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

CHAPTER TWO

LITERATURE REVIEW

2.1 HISTORICAL BACKGROUND OF DOMESTIC DEBT IN NIGERIA

According to Nzotta S.M. (2004:377) domestic debt in Nigeria has its origin in 1946 with the first treasury bill of N8 million and treasury certificates valued at N20 million issued in 1960 and 1968 respectively. Since then, the volume of government domestic debt has risen from N1040 million, N8218.5 million in 1980, N84, 09.60 million in 1990, N898, 253.9 million in the year 2000 and by end December 2010 the debt stock has skyrocated to N4.5 million.

Oshadami (2006) defined domestic government debt as debt instruments issued by the Federal Government and denominated in local currency. In principal, state and local government can also issue debt instruments, but limited in their ability to issued such.

Debt instruments consist of Nigerian Treasury Certificates, Federal Government Development Stocks and Treasury bonds. Out of these, treasury bills, treasury certificates, and development stocks and marketable and negotiable while treasury bonds; ways and means advances are not marketable but held solely by the Central Bank of Nigeria.

The Nigerian economy is undergoing a major debt crisis, the most serious in its history since the country’s incorporation into the world capitalist system at the turn of this century. As with other third world countries, Nigerian debt crisis is part of a wider crisis of accumulation which is already in a market deterioration in the aggregate performance of the productive sectors of the economy, a yawning-gap between government revenue and expenditure, the collapse of social services and infrastructure, an escalating level of inflation, an acute shortage of basic consumer goods and a drastic decline in living standard and assets.

2.1.2 THE TRENDS IN NIGERIA’S PUBLIC DOMESTIC DEBT

Total domestic debt was N8,215.6 million in 1980, N28,438.7 million in 1986 but rose to N36,790.6 million in 1987, showing an increase of N8,339.4 million between the two periods. Similarly, in 1990, domestic debt increased to N84,091.60 million from N47,031.1 in 1988, showing an increase in domestic debt between 1989 and 1990. It is greater than that in the period 1986 and 1987 by N28,711.6 million. The reason for this increase is that more money was needed by the government to finance her deficit finance. In 1996, domestic debt outstanding rose astronomically to N343,674.1 million, increasing by almost five-fold to N84,093.1 million in 1990. By 2000 domestic debt had grown, to N898,253.9 million showing an increase of N554,579.8 million between 1996 and 2000. The high rate of domestic debt outstanding continue to increase to N1,370,300.0 million in 2004, N1525,900.0 million, N1,753.300 million, N2,169.60 million in 2005, 2006 and 2007 respectively. By 2010 December ending it has hit N4.5 million.

HOLDINGS OF FEDERAL GOVERNMENT DOMESTIC DEBT OUTSTANDING (N MILLION)

TABLE 2.1.2 A

Source: CBN Statistical Bulletin 2012: 117 -113 &99

2.1.3 MATURITY STRUCTURE OF FEDERAL GOVERNMENT DOMESTIC DEBT

Domestic debts carry different maturities such as short, medium and long term debts.

Short-term debts have original maturity of not more than one year and include ways and means advances, treasury bills.

Medium term debts have original maturity spanning over one year and include treasury certificates.

Long term debts on the other hand have maturity between 3 and 25 years and include development stocks and treasury bonds. The above determine the relative ease with which interest and principal payments are made.

Thus the maturity structure reflects a time dimension.

TABLE 2.1.3 A

MATURITY STRUCTURE OF FEDERAL GOVERNMENT DOMESTIC DEBT (AMOUNT IN N’ BILLION)

SOURCE: CBN ANNUAL REPORT AND STATEMENT OF ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER, 2006: 69.

Analysis of the maturity structure of the domestic debt showed that instruments with a tenor below two (2) year accounted for N897.1 billion or 15.2 percent, compared with N983.7 billion or 64.5 percent in the preceding year. This was followed by instruments with a tenor of two (2) years to five (5) years which accounted for 24.6 percent or N431.2 billion. Instruments with a tenor of over ten (10) years accounted for 13.2 percent or N231.0 billion, while those with tenors between five (5) and ten (10) years accounted for N194.0 billion or 1.1 percent.

2.2 COMPOSITION AND TYPES OF NIGERIA’S INTERNAL DEBT

The composition of the securities internal debt in Nigeria consists of four government instruments. Treasury bills, treasury bonds, development stocks, Federal Government of Nigeria bonds.

