A CRITICAL ANALYSIS OF THE EFFECT OF DOMESTIC DEBT ON THE NIGERIAN ECONOMY

1.0       INTRODUCTION

1.1       OVERVIEW OF THE STUDY

1.2       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 profer solution to:

The effect of domestic debt, principal portion of economic growth.

The effect of the cost of servicing domestic debt and economic growth.

The effect of domestic debt instrument on economic growth.

The effect of domestic debt on Gross Domestic product (GDP).

1.3       OBJECTIVES OF THE STUDY

The objective of the study is to:

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 Gross Domestic product (GDP). 

1.4       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 Ho while the alternative hypothesis will be represented with hypothesis Hi.

Hypothesis oneHO:      There is a negative relationship between the principal portion of domestic   debt and economic growth.Hi:       There is a positive relationship between the principal portion of domestic    debt and economic growth.

Hypothesis TwoHo:      There is a negative relationship between the cost of servicing domestic debt,          and economic growth.Hi:       There is a positive relationship between the cost of servicing domestic debt,           and economic growth.

Hypothesis Three Ho:      There is a negative relationship between domestic debt instruments and the economic        growth.Hi:       There is a positive relationship between domestic debt instruments and the economic         growth.

Hypothesis FourHo:      There is a negative relationship between domestic debt and gross    domestic product (GDP).Hi:       There is a positive relationship between domestic debt and gross domestic product (GDP).

1.5       SCOPE OF THE STUDY

This research is based on domestic debt and the Nigerian economy, the extent of study will be limited to Nigerian domestic debts.It will cover statistical bulletins from CBN and CBN annual reports, the Debt Management Office (DMO) and other cognate publications from the internet. The researcher will use secondary data in eliciting information that will be used in the research work, and it will cover the period between  2001 – 2010.

1.6       SIGNIFICANT OF THE STUDY

A study of domestic debt and the Nigeria economy will immensely enable creditors in the economic system to identify the level of risk that are 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.