EFFECTS OF DOMESTIC ON ECONOMIC GROWTH OF NIGERIA Obiwuru Timothy Chidi, University of Lagos, Nigeria Okwu Andy Titus, Babcock University, Nigeria Ekezie, Johnbosco Okeahialam,, PG student, Warwick University, United Kingdom Obiwuru Timothy Chidi: Lecturer, University of Lagos, Nigeria. Okwu Andy Titus: Lecturer, Babcock University, Nigeria. Ekezie Johnbosco Okeahialam, PG student, Warwick University, UK.

ABSTRACT Persistent increases in stock of domestic debt in Nigeria have raised concerns about effects of such debt stock on growth of the economy. This study employed econometric methodology to examine the phenomenon of domestic debt in relation to growth of the Nigerian economy for the period 1990-2010. The objective was to establish the effect of the phenomenal debt stock increases on economic growth in Nigeria during the study period. The major tool of analysis was multiple regression model premised on theorised functional relationship between economic growth and domestic debt stock.

ABSTRACT CONTD. Gross domestic product (GDP) entered the model as response variable and proxy for economic growth, domestic debt stock (DDS), expenditure on debt servicing (EDS) and domestic credit to the economy (DCE) were considered as the causal variables, with interest rate (INT) as the moderating variable. Data used for analysis were obtained from Statistical Bulletin of the Central Bank of Nigeria. Diagnostic tests were conducted to ascertain Stationarity, Co-integrating and Stability features of the data set series. Facilitated with Econometric Views version7 (EViews7) statistical software, the LS estimation

ABSTRACT CONTD. techniques were employed to obtain estimates of model parameters. The estimated model was subjected to evaluation. The results revealed that while those domestic debt components exerted significant positive effects on economic growth, interest rate exerted insignificant negative effect. On the aggregate, the variables jointly exerted significant effect, and highly explained variations in economic growth during the study period. Consequently, the study concluded that domestic debt enhanced growth during the period, and, thus, recommended that growth-oriented strategies should be top priority in domestic debt and its dynamics. Keywords: Domestic debt, Economic Growth, Analysis JEL Classification: C22, C51, H63, O47

INTRODUCTION Origin of domestic debt in Nigeria. Rapidly rising stock of Nigeria’s domestic debt – suggested justification. Domestic debt-GDP ratio since 1960s. Nigeria’s domestic debt-GDP ratio worse off (Asogwa, 2005). Domestic debt in poor countries (Del and Piero, 2003, Kumhof, 2005).

INTRODUCTION CONTD. Theoretical basis for domestic debt (Alison, 2003; Soludo, 2003). Domestic debt for economic growth. Debt overhang models. Large amounts borrowed in the past two decades, yet staggering economic growth and poverty situations persist. Nigeria’s indebtedness – beyond reasonable limits (Sanusi, 2003). Thrust of the paper.

THEORETICAL FRAMEWORK AND LITERATURE REVIEW Crowding out process and effects in theory. Studies on effects of domestic debt on growth include Cunningham (1993), Gbosi (1998}, Christensen (2004); Abba (2005), Asogwa 2005; Blavy, 2006; James, 2006; Waheed, (2006), Abbas (2007), Hameed, Ashraf and Chauhary (2008). Yet no consensus. Overview of Domestic Debt in Nigeria: Composition of Nigeria’s domestic debt (see tables A and B).

Design, data and sources. The analytical model: METHODOLOGY Design, data and sources. The analytical model: GDP = λ0 + λ1DDS + λ2EDS + λ3DCE + λ4INT + µ where λ0 is the intercept or GDP of the economy without domestic debt , λi (i = 1, 2, 3, 4) are the model coefficients. Each captures the effect of associated proxy variable on economic growth (GDP), µ is stochastic variable included in the model to accommodate effect of other factors that can cause GDP to change but which are not explicitly included in the regression model.

METHODOLOGY CONTD. Hypotheses: H01: Domestic debt stock has no significant effect on economic growth. H02: Economic growth is not significantly affected by domestic debt servicing. H03: Domestic credit to the economy has no significant relevance to economic growth. H04: Interest rate bears no significant relevance to economic growth. H05: Domestic debt components have no significant joint effect on economic growth.

DATA, DIAGONISTICS, REGRESSION RESULTS AND DISCUSSION Data (1990 – 2010; see Table C): Gross Domestic Product (GDP), Domestic Debt Stock (DDS), Expenditure on Debt Servicing (EDS), Domestic Credit to the Economy (DCE) in millions of Naira, and Interest Rate (INT) in %. Diagnostics: Unit Root Test Results (See Table D) Regression Results (See Table E). Discussion/Findings:

DISCUSSION AND FINDINGS CONTD. Some level of debt sustainable without debt (Autonomous GDP = λ0 = 1573821). Each of DDS, EDS and DCE has positive effect on growth (λ1 = 3.846669; λ2 = 16.25341; and λ3 = 0.836482). EDS has more positive effect that each of DDS and DCE (λ2 = 16.25341 > λ1 = 3.846669 or λ3 = 0.836482). INT has negative effect on growth (λ4 = - 154224.8).

DISCUSSION AND FINDINGS CONTD. Positive effects of DDS, EDS and DCE are significant at the 5% level of significance as evidenced by the respective p-values (0.0001, 0.0038 and 0.0315). Negative effect of INT is not significant at the same level of significance (p-value – 0.3591). Though INT appears a more strategic variable, the other components of domestic debt bear more relevance in growth process of Nigeria.

DISCUSSION/FINDINGS CONTD. All debt components jointly exert significant effect on economic growth (p-value of F-stat = 0.0000. Domestic debt components in the study were found appropriate (they explained 96% variations in growth of the economy).

POLICY IMPLICATION, CONCLUSION AND RECOMMENDATIONS Growth or GDP responds to domestic debt. The effects of domestic debt may be rendered spurious in practice by human actions. Need for surveillance on domestic debt managers. Domestic debt components, except interest rate, enhance economic growth.

POLICY IMPLICATION, CONCLUSION AND RECOMMENDATIONS Debt management units should be subjected to the surveillance of the Economic and Financial Crimes Commission (EFCC). Domestic debt mechanism should always be growth-oriented.

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