2.2.1 TREASURY BILLS

The first treasury bills were introduced in Nigeria in April 1960. According to Nzotta (2004) treasury bills are debt instruments used by he Federal Government to borrow funds for short periods of about three months pending the collection of its revenues. Treasury bills were introduced in Nigeria in April 1960, primarily to develop the local money market and create an avenue for investment of short-term funds. This point is well illustrated by the fact that between 1971 and 1976, the early oil boom years where government was a net creditor to the bank. Treasury bills were deliberately maintained at a level of N616 million in order to sustain the money market over the years, however, the objective of the issue and continuous growth in the level of Treasury bill have changed to that of meeting the financial needs of the Federal Government. Treasury bills outstanding increased from N18.0 million in 1960 to N556.0 million by 1970 and further to N2119.0 million in 1980. It peaked any N103,326.5 million in 1992 and by 2002 it is N733,762.5 million by 2003 it rose to N825,050, 2004 it increased to N871,577,2005 was N854,828.4 and 2006 it was N695,000. The growth in the level of Treasury bill reflected the practice of roll over maturity securities and continuous resources to conversion of ways and means advances outstanding at the end of the year to treasury bills as a way of financing the fiscal deficit. Nigerian treasury bills worth N1,509.1 billion issued during 2006, compared with N2,521.7 billion in 2005, a decrease of 40.4 percent. The significant decrease resulted form the restructuring of the 91-day NTBS to longer tensor of 182 and 364 days. Consequently the total outstanding NTBS fell from N845.8 billion as at end-December 2005 to N701.4 billion (made up of N695.0 billion NTBS and N639 special NTBS) as at end December 2006, owing to the repayment of matured bills of 91-day tenor.

2.2.2 TREASURY BONDS

In 1989, the security authorities at the inception of the auction bid system for flotation of Treasury bill and treasury certificates introduced treasury bonds as another instrument in the portfolio of internal debt.

The objective was largely to minimize debt service obligation in internal debt arising from liberalization policies adopted in the management of the economy. This was in contrasts to the primary objective of providing deficit finance to meet the budgetary need of the N20.0 million worth of treasury bills, representing 58.6% of the treasury bills outstanding and 35.0% of the debt stock were converted to treasury bonds of fiscal interest rate in November 1989. Treasury bonds are long-term instruments and are managed by the establishment of a sinking fund to facilitate the redemption of security instruments. As a result of the floatation of new issues of treasury bonds and conversion of part of treasury certificates outstanding. As at 2002 treasury bonds was N430,608.2 by 2003 it was N430,600, also at 2004 it was N428,938.2 and by 2005 it reduced more to N413,598.2 in 2006.

2.2.3 DEVELOPMENT STOCK

Development stocks as the name implies are floated largely to provide development finance, either directly to meet the

needs of the Federal Government or to state governments. In order to meet development needs, the tenure of maturities is long term and varying between 5 and 25 years. The first registered British colonial administration in 1956. The first development loan stock of N40 million issued on behalf of the Federal Government after independence was highly successful with a subscription of N4.7 million. Development stock outstanding increase from N25.3 million in 1961 to N299.1 million in 1970 and further to N3050 million in 1988. When it started to decline in 2002 it got to N1,630.0, 2003 it reduced to N1,470.0, 2004 it was N1,250.0 in 2005 it reduced further to N980.0 million by 2006 it went down further to N720.0 million and in 2007 it was 620.0. Development stocks are managed through the establishment of a sinking fund which enhances its prompt redemption. The issue of development stock is subject to statutory limitation section 2 of the finance decree no 32 of 1969 stipulated that the level of development stocks outstanding to any given time should not be more than 75% of the Central Bank of Nigeria’s

total demand liabilities. Over the years, the statutory limit on the issue of the instrument has been observed.

2.2.4 FEDERAL GOVERNMENT OF NIGERIA BONDS Nigeria Government Bonds represent debt instruments issued by the Federal Government of Nigeria (FGN) in which the bank has invested. These bond issues are normally underwritten by the bank and the investments arise as a result of crystallization of its underwriting commitment.

2.2.4.1 FIRST FEDERAL GOVERNMENT OF NIGERIA BONDS

As at 2002, there was no debt raised through the bond. By 2003 the debt was N72,560 million, in 2004 the debt was the same but by 2005 the debt was reduced to N72,555.7 million and by 2006 the debt reduced to N16,830.6 million.

