CHAPTER ONE
INTRODUCTION
1.1. Background to the Study
Global attention has been drawn to the issue of public debt proliferation that many emerging nations are currently dealing with. The economies of emerging nations around the world, particularly Nigeria, have been negatively impacted by factors including declining oil prices, fluctuating exchange rates, rising interest rates, etc (Favour, Ideniyi, Oge & Charity, 2017).
Governments can use debt or borrowings as a crucial weapon for their fiscal policies in order to finance their country's development. Debt is utilized to pay off expenses, which will increase productivity and boost economic growth (Muhammad, Ruhaini, Nathan & Arshad, 2017). Numerous studies have revealed that the growth of the majority of developing countries is negatively impacted by public debt (Panizza & Presbitero, 2020; Reinhart and Rogoff, 2019). Budget deficits demonstrate that government expenditure exceeds revenue, and public debt fills this gap (Mankiw, 2020). A government is compelled to deal with public debt, which includes both internal (domestic) and external loans, when its revenue is not enough to meet its anticipated expenditures (Rahman, 2018).
Debt has alarmingly increased since the turn of the century, especially in developing nations. This is due to the fact that a country's economic growth can be negatively impacted by an increase in government debt, especially if it is not efficiently regulated (Favor, Ideniyi, Oge & Charity, 2017). However, the national debt increases when the government consistently runs budget deficits. In other words, national debt is the total of all borrowings made by the government at all levels. These borrowings may be a result of obligations the government has, like pension obligations to workers, or from contracts it enters into that have a backlog of unpaid debts (Favor, Ideniyi, Oge & Charity, 2017). The government can also choose to borrow money directly from foreign financial institutions, issue Treasury bills, bonds, or securities. By creating job opportunities, constructing appropriate infrastructure, and enlarging the range of private investment, borrowed money is often used to boost productivity and develop human capital, leading to improved economic growth and development (Rahman & Islam, 2020). Despite the fact that during the 1980s, national debt levels continued to climb, a sizable number of nations with high levels of government debt received aid from international financial organizations. This aid aims to increase productivity in developing nations while also lowering foreign debt, improving living conditions, and accelerating Nigeria's economic progress (Idris & Ahmad, 2017).
Due to the current administration's debt profile and the country's declining ability to pay off its debt obligations to creditors, Nigerians should be concerned about the sustainability of the country's debt. Due to the deficit, Nigeria's overall debt will increase to 14 percent of GDP, or 2.16 percent of GDP. This is still feasible given the financial limitations. A combination of N984 billion in domestic borrowing and N900 billion in foreign borrowing, for a total of N1.84 trillion, was used to cover the deficit (Idris & Ahmad, 2017). The deficit, which was projected to total N2.32 trillion, was paid for via borrowing. The government intended to finance N1.254 trillion from the domestic market while borrowing N1.067 trillion from outside sources, or roughly 46% of the total (Rafindadi & Musa, 2018). In the budget presentation to the National Assembly, it was announced that the government intended to primarily finance fresh borrowings estimated at 1.699 trillion Naira to fill the deficit. Outside sources accounted for the majority of this borrowing, with domestic sources accounting for the remaining amounts (Akhanolu, Babajide, Akinjare, Oladeji, & Osuma, 2018). Profits from the privatization of some non-oil assets by the Bureau of Public Enterprises (BPE) were used to pay the remaining 306 billion Naira in deficits.
In November 2019, the current administration intends to ask Parliament to approve $23 billion in foreign loans for infrastructure and other projects (Rahman & Islam, 2020). The President claimed that the whole $30 billion external borrowing package had not received parliamentary approval in a letter dated November 26. Instead, five of the 39 projects were approved together with a $4.5 billion Eurobond issuance. The Senate approves the President's request for a $22.7 billion loan in March 2020 (Rahman & Islam, 2020). The president asked for the loan as part of the 2016–2018 external borrowing strategy to aid in funding significant infrastructure projects. On July 7, 2021, the upper house approved a loan request for N2.343 trillion (approximately $6 billion) and a second loan proposal for $8.3 billion (about €490 million). The Debt Management Office (DMO) defended one of the loan requests by claiming that it was a part of a borrowing strategy for the 2021 budget. The new external borrowing permitted by the Appropriations Act of 2021 to assist close the budget deficit constitutes the estimated new capital. According to the DMO, this means that the executive and legislative arms of government have already approved the new capital raise through the budgetary process. Nigeria's total national debt, which as of March 2021 was N33.1 trillion ($87.24 billion), was the result of borrowings from several governments, the majority of which were taken out after the country's restoration to democracy in 1999.
The term "overall public debt" refers to the entire amount that the federal government, states, and the FCT owe to domestic and international lenders. Out of the total N33.1 trillion, which includes FGN bonds, Sukuk, green bonds, and Euro bonds, the federal government borrowed N26.91 trillion. According to DMO data, the amount borrowed by the federal government (including domestic and foreign debt) climbed from N3.55 trillion in 1999 to N26.91 trillion by the end of March 2021. This represents a 658 percent increase in the 21 years between the previous and current administrations of Nigeria (Nigeria's Public Debt - DMO, 2021).
