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THE IMPACT OF DOMESTIC DEBT ON THE ECONOMIC DEVELOPMENT OF NIGERIA FROM 1981-2012 CHAPTER ONE

CHAPTER ONE

INTRODUCTION

Background of the study

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 result, the government has intervened in resource allocation through the provision of public goods and services. To be able to fulfill its function successfully, the government must spend money. Nigeria, like many other growing countries, is beset by rising government spending that is outstripped by rising government receipts. As a result, government borrowing has become necessary. When traditional revenue streams (both tax and non-tax) are insufficient to fund government expenditures, borrowing becomes necessary. The government has to borrow to fund its budget deficit in order to increase domestic investment and, as a result, promote economic growth and development. Debt refers to a circumstance in which a borrower receives something from a lender in exchange for pledging to pay the lender the same amount at a later period. There are two sorts of debt: private and public. When the borrower is a private individual, it is private; when the borrower is the government, it is public. Internal or external sources of public debt are available. Internal source refers to borrowing money from the country’s population through issuing government securities, whereas external source refers to borrowing money from other countries or international organizations such as the London Club, Paris Club, International Monetary Fund (IMF), World Bank, and so on. The profile of Nigeria’s domestic debt appears to have reached a level of serious concern among policymakers and academics in Nigeria, and it now forms an essential part of the country’s economic agenda. Nigerian oil made its economic debut in 1970. Oil became the driving force behind Nigeria’s development from then on. The huge price increases in 1973-1974 and 1979-1980 helped Nigeria enormously. Oil has become the primary source of government revenue and a foreign exchange earner in both situations by 1976. (Ajayi,1991). Oil exports resulted in a significant increase in the flow of resources into the economy. Oil revenue grew at a quick pace throughout this time period, but non-oil revenue grew at a far slower pace. The nationally collected revenue rose from barely N634 million in 1970 to N15.2 billion in 1980 and more than a factor of four in 1990, when it stood at almost N67 billion.

During this time, the yearly average growth of oil revenue and non-oil revenue was 114 and 23%, respectively. The influence of favorable oil export terms of trade, particularly in 1971 and the period of the first positive oil shock (1973-1974), on government revenue was substantially responsible for the recorded growth rate. As a result, total revenue increased by 63%. Oil’s relative importance increased as a result of its considerable revenue, at the expense of other sectors. These funds were used to fund considerable increases in government spending aimed at improving infrastructure and the economy’s non-oil output potential.

Nigeria’s domestic debt problem dates back to 1948. (Gbosi, 1998).

The first development stock of five hundred thousand naira (N500, 000) was floated in Nigeria in that year. In 1960 and 1968, however, the first treasury bills and treasury certificates of eight million naira (N8, 000,000) and twenty million naira (N20,000,000) were produced. The First National Development Program, which ran from 1962 to 1968, called for foreign funding to cover 50% of anticipated expenditures. It found out that foreign loans only accounted for 25% of total capital investment. For the requisite cash to support development, the government had to rely on domestic sources.

Problem statement

In 1970, Nigeria’s entire domestic debt was only 1.1 billion dollars. It steadily increased to N8.2 billion in 1980. Following that, it soared to N84.1 billion in 1990. The profile of this debt rose to over 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 amounted at $21.8 billion in October 2010, up from $17.7 billion in 2009. Rapid expansion initiatives and changes in the macroeconomic environment have been highlighted as primary causes of Nigeria’s domestic debt level’s meteoric rise. Because resources are few and governments around the world don’t have enough money to pay for what they need, borrowing from internal sources becomes a viable option for conducting business. Nigeria has found itself in a scenario where the size of its domestic debt and service commitments is causing severe problems for both the government and the creditors (the general public), in the sense that the debts are piling up considerably faster than the country’s ability to repay them. Despite certain policy steps aimed at alleviating the domestic debt situation, it has persisted.

The effects of this internal debt problem can be seen in rising unemployment, skyrocketing inflation, underutilized capacity, and overdependence on the oil sector, among other things.

As a result, it is clear that Nigeria will not be able to achieve economic progress without taking into account the consequences of domestic debt on the economy. The goal of this study is to determine the impact of Nigeria’s domestic debt on the country’s economic performance. Every nation’s pursuit of economic progress is critical. To accomplish so, feasible macroeconomic policies are required, which relate to activities made by government bodies responsible for economic policy conduct to attain some desired objectives by the manipulation of a collection of macroeconomic variables, one of which is domestic debt.

Purpose of the study

The goal of this research is to look at the impact of domestic debt on Nigeria’s economic progress from 1981 to 2012. The study in particular:

  1. To investigate the size of Nigeria’s domestic debt from 1981 to 2012
  2. To figure out the nature of the link between domestic debt and economic growth
  3. Estimate the influence of Nigeria’s domestic debt on the country’s economic progress from 1981 to 2012.

Significance of the study

The following are the study’s implications:

  1. The findings of this study will inform Nigerian policymakers and corporate executives, as well as the general public, about the impact of domestic debt on the Nigerian economy.
  2. This study will add to the corpus of knowledge in the domain of the consequences of domestic debt on the Nigerian economy, thereby forming the empirical foundation for future research in the field.

Study hypothesis

The hypothesis of the research is as follows:

HO: There is no major link between domestic debt and economic growth.

HO2: From 1981 to 2012, Nigerian domestic debt has no substantial impact on the country’s economic performance.

Scope and Limitations of the Study

The study’s scope is confined to looking into the impact of domestic debt on Nigeria’s economic progress between 1981 and 2012. The research was hampered by a lack of time and financial resources.

Definition of Basic terminologies

A debt is something that is owed or due, usually money.

Growth is the process of a country’s progress accelerating.

Capital refers to a person’s or organization’s wealth in the form of money or other assets that are available or provided for a specific purpose, such as founding a business or investing.

The process of developing or being developed is referred to as development.

Organization of study

The research is divided into five sections. This is the opening chapter, and it provides an overview of the research. The second chapter is devoted to a review of the relevant literature. The research methodology is presented in Chapter 3; the data analysis, as well as the interpretation and discussion of the results, are presented in Chapter 4. The findings and recommendations are summarized in Chapter 5.

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