2.2.4.2 2ND FEDERAL GOVERNMENT OF NIGERIA BONDS

As at 2005, the debt raised through this source was N178,274.3 million, in 2006 it was still N178,274 million.

2.2.4.3 3RD FEDERAL GOVERNMENT OF NIGERIA BONDS

The issuance of fresh Federal Government of Nigeria bonds (3rd FGN Bonds) worth N282.1 billion as part of the money to settle pension arrears in the nation. This increased domestic debt stock outstanding as at end December 2006.

2.2.4.4 SPECIAL FEDERAL GOVERNMENT OF NIGERIA BONDS

The issuance of the bond amounting to N166,753.2 billion was equally part of the money raised to settle pension arrears. This special FGN bonds aided to increase domestic debt profile further.

Table 2.2.8

Domestic public debt of the Federal Government (End Period) (Naira million).

Item

Source: CBN Annual Report and Statement of Accounts for the year ended December 2006.

2.3 SOURCES OF NIGERIA’S INTERNAL DEBT

When government revenue performance falls short of projections, government resort to internal borrowing to finance project of social and economic importance such as health, education industry and other social amenities. Internal debt, which is procured through instruments such as treasury bills, development stocks, Federal Government of Nigeria bonds as well as spend FGN bonds is constructed through the following sources:

2.3.1 COMMERCIAL BANK

As part of their instrument portfolio, commercial instruments sold by the Central Bank on behalf of the Federal Government are being held by Commercial Banks in Nigeria. They are also required to hold part of their liquid assets in treasury securities. These banks also engage in wholesale banking, medium and long-term financing, equipment leasing, debt factoring, investment management, issue and acceptance of bills and management of unit trust. They are also called acceptance houses or Discount houses. These debt instruments earn interest.

TABLE 2.3.4A

Federal Government’s Domestic Debt Outstanding (N million)

Source: Central Bank of Nigeria Statistical Bulletin December 2008: 100

Anyanwu (1990), Merchant bank means any person in Nigeria who is engaged in wholesale banking, medium and long-term financing, equipment leasing, debt factoring, investment management, issue and acceptance of bills and management of unit trust. They are also called acceptance houses or discount houses.

2.3.2 NON-BANK PUBLIC

Non-bank public comprising insurance companies, saving institutions, state and Local Governments, statutory boards/corporations and individuals also subscribe in these debt instruments.

2.3.3 CENTRAL BANK OF NIGERIA

The Central Bank of Nigeria (CBN) absorbs the unsubscribed portion of government securities floated in the primary market. Arrangements are on to transfer this underwriting function of the CBN to discount houses under the open market operation.

2.4 DOMESTIC DEBT RISKS

It has become conventional wisdom that many of the debt problems in Nigeria had their origins in the “mispricing” of risk. There is, no doubt, an element of truth to this view, particularly during the boom years because key financial

players sum to have underestimated important risks.

2.4.1 FISCAL RISKS

Failure to address the trend of rising debt could be “inflated away” or that default is inevitable.

Interest rates would then rise, making the fiscal problem the recovery, debt maturities would shorten, and refinancing crises could occur. These concerns would be especially severe where perceived risks of currency depreciation are high. It is worthy to note that high inflation gives rise to sizable distortions of its own and may be costly to bring down again. Inflation could not make much dent in the real value of debt, especially if higher inflation expectations are reflected in higher interest rates when government refinance themselves in the years ahead. In short, price stability in the form of low inflation, is a critical public good. It is important to preserve it to support sustained economic growth.

2.4.2 CREDIT RISKS

This is the risk that the interest or the principal on loans and exposures made to customers will not be repaid as agreed. Usually if loans are non-performing and are written off, the bank loses both the earning asset and some portion of its expected revenue. This affects the capital adequate of the bank and unless additional funds are injected the bank may be forced into liquidation.

These loans to the Federal Government of Nigeria are most time not invested into projects that can pay back principal and interest rather into non-performing projects and this leads the federal government to default in payment. When the Federal Government defaults, default risk spread, thereby de-stabilizing the entire macroeconomic variables of the economy.

2.4.3 ROLLOVER RISK

As a result of the short-term nature of the Federal Government debt instruments the issue of rollover risk has

been persistent. This involves carrying over the principal and interest rate repayment of loans. Rollover risk has seriously affected debt in Nigeria. Rollover risk has created volatility in the short-term rate market, thereby affecting negatively the entire economy.

