Ebook Domestic Government Debt Structure, Risk Characteristics and Monetary Policy Conduct: Evidence from Nigeria
Since the early 1980s, the ratio of domestic government debt to gross domestic product (GDP) in Nigeria has risen sharply. By 1964, the level of domestic debt was 5.5 percent of GDP. A decade later (by 1974), this ratio went up slightly to 6.9 percent of GDP. But by 1984, the domestic debt /GDP ratio was over 40 percent. Although it declined slightly in the 1990s, it has since 2000 moved upwards.
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 the high side. For the non-HIPC in sub-Saharan Africa, the domestic debt/GDP ratio averaged 23 percent between 1995-2000, and if we exclude Nigeria, it drops to 18 percent (see Christenesen, 2004).
The dramatic growth in the domestic debt /GDP ratio has raised many doubts about fiscal sustainability of the current economic policy. The concerns about sustainability have also been compounded by those related to the very short maturity of most of the government domestic debt, and also the fact that the Central Bank of Nigeria(CBN), still remains the dominant holder of federal government debt instruments. These concerns are further fuelled by the fact that government domestic debt is the major interest bearing financial instrument in circulation and therefore plays a major role in monetary policy implementation.
The rising domestic debt profile, its excessive short-term nature and the narrow investor base therefore raises a number of important questions. First, given that the CBN has relied mainly on Open Market Operations (OMO) in government debt securities as a transmission channel of monetary policy since 1993, how will the narrow investor demand affect the conduct of the needed transactions. This is even more worrisome, given the fact that government securities market still constitutes the predominant portion of the domestic debt market in Nigeria. Second, what are the current levels of macroeconomic risk exposures associated with the present structure of government domestic debt?
Existing studies on domestic debt analysis in Nigeria are still scanty. Few that exist, focus on the analysis of the structure, especially the composition and investor base (see for eg. Okorunmu, 1992, Odozi, 1996, Garba, 1997; 1998). None has gone further to analyse the risk features, and more importantly the implications of these risk features for monetary policy.
Contents
Executive Summary
1. Introduction
- 1.1 Historical Evolution of Domestic Government Debt in Nigeria
1.2 Reasons for the Rising Domestic Government Debt Profile
1.3 The Policy Context
2. Domestic Government Debt in Nigeria: Structure and Characteristics
- 2.1 Composition
2.2 Investor Base
2.3 Maturity Structure
2.4 Implications of the Current Domestic Debt Structure
3. Risk Measures of Domestic Government Debt Portfolio
- 3.1 Value at Risk
3.2 Rollover Risk
4 Implications of Risk Measures for Monetary Policy
- 4.1 Risk Measures, Demand for Debt and Debt Issues
4.2 Risk, Reserve Requirements and Monetary Policy
4.3 Domestic Debt Risk and Banking Stability
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