ABSTRACT
The study examined the domestic debt and financial development in Nigeria (1992-2019). Secondary data were used and collected from Central Bank of Nigeria Statistical Bulletin and National Bureau of Statistics. Hypotheses were formulated and tested using Ordinary Least Square (OLS) model. The study indicates that interest rate has inverse significant relationship with Gross Domestic Product in Nigeria. There is a positive significant relationship between domestic debt and Gross Domestic Product in Nigeria. The coefficient of determination indicates that about 68% of the variations in gross domestic product can be explained by changes in domestic debt variables (DMD, INT, INFR) in Nigeria. This implies that a good portion of gross domestic product trends in Nigeria is explained by domestic debt variables. Government should maintain a debt bank deposit ratio below 35 percent and resort to increase use of tax revenue to finance its projects as it is our believe that tax revenue is far from the optimum. Government should divest itself of all projects which the private sector can handle including refining crude oil (petroleum product) and transportation but should provide enabling environment for private sector investors such as tax holidays, subsidies, guarantees and most importantly improved infrastructure.
CHAPTER ONE
INTRODUCTION
One of the problems facing contemporary developing nations of the world including Nigeria is arguably the issue of rising domestic debt stock and the unpleasant implications to the economy especially when such debt spiral out of control. The evolution of government borrowing in Nigeria can be traced back to the financial reform introduced by the colonial administration in 1958 which led to the creation of marketable public securities to finance fiscal deficit. Alison et al. (2003) pointed out several reasons for government domestic debt, first, for budget deficit financing, second is for implementing monetary policy (buying and selling of treasury bills in the open market operations) and the third, is to develop the financial sector (supplying tradable financial instruments so as to deepen the financial markets). For this reason, government debt provides a benchmark for insurance of private sector securitized debt such as corporate bonds and treasury bills to build investors’ confidence through guaranteed or secure return.
In the Late 1970s and early 1980s, most developing countries of Africa including Nigeria experienced unprecedented and severe economic crisis. These crises manifested in several ways such as persistent macroeconomic imbalances, widening-savings-investment gap, high rates of domestic inflation, chronic balance of payments problems and huge budget deficit (Akpokodje, 1998). Although different reason has been adduced for the slowdown of these economies. Green and Villannueza (1998) attributed the problem to the decline in investment rate in the affected economies. It is in the light of this that prominence is being attached to increasing the magnitude of real asset investment in the economy.
Domestic debt may have positive effect on growth in the short-run but in the long-run if the debt service repayment regime exceeds the ability to pay with some probability, it will lead to debt overhang and at a point, the interest becomes higher than the principal and the effect becomes negative. At this point, crowding-out of investment and private sector constraints will arise due to capital shortages. In Nigeria apart from factors identified to explain the changing domestic debt profile (such as high budget deficit, low output growth, large expenditure growth, high inflation and narrow revenue base), others include oil shocks as defined in terms of price fluctuation and single commodity economy as a result of no diversification and expansion of non-traditional export. Base on this background the researcher wants to investigate domestic debt and financial development in Nigeria
Domestic debt reduces macro-economic risk, the absorption of the domestic financial resources by the government brings some question like inefficient credit to the private sector and poor financial development. Whatever the purpose, the government should find a way of managing debt so that the level of debt is not counter-productive. The researcher therefore set out to investigate the structure and effect of rising domestic debt on Nigerian financial development
The objectives of the study are;
- To ascertain the relationship between domestic debt and financial development
- To ascertain the effect of domestic debt on Nigeria economy
- To suggest what to be done to avoid domestic debt
For the successful completion of the study, the following research hypotheses were formulated by the researcher;
H0: there is no the relationship between domestic debt and financial development
H1: there is the relationship between domestic debt and financial development
H02: there is no effect of domestic debt on Nigeria economy
H2: there is effect of domestic debt on Nigeria economy
- SIGNIFICANCE OF THE STUDY
The study will be very significant to students and the government of Nigeria. The study will give a clear insight on domestic debt and financial development in Nigeria. The study serves as a reference to other researchers that will embark on this topic or related topic
- SCOPE AND LIMITATION OF THE STUDY
The scope of the study covers domestic debt and financial development in Nigeria. The researcher encounters some constrain which limited the scope of the study;
- a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
- b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
1.7 DEFINITION OF TERMS
DOMESTIC DEBT: Internal debt or domestic debt is the part of the total government debt in a country that is owed to lenders within the country. Internal debt’s complement is external debt. Commercial banks, other financial institutions etc.
FINANCIAL DEVELOPMENT: Financial sector development in developing countries and emerging markets is part of the private sector development strategy to stimulate economic growth and reduce poverty. The Financial sector is the set of institutions, instruments, and markets.
DOMESTIC DEBT AND FINANCIAL DEVELOPMENT IN NIGERIA