2.4.4 INVESTMENT RISKS

Investment risks arise from changes in the value of marketable securities for reasons other than default or delayed payment. It arises from

* Changes in macro-economic environment

* Changes and variability in interest rate and exchange rate (The Nigeria example is a classical case). Consider the risks arising from the massive depreciation of foreign exchange rates since the deregulation of the forex market.

The case of investment risk arises in an issue whereby the Federal Government borrows with the aim of paying Pensioners and procurement of election materials. It is obvious that this is investment in the wrong direction and

will therefore lead to loss of confidence risks and this may affect the Nigerian bond market negatively.

2.4.5 LIQUIDITY RISKS

This may arise when a bank is unable to meet maturing commitments and obligations or is unable to undertake new transactions as desired. liquidity risks are due to financing mismatches in the tenure of assets and liabilities resulting in losses, faulting balance sheet and cash flow structures that is unable to generate enough funds in time, at normal interest rates, to enable the country to meet its obligations when due and undertake normal transactions when desirable. Currency and maturity mismatches are the real source of vulnerabilities. Countries which have a large stock of foreign currency or short term domestic debt are more vulnerable to financial crises. The recent switch from external to domestic borrowing may just lead Nigeria to trade one type of vulnerability for another. For instance countries that are switching from external to domestic debt could be trading a currency mismatch for a maturity mismatch.

Alternatively, the switch to domestic borrowing could lead to pressure on institutional investors and banks to absorb too much government debt and this may have a negative effect on financial stability.

Moreover, expanding the market for domestic government bonds may have positive externalities for the domestic corporate bond market but there is also the risk that the public sector may crowd out private sectors.

There are political economy reasons that may make domestic debt more difficult to restructure. In fact a few highly indebted countries which were able to use debt relief initiatives to address their external debt problems are still burdened with high levels of domestic debt. It is also important to correctly evaluate the cost of borrowing in different currencies.

In an environment in which several emerging currencies are expected to appreciate vis-à-vis the US dollars the being higher than that of dollar.

2.5 RELEVANT THEORIES TO DOMESTIC DEBT AND ECONOMIC DEVELOPMENT IN NIGERIA.

Odozi (1996), in his opinion sees domestic debt as the gross liability of government and properly considered should include Federal, State and Local government transfer obligations to the citizens and corporate firms within the country. Consequently the Central Bank of Nigeria (CBN) as banker and financial adviser to the Federal Government is charged with the responsibility for managing the domestic public debt. Lipsey (1986), defined economic growth as the positive trend in the nations total output over long period of time. This implies a sustained increase in Gross Domestic Product (GDP) for a long time. Schiller (1999), opined that economic growth is an increase in output (real GDP), an expansion in product possibility curve. Schiller (1999) view was not different from that of Dolan and Lipsey (1991) who sees economic growth as most frequently expressed in terms of increase in Gross Domestic Product (GDP), a measure of the economy’s total output of goods and services. This GDP as a measure of economic growth, like any other economic quantitative must be expressed in real terms. That is, it must be adjusted for the affects of inflation as for it to provide a meaningful measure of growth over time. According to Ngozi OKorjo-Iwela in Finance and Development (2008) “Nigeria squandered its oil windfall of the 1970s, which led to three decades of economic stagnation and the degradation of public institutions. The reason was a mix of bad fiscal and macro-economic policy, corruption, and poor governance. The latest oil boom gives Nigeria a chance to turn the “oil resource curse” into a blessing. It must lean from its past mistakes and can no longer plead inexperience. The country has made a good start by making fundamental changes in its response to the current oil boom, but sustaining these reforms is vital, both for Nigerians and for the entire African continent”.

In April 2006, Nigeria paid the last installment on the $30 billion it owed the Paris Club of official creditors, which had accounted for more than 85 percent of its external debt. As part of the agreement, Nigeria immediately paid $6 billion

in arrears, with the remaining $24 billion restructured on Naples Terms-The Paris Club’s concessionary terms for restructuring poor countries’ external debt, resulting in an

$18 billion write-off. While an unalloyed triumph, the vary fact that Nigeria, a country blessed with vast oil reserves, had to extricate itself from, a debt overhang was ironic.

How did Nigeria get itself into this predicament, and what lessons can it and other oil exporting developing countries draw from this experience. This is a good time to be asking these questions. The reason is that the oil price boom of the past few years has given oil exporting developing countries, especially those that squandered the proceeds of the previous oil price booms of 1973-74 and 1979-80, a rare shot at redemption.

