ABSTRACT
This study is on Debt Management in Nigeria from (1960 – 2005) challenges and prospects. This study seeks to determine how and what contributed to Nigeria public debt, both internal and external. The study is a survey research. The study randomly selected three organizations responsible for managing debt. A sample of 364 was selected from a finite population by yamene’s statistical technique. Questionnaire was developed for soliciting information from the respondents. A test-retest method was used to make the questionnaire reliable, percentages were used to analyze the
biodata and question items while X2 Test of a contingency table were used to analyze
the hypotheses. This study found out that Nigeria is not heavily indebted, corruption, inadequate resources are not the challenges, poverty reduction, effective fiscal and monetary policies, plus sustainable economic growth are not prospects, that debt reschedule, debt buy back and debt conversion programme are not ways of managing Nigeria external debt. This work concludes that deficiencies in managing our debt by debt agencies, non centralization of the offices, and functions/activities, plus unpatriotic attitude of past leaders, including the rapid rate of technological innovation, and overnight policy reversals by past dictatorships government. Recommendations are that debt management office, in collaboration with other agencies managing debt in Nigeria should work out guidelines and criteria for borrowing from both internal and external sources by all tiers of government, even as the viability of the projects for which loan may be obtained and determined through realistic feasibility studies. Proper funding of the agencies and award for performance, adequate framework, mainly targeted of price stability, and form a good habit that will say no to corruption and pave way for effective communication and interaction for more productivity.
CHAPTER ONE
1.1 HISTORICAL BACKGROUND OF THE STUDY
Debt operationally, is defined as the Obligations owned by one country to another country, denominated in either local and /or foreign currency only or in both, comprising both domestic and external obligations (DMO,2002).
Debt management in Nigeria refers to the technical as well as the institutional arrangements involved in organizing both domestic and the external liabilities so that the debt service burden is maintained/contained witching a sustainable level (Omoruyi, 1997:358).
Debt portfolio of Nigerian government is usually the largest financial portfolio in a country. It often contains complex financial structures and can create substantial balance sheet risk for the government. Large and poorly structured debt portfolio also makes governments move vulnerable to economic and financial shocks and have often been a major factor in economic crisis (IMT, 2003:10).
Together with overall macroeconomic policy debt management policy plays an important role in ensuring and maintaining long-term debt sustainability.
Appreciating the significant role that public debt management can play in helping countries or nations cope with economic and financial shocks. The International Monetary and Financial Committee (IMFC) has requested that staff from the international Monetary Fund (IMF) and the World Bank Work together in cooperation with national debt managements experts to develop a set of guidelines on public debt management to assist countries in their efforts to reduce financial vulnerability. The IMFC’S request which was endorsed by the financial stability forum in the year 2000, was made as point of a search for board principles that could
help governments improve the quality of their policy frame works for managing the effects of volatility in the international monetary and financial system, meanwhile contrast to 15 to 20 years ago, countries are now much more focused on managing the financial and operational risks inherent in their debt portfolio than was the case in the past. And the way in which the stock of debt is managed is becoming increasing sophisticated, especially in those countries levels or have experienced shock associated with the removal of capital flows.
This Institutional responsibilities for debt management vary from country to country. In some countries, the ministry of finance is in charge of debt management, while in others, debt management functions are shared by more than one agency (the Central Bank and Ministry of finance for the most part). And in others, all functions and activities of public debt management are charged to a sole agency.
Since 1999, President Olusegun Obasanjo has visited the world’s financial capital many times, seeking debt forgiveness and out the least, some meaningful relief. To ensure our creditors that Nigeria is a responsible country, he has ensured that we service our huge debts regularly. But all his effects in this regard so far until recently have been futile. The creditors would not bulge. They insisted we must pay up even though much of the debt is dubious because it is based on very dodgy figures and accounts. This is why the president become increasingly exasperated by their intransigence and sheer bloody mindedness, and public opinion was hardening around the popular but dangerous proposition that Nigeria unilaterally repudiates the debt.
According to the Debt management office (D.M.O, 2004), Nigerian’s foreign debt increased to US $36 billion in the first quarter of the year 2005, in spite of the country paying close to US $40 billion in the past two decades. As reported by “THE punch” of march 14, 2005, the D.M.O Director-General, Dr Mansur Muhtar, attributed the increase to the continuing freefall of the dollar in which most of the debt is denominated. Dr Muhtar disclosed to the punch, that “an illustration is that (as at) December 2000 when we were going to reschedule our debts with Paris club, we found out that out of that was being rescheduled, about 24% was penalty and 22% was interest. Another 48% constituted arrears, which are payments that should have been made. Only 7% was really the outstanding (debt).” This means that the penalty and interest equal US $ 10 billion. At this rate, by the time the debt is finally retired, Nigeria would have bettered of closed to US $ 100 billion.
