GOVERNMENT DOMESTIC DEBT AND DEPOSIT MONEY BANKS LIQUIDITY IN NIGERIA
ABSTRACT: This study focuses on Government Domestic Debt and Deposit Money Bank Liquidity in Nigeria. It specifically seeks to investigate government domestic debt and liquidity in Nigeria from the perspective of the elements that constitute domestic debt. Using Ordinary Least Square Method (OLS) with the aid of Econometric View (E-View) was used to analyze the data. The time Scope covers 1985-2018. The relevant data used was sourced from the Central Bank of Nigeria Statistical Bulletin. The variables used to investigate the study are dependent and independent variables. (Domestic Debt) dependent variable while (Deposit Money Bank Liquidity) independent variable. The dependent variable was measured using Federal Government Bonds (FGBND), Nigeria Treasury Bill (NTBLL), Nigeria Treasury Bonds (NTBNDS), and Federal Government Development Stock while the independent variable was measured using the Liquidity Ratio (LR). Hence the mathematical specification model is represented as:
LQ=f(NTBLL, NTBNDS, FGDS, FGBND).
From the data, the study reveals that there is a positive and significant relationship between all the elements that constitute domestic debt in Nigeria and liquidity ratio. The study, therefore, concluded that government domestic debt such as the federal government of Nigeria bonds, Nigeria treasury bills, Nigeria treasury bonds, and federal government development stock have jointly played a significant role in influencing liquidity ratio in Nigeria. Also based on the findings, the study finally recommends that more debt instruments and innovation should be introduced into the money market to enlarge their scope of liquidity.
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CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Debt has no precisely fixed meaning but maybe regarded essentially as that which a person or group of people legally owes another or an obligation that is enforceable by legal action to make payment for money owed to another. Technically, a debt is the disbursement of funds made available to a needy entity or institution for development and consumption purposes on certain terms of payments.
Countries borrow when they are unable to generate enough domestic savings to carry out their productive activities. The funds borrowed are meant to boost economic growth and development of the country; thereby improves the standard of living of its citizens (Sunday. Essen, Ngozi .T. I Agboegbulem, Michael .K. Mba, (2016). The government usually borrows by using securities, government bonds, and bills.
Deficit financing is rife and practiced by both developed and developing countries alike. For instance, data show that the United Kingdom, United States, and Russia had a deficit of $49billion, $49billion, and $14.4billion respectively; while a deficit of #2.2trillion is proposed to finance Nigeria’s 2016 public sector expenditure. In fact, evidence show that the Nigerian government has consistently had deficit budgets, ultimately culminating in the acquisition and accumulation of sovereign debts which upon comparison with GDP is reported to be: 2006 – 11.8%, 2007- 12.8%, 2008-11.6%, 2009- 15.2%, 2010-18%, 2011-17.8%, 2012-19%, 2013-11% and 2014-10.5% (CBN, 2016). No gainsaying that debt constitutes about 36% of 2016 national budget (CBN, 2016).
The Nigeria government is currently facing monumental federal and state debts/deficit as the price of oil, the nation’s principal budget factor fluctuates endlessly from the stipulated price and output. Consequently, in addition to the public debt of #1.84trillion to augment revenue for the implementation of the 2016 budget, the government which had an “explorative talk” for a foreign loan of $3.5billion from China Exim Bank and African Development Bank is now shopping for $29.9billion to finance infrastructure in 2017. Indeed upon debt rescheduling and relief in 2006, the country’s debt base shifted from global to local creditors (CBN, 2010). And through, the present state of debt is within acceptable limits, thereby posing no immediate threat to the solvency of the economy.