The two price hikes orchestrated by the organization of Petroleum Exporting Countries in 1973-74 and 1979-80 resulted in a substantial windfall for Nigeria, amounting to

$300 billion between 1970 and 20001. But the windfall also led to a substantial appreciation in the real exchange rate to 55 percent between 1974 and 1980. Subsequently, in

1982, the country was hit by a double whammy: falling oil prices and a sharp rise in interest rates. As a result, inflation rose, the country faced the prospect of debt rescheduling, and the government chose to ration foreign exchange through import license. Reflecting these developments, Nigeria’s currency, which was pegged to the US dollar, was devalued by 36 percent between 1980 and 1984. But inflation was far higher, and excess demand for foreign exchange was rationed by tightening restrictions on import licensing, raising the black market premium on foreign exchange.

In addition to this macro economic imbalance, the country had little to show for its oil windfall in terms of economic development and poverty reduction.

Why did this happen? The answer lies in the authorities’ mismanagement of the oil boom of the 1970s, which shows that even brief periods of mismanagement can have negative consequences that persist for decades. The authorities” focus at the time was on avoiding Dutch disease or deterioration in the non-oil traded goods sector

notably agriculture and manufacturing. Only much later did the authorities recognize the more serious damage to the economy-in the form of debt overhang, prolonged economic stagnation, and degradation of public institutions-caused by corruption and bad governance.

Following elections in 1999, the first administration of Olusegun Obasanjo focused on ensuring political stability and tackling corruption. The second Obasanjo administration (2003-2007) implemented a comprehensive economic and anti-corruption reform program that emphasized fiscal, structural, and institutional and governance reform by adopting the Extractive Industries Transparency Initiative (EITI) and prosecuting corrupt officials. This resolve to change the course of the Nigerian economy coincided with rising oil prices, which enabled Nigeria to break out of the natural resource trap.

On the macroeconomic front, the central challenge was to lower volatility by de-linking public expenditure from current oil revenue. Nigeria succeeded in doing this in 2004 by adopting an “oil-price-based fiscal rule”. The rule’s objective was to constrain spending by transferring oil revenues to the budget in accordance with a reference price, together with a ceiling on the non-oil deficit. The Fiscal Responsibility Bill, signed by President Umaru Yar’adua in November 2007, enshrined the oil-price-based fiscal rule into law, to improve transparency and tackle corruption; the government adopted a two-pronged approach:

* It embedded anticorruption measures in comprehensive economic reform program.

* It conducted diagnostic studies to identify specific arrears in which corruption was undermining public sector performance and growth.

After the administration of Obasanjo and external debt overhang settlements, Nigeria is plugging back to domestic borrowing thereby endangering the economic.

The need to finance rising government expenditure has been identified to be responsible for the rapid increase in the stock of Nigeria’s domestic debt.

Gbosi (1998), opined that borrowing by government from the domestic economy became the main source of financing government expenditure due to the collapse in prices of oil in the international market. He asserts that despite the various efforts made by the government to rationalize public expenditure, much success has not been achieved in reducing its spending and this had continuously raised the size of the domestic debt. Christensen (2004) employed a cross country survey of the role of domestic debt market in sub-Saharan African countries during the 20 year period (1980-2000), he finds out that domestic debt markets in these countries are generally small highly short term and often have a narrow investor’s base. He also discovered that domestic interest rate payment present a significant burden to the budget despite much smaller domestic debt than foreign indebtedness. He did not stop at that, he further revealed

that, the use of domestic debt is also found to have crowd out effect on private investment.

Asogwa (2005), employing a more comprehensive technique in investigating the effect of domestic debt on economic growth concluded that domestic government debt in Nigeria has continued to suffer a form of confidence crisis as market participants have consistently shown greater unwillingness to hold longer maturities. The government has only been able to issue more of short term debt instrument.

In the words volume of public Shaw (1956), mounting volume of public debt is a necessary feature of a strong and healthy finance structure of an economy. Therefore, some secular increase in public debt should be planned by every government of a market-oriented economy. However, it appears that no government plans a long term increase in response to compulsion of the moment. We must note here the false view that a country that borrows is automatically immersed in the debt burden. This false conclusion was clarified by Queintin (1984) that

indebtedness amounts to a problem, if a country could not afford to pay back its debt. To him, the key interest is the cost of debt servicing which includes the repayment of interest and principal due on the loan. He justified borrowing as arising from increased government expenditure on development programs without generally an additional income to finance it.