According to the Budget Office's medium-term expenditure plan and fiscal policy paper from 2015, the current Nigerian administration racked up N7.63 trillion in domestic debt between June 2015 and December 2020 (Punch, 2021). External borrowing increased during the current President, going from $7.3 billion in 2015 to $28.57 billion in December 2020. This shows that the president increased the country's debt load by $21.27 billion through foreign borrowing. From N197 per dollar in 2015 to N381 at the end of December 2020 and N410 on November 19, 2021, the exchange rate for the nation has increased. According to consolidated debt research, the domestic debt climbed by 86.31 percent during the last six years of the current administration, while the external debt increased by 291.37 percent (Punch, 2021). As of March 2021, the current administration owed a total of N17.06 trillion in debt, calculated using the N381 exchange rate. Since he was elected president in 2015, this has increased by 173.2 percent.
According to the aforementioned data, the current administration is the biggest borrower in the nation, having grown the public debt (FG component) by nearly 173 percent. The Fiscal Responsibility Act and the Central Bank of Nigeria Act of 2007 are just two of the country's financial laws that the current administration is in breach of. In 2021, the government borrowed more than it was allowed to under the budgetary legislation. Regarding overdrafts, the CBN Act specifies that "the total amount of such advances outstanding shall not at any time exceed 5 percent of the previous year's actual revenue of the Federal Government" and that "the Bank may grant temporary advances to the Federal Government in respect of temporary deficiency of budget revenue." By the end of 2020, the CBN's overdrafts to the current administration had exceeded the cap by 69% of money received in 2019, flagrantly breaking the rules set by the apex bank. The government's revenue in 2020 was N4.1 trillion, while it had a N2.9 trillion overdraft.
AN obvious and immediate threat to Nigeria's national security or sovereignty gives the president the power to "reach the level," which is three percent, according to the fiscal responsibility statute (Elom-Obed, Odo, Elom, & Anoke, 2020). In 2020, the country's budget deficit was almost 4% of GDP, clearly in violation of the regulations. Market experts at United Capital have recently expressed concern about the nation's growing risk of debt sustainability. A debt-to-GDP ratio lower than 30.0 percent historically served as justification for the government's rising debt profile. Every Nigerian owes domestic and foreign organizations N165,500 due to a total public debt of N33.1 trillion ($87.24 billion). The study shows that the current administration is borrowing more money, spending more, and collecting less money. There will be a deficit in 2020 since the current administration budgeted N5.37 trillion in revenue but only collected N3.42 trillion (Punch, 2021). Additionally, there hasn't been a rise in earnings to counteract the rising debt service expenses. The current debt profile can only be maintained as a result if revenue growth maintains up with debt growth.
The impact of national indebtedness on economic development has been the subject of numerous studies over the years, but it has lately gained substantial attention as a result of the serious decline in public finances across many countries that can be linked to the global financial crisis of 2008 (Alejandro & Ileana, 2017). The case for and against public borrowing as a strategy for promoting and boosting economic development in a nation is supported by a number of empirical research. Examples of this literature are Elom-Obed, Odo, Elom-Obed and Anoke (2017), Eze, Nweke, and Atuma (2019), among others. It is important to keep in mind that while public debt is undesirable when it persists and burdens the government with repayment, nations cannot avoid it because it allows for the achievement of crucial macroeconomic objectives that will raise citizens' living standards and act as a catalyst for economic growth. Governmental debt has thus been referred to as a necessary evil. This indicates that borrowing is advantageous up until the point where it hurts the economy.
Researchers have hypothesized that nations with lower debt loads experience faster rates of development than nations with greater debt loads. This is due to the fact that developing and less developed nations take on more debt to foster economic growth and development because they lack the resources to reduce budget deficits and advance economic development (Eze, Nweke, & Atuma, 2019). Governments prefer debt buildup to tax increases or issuing new currency since it has anti-inflationary effects, but doing so is more likely to result in the economy experiencing hyperinflation. Taxes can be used by the government to cover the budget deficit, but they often distort relative price structures, and public debt that is too high for the economy's capability leads to problems with international equity (Akram, Padda, Khan, & Husnain, 2018).
Based on the foregoing, the purpose of this study is to investigate the impact of national debt on the economic development of Nigeria. For this study, national debts is measured using the following proxies, domestic debt (DB), foreign debt (EXD), and public debt (PD), while gross domestic product (GDP) is used to measure economic development.
1.2. Statement of the Problem
Nigeria's continued reliance on national debt, particularly foreign debt, which is marked by unfavorable lending conditions, fluctuating foreign exchange rates, and the risk of repudiation, all of which have a negative impact on Nigeria's economic growth, is the result of the country's inability to accumulate domestic resources to fill the country's typical budget deficit (Akinwunmi & Adekoya, 2018; Lucky & Godday, 2017). This issue has also been noted as limiting domestic capital growth, which has led to a decrease in the availability of essential services for the nation's population (Udoka & Anyingang, 2010).