Domestic debt reduction in Nigeria has taken a center stage for conversing realistic pricing of petroleum products in Nigeria as the ratio of domestic debt has risen astronomically and if not controlled could create some unfavorable consequences as crowding out private sector investment, poor GDP growth, etc. Okonjo-Iweala (2011). Domestic debts are debts instruments issue in local currency. State and local government can also issue debt instruments but debt instruments currently in issue consist of Nigeria treasury bills, federal government development stocks, treasury bonds, ways, and means advance. Nigeria treasury bills and federal government development stock are marketable and negotiable, while treasury bonds, ways, and means advance are not marketable but held solely by the central bank of Nigeria (CBN), Adaful, I. and Abula, M (2010). Nigeria has not been alone in experiencing escalating levels of government domestic indebtedness but in comparison to other countries. In sub-Saharan Africa, Nigeria’s domestic debt to GDP ratio is clearly on a high side, for the non-hipc in sub-Saharan Africa, the domestic debt ratio averaged 23% between 1995-2000 and if we exclude Nigeria, it drops to 18% (Christensen 2004). Alison, J (2003) reveals three principal reasons often advanced for government domestic debt. The first is for budget deficit financing, second for implementing monetary policy and thirdly to develop instrument so as to deepen the financial market.
The central bank of Nigeria still remains the dominant holder of federal government domestic debt instruments.(Fiona & Sanni, 2O11).
1.2 Statement of the problem
The domestic debt discourse has ranged amongst scholars for decades if not centuries, with yet an inconclusive stance as to its context and import on socio-economic dynamics. Generally, a strand of theoretical and empirical evidence suggests a negative relationship between public debts and growth while others contend that sovereign debt supports economic growth.
However, domestic debt constitutes a larger proportion of public debt and influences liquidity more especially given its higher default frequency in comparison with external debt. Unfortunately, studies on domestic debt are quite scanty and seldom have time-series data in studies that pertain to them.
Another observed contextual gap pertains to the variables adduced to proxy domestic debt. Most scholars apply variables that are theoretically admissible; e.g. exchange rate, indirect taxes, and government expenditure Fiscal deficit and public sector credit as well as domestic debt outstanding. The need, therefore, to evaluate the effect of government domestic debt on deposit money bank liquidity constitutes the problem of this study.
1.3 Aim and objectives of the study
The main aim of the study focuses on government domestic debt and liquidity in Nigeria from the perspective of the elements that constitute domestic debt. However, the specific objectives of the study include
- To examine the effect of the Nigeria treasury bills on deposit money bank liquidity in Nigeria
- To determine the effect of the Nigeria treasury certificate on deposit money bank liquidity in Nigeria
- To ascertain the effect of federal government development stock on deposit money bank liquidity in Nigeria
- To evaluate the effect of treasury bonds, ways and means advance on deposit money bank liquidity in Nigeria
1.4 Research Question
The basic questions this research attempt to answer includes:
- To what extent do the Nigerian treasury bills affect deposit money bank liquidity in Nigeria?
- To what extent does the Nigerian treasury certificate affect money deposit bank liquidity in Nigeria?
- To what extent do federal government development stocks affect money deposit bank liquidity in Nigeria?
- To what extend do treasury bonds, ways and means affect deposit money bank liquidity in Nigeria?
1.5 Research Hypothesis
HO1: There is a significant positive relationship between the federal government of Nigeria bonds and Deposit money bank liquidity.
HO2: There is a significant negative relationship between the Nigerian treasury bills and Nigeria treasury bonds with Deposit money bank liquidity.
HO3: There is no significant relationship between federal government development stock and Deposit money bank liquidity.
HO4: There is no significant relationship between ways and mean and Deposit money bank liquidity.
1.6 Significance of the study
The significance of the study will be of benefit to the following parties:
The government, the academia, the students, the policymakers, the general public, and the domestic banks.
TO THE GOVERNMENT: This study will help the government, to enable them to formulate beneficiary monetary policies that will trigger development and discourage fiscal indiscipline.
TO THE ACADEMIA: This study will benefit the academia in giving detail information and to encourage the academic environment to progress to greater heights.
TO THE STUDENTS: The study will be of significance to the students, to create an avenue for further research.
TO THE POLICY MAKERS: This study is important to the policymakers because of the possible implication of the result for decision.
TO THE GENERAL PUBLIC: This research is significant to the general public as it serves as a reading material for academic discussion.
TO THE RESEARCHERS: This research work will be useful to researches as a veritable tool for similar research topics.
1.7 Scope and of the study
The scope of the study or the research exist in three different forms, which are:
Geographical Scope: Geographical scope talks about the scope within a particular area; here in this research work, the geographical scope covers only Nigeria as a country.