Ajayi (1989) traces the origin of Nigeria’s debt problems to the collapse of the international oil price in 1981 and the persistent suffering of the international oil market and partly due to domestic lapses. As a result of the debt problem credit facilities gradually dried up, which led to a number of project getting stalled. He advocated the revival of the economy growth as the best and most durable solution to the debt problem. The needed growth however is disturbed by two factors which include limitation imposed by inappropriate domestic policies and the external factors which are beyond the control of the economy.

Sanusi (1998), was of the opinion that faulting domestic policies which ranges from project financing mismatch,

inappropriate monetary and fiscal policies was responsible for domestic borrowing problem. He believes that some of the policies were of little significance because of the perceived temporary effect of the external shocks. The expansionary policies, he believes, led to stupendous macroeconomic fallout, which encourage import and discourage export production.

Ahmed (1984) reflected the causes of debt problem as related to both the nature of the economy and the economic policies put in place by the government. He articulated that the developing economies are characterized by heavy dependence on one or few agricultural and mineral commodities and export trade is highly concentrated on the other. The manufacturing sector is mostly at the infant stage and relies heavily on imported inputs. To him, they are dependent on the developed countries for supply of other input and finance needed for economic development, which made them vulnerable to external shocks.

James (2006), opined that public debt has no significant effect on the growth of the Nigerian economy because the fund borrowed were not channeled into productive ventures, but diverted into private purse. He suggested further, that for the gains of the debt forgiveness to be realized the war against corruption should be fought to the highest. The prevailing view in international finance literature is that high levels of debt undermine economic performance by effectively acting as a tax on future investment projects and constraining the financing of these projects.

Oshadami (2006) in her own study concluded that the growth of domestic debt has affected negatively the growth of the economy. This situation is premise on the fact that majority of the market participants are unwilling to hold longer maturity instruments and as a result the government has been able to issue more of short term debt instruments. This has affected other macroeconomic variables like inflation, which makes proper prediction in the economy difficult.

2.6 CURRENT LITERATURE BASED ON DOMESTIC DEBT AND ITS IMPLICATION TO THE ECONOMY

As at February 2010, the country’s domestic debt starts at N3.228 billion and an additional domestic borrowing of N897.3 billion already earmarked in the budget as at then.

According to Okonjo-Iweala “there has been an astronomical rise in the consolidated fiscal deficit from a surplus of 3.7 percent of GDP in 2008 to an estimated deficit of 10 percent of GDP in 2009”. She noted that it is hard to justify deterioration in the consolidated fiscal balance of close to 14 percentage points of GDP in one year.

Greater fiscal discipline is needed in Nigeria. The magnitude of fiscal adjustment needed in the next couple of decades is almost unprecedented, especially for countries with the highest debts. Fiscal adjustment will require reform of pension and health entitlements-the key

source of spending pressures over the coming decades. Economic growth should be a top priority, given its power to improve a country’s debt position. A 1 percentage point increase in economic growth for 10 years (holding spending constant and assuring a 40 percent tax rate). Lowers public debt by 24 percentage points of GDP. And if growth over the coming decade averages the same as over the past two decades, balanced budgets-while a challenging objective would be sufficient to cut a country’s debts ratio from 100 percent of GDP to 60 percent.

However, economic growth over the inset decade or so is by no means guaranteed. Nigeria’s debts burden could result in lower potential growth than in past decades and adverse demographic developments may also constrain growth. Thus reforms to enhance potential growth are essential. Governor of the Central Bank of Nigeria (CBN) Mallam Sanusi Lamido Sanusi may have lent his voice to the debate on whether or not, the country is in debt crisis, stressing that since debt has been growing proportionate to

the country’s Gross Domestic Product (GDP) growth rate Nigeria is not in debt crisis.

According to him “There is no gainsaying the fact that the country’s public debt is high at N4.7 billion for the foreign component and N4.5 billion at end December 2010 for domestic component comprising. Federal government bonds, treasury bills, and development bonds, but this is not an indication that Nigeria is in debt crisis. The apex bank boss stated that Nigeria’s debt is currently 16 percent of GDP, which is far short of 40 percent of low income countries (LIC) in which Nigeria falls. In addition, Lamido the Central Bank of Nigeria Governor, said, the usage of the debt has been commendable the debts are being channeled to areas that will enhance growth and facilitate repayments. Some of the projects which he observed were listed by the Director. General Debt Management Office (DM0) included the funding of the Nigerian cotton, textile and garment schemes, the revitalization of rail transport, especially the purchase of new locomotives and development of infrastructure in the Federal Capital

Territory (FCT). He further opined that these projects are capable of including increase in aggregate demand thereby impacting positively on income and employment generation in the country. This development he said would further reduce unemployment and poverty level, implying a right step towards meeting the target of millennium development goals (MDGs) of 2015. He however, warned that the re-occurrence of debt crisis in any economy cannot be over-ruled, especially if the resources are not well managed and invested in high income generating projects. To avoid the adverse effects of debt crisis and dependence on external funding he recommended that Nigeria must develop and implement sound macroeconomic policies to ensure strong and stable economy.