Nigeria and several other emerging nations around the world are seeking debt restructuring and cancellation as a result of the country's rising domestic and external debt levels, which have not been accompanied by gains in capacity utilization (World Bank, 2021). the shifting of society's finite capital from the productive private sector to the unproductive public sector, as well as additional tax burdens. The necessity for debt relief, which was started in 2004, was motivated by economic exogenous factors such as currency rate and interest rate, particularly when coupled with the collapse in oil prices, which plunged Nigeria into its first recession in 2004 and increased its debt stock (Eze, Nweke, & Atuma, 2019). Nigeria continued to use deficit financing even after its participation in the Paris and London Clubs was terminated in 2006 (Lucky & Godday, 2017), especially in 2009 and 2010 when it issued loan instruments worth N524 billion and N867 billion, respectively. This manifestly failed plan led to the Paris Club receiving a $42 billion interest payment (Lucky & Godday, 2017).
Over time, numerous studies on the impact of debt on economic growth have been carried out in a number of nations around the globe. A substantial portion of these studies and other related researches lack strategic empirical evidence in developing nations like Nigeria and other developing nations (Saifuddin, 2016; Idenyi, Ogonna & Ifeyinwa, 2016; Muhammad, Ruhaini, Nathan & Arshad, 2017; Siew-Peng & Yan-Ling, 2015; Amilcar, 2016; Naeem, 2017; Muhammad, 2017; Mousa & Shawawreh, 2017; Ndieupa, 2018; Matandare and Tito, 2018; Brini, Jemmali & Ferroukh. 2016; and Blake, 2015).
Therefore, this study empirically evaluates the impact of national debt on economic development of Nigeria, filling a gap in the research topic and literature of prior studies.
1.3. Research Questions
The following research questions are formulated for the study, which are:
i. What is the relationship between the growth in domestic debt and economic development of Nigeria?
ii. How does external debt growth affect the economic development of Nigeria?
iii. Is there any significant relationship of external reserve growth on the economic development of Nigeria?
1.4. Research Objectives
The overall goal of this research is to look into the impact of national debt on the economic development of Nigeria. Domestic debt (DB), foreign debt (EXD), and external reserve (EXR) are used to represent national debt in this study, whereas gross domestic product (GDP) represents economic development. The study's specific goals are to:
i. assess the influence of Nigeria's domestic debt on her economic development.
ii. find out the impact of Nigeria's external debt on her economic development.
iii. investigate the relationship between Nigeria's external reserve and her economic development.
1.5. Research Hypotheses
The following research hypotheses are formulated in the null form, which are:
- Domestic debt has no significant impact on the economic development growth of Nigeria.
- External debt does not significantly affect the economic development growth of Nigeria.
- External reserve has no significant impact on the economic development growth of Nigeria
1.6. Significance of the Study
Nigeria's leadership and the nation as a whole have expressed serious worry about the national debt and economic progress, which has led to harsh measures including difficulties allocating the nation's limited resources to pay the bills on a yearly basis. This action has caused the economy to disinvest, which has decreased growth overall, domestic savings, and living standards. This study is important because it will provide a framework for policymakers to create solutions to Nigeria's debt crisis.
The CBN and the government would also greatly benefit from the study's conclusions since they will receive empirical facts from it that they can use to manage the financial system and keep track of the nation's debt. The results will also improve academics' and the general public's comprehension of the relevance and significance of debt management in bolstering Nigeria's economic development.
1.7. Scope of the Study
The study looks at the impact of national debt on the economic development of Nigeria from 1986 to 2021 (i.e. a period of 36 years). The reason for starting from 1986 was to understand how the debt profile fared after the structural adjustment period and how it has impacted economic development.
1.8. Instrumentation of the Study
The study would only use secondary data from the Statistical Bulletin (various issues) Annual Reports, and financial position statements of the Central Bank of Nigeria (CBN). The methodology used in this study is the Co-integration analysis which will be carried out using the Augmented Dickey Fuller (ADF) unit root test, and Vector Error Correction techniques of estimation which provides coefficient estimates of the time-series data used in the analysis. Also a test for causality between national debt and economic development using Granger Causality Test is carried out. Time series data covering a period of (36) years will be estimated using Co-integration technique of analysis which is an improvement on the classical ordinary least square technique (OLS)
Proxies are as follows:
Domestic Debt = Government Debt ÷ Gross Domestic Product
External Reserve = PD = DB + EXD
Economic Growth = Gross Domestic Product (consumption + investment + (government spending) + exports – imports)
1.9. Definition of Terms
Debt: refers to that part of a nation’s debt that was borrowed from both domestic and foreign lenders such as commercial banks, governments or international financial bodies
Economic Development: is a policy intervention aiming to improve the well-being of people
External Debt: is the phenomenon used to describe the financial obligation that ties one party (debtor country) to another (lender country)
Domestic Debt: refers to the total debt incurred internal in a country.
Public Debt: also referred to as government debt or external debt is conceptualized as the aggregate debts owed by a certain country to individuals, corporations and countries within the country or abroad.
External Reserve: consists of official public sector foreign assets that are readily available to, and controlled by the monetary authorities, for direct financing of payment imbalances, and directly regulating the magnitude of such imbalances, through intervention in the exchange markets to affect the currency exchange rate and/or for other purpose
