CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF THE STUDY

The debt structure of a country affects citizens, institutions of government, privately owned corporate organizations like banks and consequently the economy at large.

The debt structure in this context is the magnitude of the domestic debt as well as the magnitude of the external debts. The issue of Nigeria’s public debt became important in recent times especially prior to the period of the debt forgiveness because of its magnitude and the amount which was required to service such debts as well as its attendant possible effects on different operating sector and the economy especially the banking sector and the growth of the economy at large.

As at the month of July 2015, Nigeria external debt was US$ 34 billion of which about $28 billion or 85% was owned to the paris club of fifteen creditors nation.

Apart from external debts, Nigeria’s domestic debt as at 31st December, 2003 was N1.329 trillion as at July 2006 it was N1.5trillion as at July 2005 as reported by the debt management office.

Nigeria’s domestic debt is defined as debt instruments by the federal government and denominated in local currency. It consists mainly of Nigerian treasury bills, Nigerian treasury certificates, treasury bonds, federal government development stocks, and ways and means and recently considered are contractor debts.

According to Alison (2003), Three reason have been advanced for the growing government domestic debt. The first of this is debt incurred from financial budget deficit. The second reason is debt arising from the implementation of monetary policy (the purchase and sale of treasury bills in the open market operation) and thirdly domestic debt incurred to develop the financial sector through the supply of tradable financial instruments so as to deepen financial markets.

Ola and Adeyemo (1998), while explaining the reasons for increasing public debt on the part of the Nigeria government came up with the following reasons:

1. Government borrowed to finance emergencies such as natural disasters and economic depression.
2. Government borrowed to financial important capital projects such as water clams. Agricultural development projects, river basin development projects.
3. Government borrowed to finance current expenditure in anticipation of reasonable revenue collection.

At a point in year 2003 it was estimated that Nigeria needed approximately US $ 3 billion yearly to fully service her external debt apart from her domestic debt and this is considered unthinkable to do as it will result in the economy getting almost grounded. Ola & Adeyemo (1998).

In Nigeria, the genesis of the present existing market for domestic government debt was the financial reforms introduced by the colonial government in 1958 which led to the creation of marketable public securities to finance anticipated fiscal deficits. This is explicitly stated in the central bank of Nigeria ordinance 1985 thus:  The Bank shall be entrusted with the issue and management of federal government loans publicly issued in Nigeria, upon such terms and conditions as may be agreed between the federal government and the bank. To the ordinary man, public debt evidenced in budget deficit might not make sense however different governments have used both budget deficit and budget surplus as a means of fostering policy agenda as occasion demands.

In Nigerians like so many developing countries especially between the periods covered by this study including the structural adjustment years to date, the government has assumed an active role in the development of the economy in trying to put in place the infrastructure and institutional superstructure necessary for economic growth and development. This necessitated borrowing from different sources with the aim of putting the funds on various projects believed to have the ability of driving the economy forward in which case they are supposed to be productive loans.

Also, over the years, the ever increasing Nigerian population has put some pressure on the government to spend more on public goods and merit goods. The contribution or provision of infrastructural facilities which is termed total factor productivity and often the responsibility of the nation state has made borrowing on the part of government also inevitable.

Since most of these infrastructures cannot be left in the hands of the private sector judging from the experience of market failures in different countries where this has been experimented, the public sector is then seen as the one better at handily issues of social overheads or infrastructural facilities.

Essentially, the argument for the sector activity is not because of its ability to run systems assigned to it efficiently but that the social marginal benefit derivable from state functions usually far exceeds their social marginal cost even if the ventures are run at a commercial loss.

Nigeria’s total internal and external debt stock stood at N 12.06 trillion or $63.5 billion as at the end of March this year, up from N11.2 trillion or  $67.726 billion in December 2014 according to figure released by the debt management office (DMO) this year (2015).

The rise in the naira quantum of the standing debt is mainly due to the devaluation of the naira against the dollar.

According to debt management office (DMO) the total external debt of the federal and states stood at $9.464 billion or N1.864 trillion as against the $9.711 billion as at December 2014.

Federal government domestic debt (DMO) said stood at $43.185 billion as at March 2015 against the figure of N7.9 trillion or $ 47.05 billion in 2014. This gives a grand total of $ 63.506 billion or  N12.06 trillion.

As at December 2014, the total debt stock of the federal government and the 36 states of the federation including the federal capital territory amounted to N11.243 trillion or $67.726 billion. States and federal capital territory as at 31st  December 2014 had a domestic debt profile of N1.707 trillion or $10.967 billion.

Federal governments domestic debt, on the other hand, stood at $47.05 billion or N7.9 trillion, while those of the states stood at $10.97 billion or N1.708 trillion.

Federal Government domestic debt is made up of N5.370 trillion bonds, N2.885 trillion treasury bills and N271.2 billion treasury bonds.

But as at June 2014, states in the federation had a domestic debt stock of N1.551 trillion or $9.963 billion. The federal governments share or the rising external debt then stood at $6.363 billion.

1.2 STATEMENT OF THE PROBLEM

Due to the problem of debt servicing in Nigerian, it has budgeted the mind of so many scholars particularly as there seem to be no near solution to the problem of debt management, Nigeria is persistent by experience, any high import on debt ratios and cost of policies that may have to be undertaken to generate foreign exchange for debt servicing. The debt service payment are a change on domestic income savings and export income.