The immediate past governor of the Central Bank of Nigeria (CBN) Prof. Charles Soludo, raised the red flag on the economy. He alleged that the ship of the economy is tottering measures. Indeed he said “something will have to give”, if the Federal Government fails to retool the economy. He expressed deep concern over the burgeoning

budget deficits and rising domestic debt as well as the gradual depletion of the excess crude account. He predicted bumpy roads ahead if excessive domestic and external borrowing and increasing government expenditure are not curtailed. Furthermore, the Debt Management Office (DM0), the custodian of the nation’s debt profile, issued a similar warning showing a rising domestic debt and its likely consequences. According to the DM0, a hefting 85 percent of Nigeria’s public borrowing comes from the domestic market, while only 15 percent external debt. This has ominous economic implications. At the moment the total domestic debt stock is N4.5 billion, up form N2.1 billion in 2009 and N1.7 billion in 2007. This is alarming. A combination of factors such as lack of fiscal prudence, increasing recurrent expenditure over the years and bloated government bureaucracy among others are responsible.

Sam Aluko (2010), was of the view that the manufacturing sector recorded a lower output from 7.03% in 2009 to 6.4% in 2010 due to lack of electricity power and paucity

of credit. It has also been observed that the debt stock has been increased because it was used “to pay pension allowances to get voters register and the likes, which shows lack of vision on the part of the nation’s leadership”. In addition domestic debt, debt servicing rates are on the high side while investment rates, enrolment rates (secondary school) are on the decline. According to analysts, several factors could be responsible for the rising debt portfolio, ranging from lack of fiscal discipline, fall in oil prices, corruption in high places and wasteful spending on the part of public office holder. In terms of rising domestic debts, analysts advance three theoretical reasons for government domestic debts. First is deficit budget financing for implementation of monetary policy (buying and selling of treasury bills in the open market operation) and the third is to develop the financial instruments so as to deepen the financial markets. Besides, with the state governments rushing to the capital market to raise funds at the twin light of tenures of some governors, there has been a noticeable leap in the domestic debt profile, resulting to concerns about the

forth-coming elections and what becomes of the debts being accumulated through bonds issue.

Olujimi Boyo an economic expert blames the situation on faulty monetary policy of the Central Bank of Nigeria (CBN) and the failure on the part of the Debt Management Office (DM0). The economist stated that the monetary frame work where CBN unilaterally captures dollar earnings of the country determine the exchange rate and subsequently substitute what it considers the appropriate naira quantum, putting it into the hands of banks creates the scourge of perennial excess liquidity.

2.7 THE CONCEPT OF ECONOMIC DEVELOPMENT

According to (Kindleberger and Herrick 1997), economic development is the improvement in the material welfare especially for persons with lowest income, the eradication of mass poverty, with its correlates of illiteracy, disease and early death, changes in the composition of inputs and outputs that generally include shifts in the underlying structure of production away from agriculture towards industrial activities.

Anyanwu and Oackhanan (2000) posit that the concept of economic development connotes an entire transformation of an economy from a less desirable to a more desirable one bringing its overall improvement in the well-being of the entire citizenry.

Anyanwu (1993), went further to say that economic development is a multidimensional process involving the process of basic needs of economic growth, reduction of inequality and unemployment eradication of absolute poverty as well as changes in attitudes, institutions and structures in the economy.

Haggins (1999), pointed out four factors that contribute to economic development as follows:

1. Capital Accumulation

2. Population Growth

3. Discovery of new resources

However, for there to be any meaningfuleconomic development, there has to be development planning. That

is why Graham (2004), pointed out the following as the main components of development plan:

1. A capital budget comprised of public investment projects of a development nature.

2. A budget of government expenditures not usually regarded as capital outlays, but which contribute to economic and social development.