Such brazenly organized robbery perpetrated on mostly poor helpless countries by the international financial system controlled by the developed nations is worse than waging a war on a country, sucking it and pillaging its resources. Yet the original debt, most of which was accumulated during the second Republic to this debt burden, the Nigeria economy continues to experience strains and stresses arising largely from debt burden and debt over hang. Despite the debt management’s efforts put in place by debt management authorities since 1983 to deal with the debt problem and challenges.
The scenario is, indeed, frightening. It is within this context that the resolution of the house of representatives early March 2005,asking the government to suspend further debt payments becomes understandable, even if it was not in the long term best interest of the country. If nothing else the resolution served notice on the creditors that the country could not continue to supinely beg for some relief without some concession from them. As Austin Opara, deputy speaker of Nigeria house of Representative was reported to have posited, “THE debt is not sustainable, so something must be done, otherwise we cannot pay.
However the creditor were unmoved by the country’s plan that the debt has
become an unbearable burden that is draining badly needed resources for development. In their estimation, Nigeria does not qualify for even debt relief because it is not a poor country. To this end and even as Nigeria wriggles under the clutches of an overwhelming debt over hang.
Nigeria is rich but the reality is that a huge proportion of its populate is desperately poor. While the intransigence of the creditors is hard to take. There is however, some merit in their argument that Nigeria can conveniently service its debts and still have a lot of funds left for development, if only it could put its financial management regime in shape and reduce corruption to the barest minimum.
This is heavily the crux of the issue. Corruption is the demon that has the country in a suffocating embrace and before whom Nigerians bow. The highly phenomenon has locked up the country in a crushing state of arrested development. Estimates of public funds stolen in the last 35 years and stashed away in numbered bank accounts abroad range from US $100 billion to US $ 200 billion. During the same period, the country earned approximately US$500 billion with very little to show for it in development terms” (Noso, 2005).
Thus while Obasanjo is boringly making his plea for our debts to be out rightly cancelled on written off, many of our elected public officers continue to globetrot in the most lavish style of Arabian princes. At any given time, half of the governors in Nigeria are out of the country for all kinds of nonsense reasons. And in the last six years. (1999-2005) Nigerian “big men and women” have poured hundreds of millions of dollars into prime real estate in Europe, North America, middle east and, lately, south Africa. Hence the contention that Nigeria should the accorded the same consideration over external debt payment has been laughable and unpersuasive. As intolerable as the situation is, a unilateral repudiation of the debt is not practicable doing so would get the country frozen out of the global financial system, and that would be irreparably damaging to an economy that is dangerously fragile.
The choice of Nigeria is actually limited. We have to continue to engage with our creditors to get a significant reduction of debts, while at the same time meeting our payment obligations. Nigeria’s pain from a killing debt overload is self-inflicted. Again considering the pains being inflicted on the citizenry by the debt overhang, it becomes absolutely necessary for Nigerian government to strengthen its action against the continuous rise of the nation’s debt. Thus according to the Economic and intelligent unit EIU (2005), the combined impact of a weak dollar, the expected invade in world bank lending to Nigeria and the build up of interest arrears may push the country’s external debt stock to a new high of US$39.5 billion in year 2006 if urgent, pragmatic and concerted effort is not made to remedy the situation. On the whole the IMF and World Bank (2001) specified that the basic objective of public debt management is to ensure that the government’s financing needs and its payment obligations owe met at the lowest possible cost over the medium to long run consistent with a prudent degree of risk.
1.2 STATEMENT OF THE PROBLEM
Though there were some inherent problems in the management of the nation’s debt between the attainment of independence in 1960 and 1970 when Nigerian’s external debt stock was less than one billion dollars, the seriousness and severity of the situation deteriorated significantly by the second half of the 1980s. This was largely due to persistent inability of the country to meet its external debt service obligations. This situation resulted in mounting arrears and unmanageable growth of the debt stock relative to available resources.
The external debt stock which was about US $9 billion in 1980, grew to neary US$19 billion by 1985. Correspondingly, the debt stock as a percentage of total export earnings and GNP rose to uncomfortable levels of 151% and 24% respectively. In that year, the debt service payment due has a little above US$4 billion which was about 33% of the total export earnings, However, the actual debt service payment for the year was about US$1 billion as at December 31, 2004, the country’s external debt stand at US$35,944.66 while the domestic credit obligation was N1,370.32 respectively. The servicing of Nigerian’s external debt has severely encroached on resources available for socio-economic development and poverty alleviation. Thus between 1995 and 2001 alone, Nigeria spent over US$32 billion in servicing external debt.
Meanwhile, in spite of the enormity of the hardship caused by the debt burden, it has not been given the serious attention it deserves early enough, as the management strategies employed by the various debt management units have not yielded the desired results in practical reality. Thus the study focuses on the effect of debt management in Nigeria. It is for this reason(s) that this researcher is out to know the true nature of the effect.
1.3 OBJECTIVES OF THE STUDY
The major objective of this study is to know the effect of debt management in
Nigeria (1960 – 2005). The specific objectives of the study is stated as follows:
1. To identify the extent of Nigeria indebtedness.
2. To identify the challenges encountered in the management of debt in Nigeria.
3. To identify the prospects from debt management in Nigeria.
4. To identify ways of managing Nigeria external debt.
1.4 RESEARCH QUESTIONS
This study seeks answer to the following questions.
