous rise in Nigeria's debt profile without a clear and visible economic stability, reduction in poverty/ unemployment, and poor economic growth over the years.

1.3 Research questions

The following research questions guides this study:

1. What is the extent of domestic debt in Nigeria from 1980 to 2020?
2. What is the nature of the relationship between domestic debt and economic growth?
3. What is the impact of domestic debt on the economic growth of Nigeria from 1980-2020?

1.4 Objectives of the study

The study's overall purpose is to investigate the impact of domestic debt on the Nigerian economy from 1980-2020.

The study, on the other hand, was focused on achieving these precise goals. To:

1. examine the extent of domestic debt in Nigeria from 1980 to 2020
2. determine the nature of the relationship between domestic debt and economic growth
3. determine the impact of domestic debt on the economic growth of Nigeria from 1980-2020

1.5 Statement of hypotheses

The study will test the validity of the following null hypotheses:

HO1: The relationship between domestic debt and economic development is not significant.

HO2: There is no significant impact of domestic debt on the economic growth in Nigeria

1.6 Significance of the study

The study will provide recommendations to policymakers that could assist in appraising the impact of domestic public debts on the Nigerian economy. This study will also bring to the notice of government the need to apply caution while borrowing since it has a negative effect in the nation’s development ad growth. It will also serve as reference material for future and further works on the impact of domestic public debts and its attendant impact on the economy. It will also provide a basis for further comparative studies, in both the developed and less developed economies.

1.7 Scope of the study

This study focuses on examining the extent of domestic debt in Nigeria from 1980 to 2020. This study will also investigate the nature of the relationship between domestic debt and economic growth. Furthermore, this study will assess the impact of domestic debt on the economic growth of Nigeria from 1980-2020. This study is therefore delimited to the investigating the impact of domestic debt on the Nigerian economy from the period of 1980-2020.  

1.7 Structure of the study

The study is divided into five inter-connected chapters, ranging from chapter one to five. In this chapter one the researcher gave an introduction to the work, state the problem that resulted to this study, mention the questions to be answered in this study the objectives it is to achieve, as well as statement of hypotheses to be tested. The scope and limitations of this study were also outlined. Chapter two deals with literature review and theoretical framework. Chapter three discusses the methodology to be used in gathering data for this study. Chapter four delves into data presentation, analysis and interpretation of results. while chapter five deals with the summary, conclusion and recommendations.

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