3. A programme of legislation and regulation governing the activities of private individuals, enterprises and institutions so as to redirect, guide and encourage their activities in a manner contributing to economic development. Graham (2004), concluded that “a conceptual simple measure would be the trend of gross national income at constant prices.

2.7.1 HUMAN DEVELOPMENT INDEX AND DOMESTIC DEBT IN NIGERIA

Torado (2011:48)”The human development index (HDI) is an index measuring national socioeconomic development, based on combining measures of education, health and adjusted real income per capital” The human development index attempts to rank countries on a scale of zero 0 (Lowest human development) to 1 ( highest human development) based on three goals of development’s longevity measured by life expectancy at birth, knowledge as measured by a weighted average of adult literacy (two thirds and gross school enrolment ratio (one third), and standard of living as measured by real per capital gross domestic product adjusted for the nation’s currency to reflect cost of living for the and for the assumption of diminishing marginal utility so that well being increases with income but at a decreasing rate ). Again, Torado 2:54 posed that in Nor 2010 the UNDP introduced its new development index (NHDI), intended to address some of the criticisms of index is still based on standard of living, education and health. With some notable changes with strengths in the New Human Development Index (NHDI)

Gross National Income (GNI) per capital replaces Gross Domestic Product (GDP) per capital.

Two new components were added to educational index: the average actual educational attainment of the whole population and the expected attainment of today’s children. The New Human Development Index is comprised with a geometric mean which captures how well rounded a country’s performance is across the three dimensions of income, health and education.

Human Capital – health, education, and skills – is vital to economic growth and human development. There is great disparity in human capital around the world while discussing the Human Development Index. Compared with developed countries, much of the developing world has lagged in its average levels of nutrition, health (as measured, for example, by life expectancy or undernourishment) and education (measured, for example, by life expectancy or undernourishment) and education (measured by literacy). According to Torado (2010:59) “The under -5 Mortality is 17 times higher in low- income

countries than in high-income countries, although progress has been made since 1990. From the Central Bank of Nigeria statistical bulletin it is seen that anecdotal evidence showed that the measures of the poverty level in Nigeria worsened in 2011, when compared with levels in 2020. The estimated poverty measures, using the relative absolute and us dollar – per –day, we have U.S, 61.9 and 62.8 percent respectively.

Corresponding to their low average income levels, a lager majority of the extreme poor live in the low income developing countries of sub-Saharan African and South Asia. Extreme poverty is due in part to low human capital but also to social and political seclusion and other deprivations.

According to Torado (2010: 62) “the incidence of extreme poverty varies widely around the developing world”. The World Bank estimates that the share of the population living on less than $1.25 per day is 41.1% in sub-Saharan Africa. When human development index is used instead of

GDP per capital, the latter would serve as a proxy for socioeconomic development.

It should be stressed that the HDI has a strong tendency to rise with per capital income, as wealthier countries can invest more in health and education, and this added human capital raises productivity. By combining social and economic data, the HDI allows nations to take a broader measure of their development performance, both relatively and absolutely.

2.8 A CRITICAL REVIEW OF RELATED WORKS Chioma in her research work opined that Nigeria’s domestic debt has increased over the years without expanciating on the rate of the increase with respect to Gross Domestic Product (GDP) which is a general measure of the output growth rate of a particular country and thereby depicts if a country is growing or not.

Also I. Adofu (2010) in his research study investigated the empirical relationship between domestic debt and economic growth in Nigeria using OLS regression technique and time

series data. This work used few years for this analysis and is not encompassing enough since current issues on this work was lacking. In addition the research work did not at all bring to lime light the types and sources of domestic debt of which is a crucial part of explaining domestic debt and economic development in Nigeria.

Furthermore, none of the research works did bring to limelight the types and risk implications of the Nigerian domestic debt which is a wide gap that will be filled by this research project.

Asogwa (2005) is of the view that domestic debt have continued to suffer a form of confidence crisis as much participants have consistently shown greater unwillingness to hold longer maturities. He opined that the government has only been able to issue more of short term debt instrument.

This research work closed the gap by extensively throwing light on composition of debt instruments in Nigeria especially the Federal Government of Nigeria Bonds (FGN) up to the special FGN bonds and their tenors. It is worthy to note that none of the former research works has done anything on domestic debt risks but this work enumerated this risks and their implications to the macro-economic growth of the Nigerian economy, thereby filling the gap of former research works It also did an analytical and detailed work on the federal government of Nigeria debt holdings and its implications to the economic development of Nigeria.