1. What is the extent of Nigeria’s indebtedness?
2. What are the challenges encountered from debt management in Nigeria?
3. What are the prospects from debt management in Nigeria?
4. What are the ways to manage Nigeria external debt?
1.5 RESEARCH HYPOTHESES
To guide this study in realizing its objectives, the following null and alternate hypotheses were formulated.
1. Ho: Nigeria is not heavily indebted.
Hi: Nigeria is heavily indebted.
2. Ho: Corruption as regards embezzlement of funds, inadequate human resources and inadequate debt data statistics are not challenges encountered in the management of debt in Nigeria.
Hi: Corruption as regards embezzlement of funds, inadequate human resources, and inadequate debt data statistics are challenges encountered in the management of debt in Nigeria.
3.Ho: Poverty reduction, effective fiscal and monetary policies, and sustainable economic growth are not the prospects from debt management in Nigeria.
Hi: Poverty reduction, effective fiscal and monetary policies, and sustainable economic growth are the prospects from debt management in Nigeria.
4.Ho: Debt reschedule, debt buy back, and debt conversion programme are not ways of managing Nigeria external debt.
Hi: Debt reschedule, debt buy back, and debt conversion programme are ways of managing Nigeria external debt.
1.6 SIGNIFICANCE OF THE STUDY
The study will be of help to the government and policy makers in debt management. It will also serve as a base point to researchers, financial managers and bankers in the aspect of debt management and it will add to existing literature for debt management in Nigeria.
1.7 LIMITATION OF THE STUDY
1. Financial Constraints: the researcher was heavily constrained by finance as it concerns travelling and distribution of questionnaire.
2. Attitude of the Respondents: Reluctance on the part of the respondents to answer the questionnaire, because of no financial benefit from the study.
3. Time constraint: The researcher does not have enough time to carry out this
study. There was constraint of time in going to places where data and information relevant to the study could be obtained.
1.8 SCOPE OF THE STUDY
The study focuses on genesis and trend of Nigeria public debt, the debt management office, prospects and benefits of debt management office in Nigeria, the need for external debt acquisition in Nigeria, ways and methods of contracting public debt, structure and composition of Nigeria public debt, managing paris club debt and debt data reconciliation, domestic public debt in Nigeria, problems and challenges in achieving effective debt management in Nigeria and strategies adopted so far at managing Nigeria external debt.
1.9 DEFINITION OF TERMS.
Debt: Operationally, this is defined as the obligations owned by one country to another denominated in either local and / or foreign currency only or in both and comprising both domestic and external obligations (DMO, 2002).
External Debt: External debt includes short-term public sector debt and/or private sector non-guaranteed debt (both short-term and long-term), all medium and long- term debt (for one year or more) guaranteed by the public sector to non-residents (Omoruyi, 1997:358).
Debt Management: Debt management refers to the technical as well as the institutional arrangements involved in organizing both domestic and the external liabilities so that the debt service burden is maintained/contained within a sustainable level (Omoruyi, 1997: 358).
Debt Servicing: This refers to combined interest payment and principal repayment
(D.M.O, 2004:6)
Debt/GDP ratio: This “The ration of debt stock to the annual GDP (or any other variant like, Sony GNI) which shows the number of years the total income of the country has to be sacrificed in order to liquidate the debt” for example, a ratio of 50% shows that the country can liquidate her debt by “starving” and devoting its total income for ½ a year to debt repayment (D.M.02004).
Debt/Export Ratio: This is described as “the ration of debt stock to the annual export earnings needed to report the debt. (CBN, 2003:39).
Domestic Debt: Domestic debt is defined as “debt denominated in local currency and being currently managed by the Debt management office (D.M.O) (D.M.O, 2001:44). Debt Service Ratio (or Debt service/ Export ration): this ration shows “fraction of a country’s export earnings used in servicing debt” (D.M.O, 2004).
Debt/Government Revenue Ratio: This is the ratio of debt stock to government annual revenue which shows the number of years of government revenue needed to repay the debt.” (CBN, 2003).
Debt Service/Government Revenue Ratio: this ratio shows the fraction of government revenue devoted to servicing of debt” (F.M.F. 2002)
Debt service/government Expenditure Ratio: this shows “ function of total (i.e. Recurrent and capital) federal Government expenditure that is used indebt servicing (CBN 199).
Debt Service/ Health Expenditure Ratio: This is the ratio which shows the size of debt servicing in relation to total (I.e. Recurrent and capital) federal Government expenditure on health and hence the extent to which debt serving crowds out government spending on health of the population (D.M.O 2004.
Debt service/Education Expenditure Ratio: The interpretation of this is similar to that of debt service/health expenditure above.
Debt Relief: this is defined as a reduction, X Do-D1, in the contractual value of the stock of debt, D. Creditors benefit from debt relief if it increases the expected of their chains, E(V), Michael B. and James W.D. 1997:23).
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