A Critical Investigation Of The Effects Of Government Domestic Borrowing On Economic Growth In Nigeria

Project and Seminar Material for Economics

A Critical Investigation Of The Effects Of Government Domestic Borrowing On Economic Growth In Nigeria


Chapter One


Introduction

1.1 Background Of The Study

One of the problems facing the contemporary developing nations of the world, including Nigeria, is arguably the issue of rising domestic debt stocks and the unpleasant implications for the economy, especially when such debt spirals 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 the fiscal deficit. In the late 1970s and early 1980s, most developing countries in Africa, including Nigeria, experienced an unprecedented and severe economic crisis. These crises manifest themselves in a variety of ways, including persistent macroeconomic imbalances, a widening savings-investment gap, high rates of domestic inflation, chronic balance-of-payments problems, and a massive budget deficit, with most resorting to borrowing from external or internal sources.

However, governments borrow for a variety of reasons, including funding the budget deficit, implementing monetary policy (buying and selling treasury bills in open market operations), and developing the financial sector (supplying tradable financial instruments to deepen financial markets).Domestic borrowing refers to government borrowing within the country.In public finance, domestic borrowingis the component of the total government debt in a country that is owed to lenders within the country. The main sources of funds for internal borrowing are commercial banks and other financial institutions. Internal public debt owed by a government due to domestic borrowing is part of the country’s national debt.

Although domestic borrowing might have a positive effect on the growth of the economy in the short-run, in the long-run, if the debt service repayment regime exceeds the ability to pay with some probability, it will lead to a 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 hindering economic growth. Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy over time. Statisticians conventionally measure such growth as the percent rate of increase in real gross domestic product, or real GDP. But when government internal debt due to borrowing is on the rise, this government may be constrained by clamping down on the ability of the government to undertake more productive investment programmes in infrastructure, education and public health. Not only does the government suffer, but it also causes an increase in tax rates levied on citizens, businesses, and organizations, stifling economic growth.


1.2 Statement Of The Problem

It is not a new argument to argue that when revenues are low, the government must borrow. Internal borrowing from commercial financial institutions results in accumulated domestic debts have been left with a large outstanding debt, leaving the national debt burden on all citizens. While government domestic borrowing may appear useful in the short run, interest must be paid on the amounts borrowed, and when the bonds expire, they must be repaid or refinanced through new borrowing, perpetuating the viscous cycle that imposes massive taxes on citizens and, in the long run, cripples economic growth. To support this claim, former CBN governor Mallam Sanusi stated, “we are borrowing money today at a high interest rate while leaving the debt burden on our children and children. “Furthermore, the impact of government borrowing extends to macroeconomic variables such as inflation, making accurate forecasting of the economy difficult, and the debt burden affects all sectors. Hence, it is upon these principles that this study seeks to examine the effect of government domestic borrowing on the growth of Nigeria.


1.3 Objective Of The Study

The main focus of this study is to examine he effect of government domestic borrowing on the growth of Nigeria Economy.

Specifically, the study seeks

  1. To examine the nature of government domestic borrowing in Nigeria.
  2. To determine the rate at which government borrow from from domestic sources in Nigeria.
  3. To investigate if government domestic borrowing will have any significant effect on the economy.

1.4 Research Hypotheses

The research is guided by the following hypothesis.

  • HO1: The rate of government domestic borrowing is low.
  • HO2: There is no significant effect of government borrowing on the economic growth in Nigeria.

1.5 Significance Of The Study

The study’s findings will be important for the government, policymakers, and financial institutions. The study will provide useful information to policymakers and governments in order to avoid a debt overhang, which will stifle economic growth and burden the masses with high taxes while also constraining businesses and the private sector.

The study will contribute to the general body of knowledge and serve as a reference material for students and other researchers who wish to conduct further studies in this field.


1.6 Scope Of The Study

The scope of this study borders on the effect of government borrowing on the economic growth in Nigeria from 1984-2019.


1.7 Limitation Of The Study

The following factors poses to be a limitation during the course of this research.

Financial Constraint:

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time Constraint:

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.


1.8 Definition Of Terms

Domestic Borrowing:

Domestic Borrowing means a borrowing consisting of simultaneous Domestic Loans of the same Type and, in the case of LIBOR Rate Loans, having the same Interest Period made by each of the Domestic Lenders. It refer to any ringgit advances, loans, trade financing facilities, hire purchase, factoring facilities with recourse, financial leasing facilities, guarantee for payment of goods, redeemable preference shares or similar facilities in whatever name or form, issued by a financial institution to another entity (government) within the country.

Economic Growth:

Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy over time. Statisticians conventionally measure such growth as the percent rate of increase in real gross domestic product, or real GDP.

Government:

A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary.


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