Content Scope: The content scope is tailored to examine the impact of domestic debt on deposit money bank liquidity.
Time Scope: The research work covers a period of thirty-four years. That is from 1985-2018.
1.8 Limitations of the study
The researcher was faced with some limitations in the course of carrying out this study among which are:
- Information: The information or data used in this study was secondary data which the researcher believed was that the use of existing data is very difficult in evaluating its quantity.
- Time factor: Time is another important limitation that stops the researcher from carrying out the research work because there was no much time given to the researcher for his work.
- Inadequate Resources: In view of the harsh economic situation of the country, it became quite expensive to carry out the research work and also inadequate finance to travel to the point of data output.
- Inadequate materials: The researcher was faced with difficulties in sourcing materials from the banks, CBN, stock exchange market and other areas. As a result of this, the researcher has to rely mostly on materials contained in some journals and published accounts.
- The study covers a period of thirty-four years (1985-2018), this consideration is based on available data and ease of sourcing the data required for the study.
1.9 Definitions of the terms
- Domestic Debt: These are debts borrowed within a country. They are debt instruments issued by the federal government and dominated in local currency.
- Liquidity: is the ability of a firm to easily convert an asset into cash
- Deposit Money Banks: are financial institutions where funds and other valuable items are kept for safe custody and also they are institutions that carry out banking business.
- Debts: These are fund borrowed by a nation or institution for either consumption or development purposes
- Nigeria Treasury bill: These are short-term debt instruments, issued by the Federal Government of Nigeria through the Central Bank, to provide short-term funding for the Government. They are usually issued for tenors of 91days, 182days, and 364days respectively.
- Nigeria Treasury Bonds: These are Government debt securities that earn interest until maturity; at which point, the owner is also paid a per amount equal to the principal.
- Federal Government Domestic Stock: These are stocks of all the companies traded on the Nigerian stock exchange. It ranges from the smallest public companies to the largest of industrial conglomerates.
1.10 Organization of the Study
This study is systematically structured into five (5) chapters, and they as follows:
Chapter One: This chapter focuses on the background of the study, statement of the problem, aims, and objectives of the study, limitation of the study, definition of terms and organization of the study.
Chapter Two: This chapter focuses on the literature review, thus we have a conceptual review, theoretical review, and empirical review.
Chapter Three: This focuses on the research methodology. It covers the research design, sample size, sources of data, description of research variables, model specification and technique of analysis.
Chapter Four: This focuses on the data presentation, data analysis and interpretation of results.
Chapter Five: This focuses on the summary, conclusion, and recommendations.
TABLE OF CONTENTS
Pages
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgement v
Abstract vi
Table of Contents vii
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study 1
1.2 Statement of Problem 3
1.3 Aim and Objectives of the Study 4
1.4 Research Questions 5
1.5 Research Hypotheses 6
1.6 Significance of the Study 6
1.7 Scope of the Study 7
1.8. Limitations of the Study 8
1.9 Definition of Terms 9
1.10 Organization of the Study 10
CHAPTER TWO
LITERATURE REVIEW
2.0 Conceptual Review 11
2.1.1 Domestic Debt 11
2.1.2 Domestic Debt in Nigeria 11
2.1.3 What Constitutes Domestic Debt in Nigeria 12
2.1.4 The Structure and Characteristics of Domestic Debt In Nigeria 13
2.1.5 Liquidity 13
2.1.6 Sources of Bank Liquidity 15
2.1.7 Functions of Liquidity 16
2.1.8 Theoretical Review 17
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Research Design 24
3.2 Nature and Sources of Data 26
3.3 Operational measures of the variables 26
3.4 Model Specification 28
CHAPTER FOUR
RESULTS AND DISCUSSION
4.1 Data Presentation 30
4.2. Data Analysis 32
4.3 interpretation of Results 33
4.4 Test for Hypotheses 38
4.5 Discussion of Findings 40
CHAPTER FIVE
SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
5.1 Summary of Findings 42
5.2 Conclusion 43
5.3 Recommendation 44
Bibliography
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