Internal Debts as threats to economic Development

“Internal debt is easier –because regardless  if you are a democracy or dictatorship, you are always have the option to publicly say: sit down and shut up people…we are pulling a lot of health benefits, public education funds etc. If you don’t like this, then move somewhere else” (anonymous).

 

The above expression is quoted to describe the ongoing reaction of the government towards the uprising, economic threatening internal debts facing our beloved nation, Nigeria. Just  as recently, formal minister of finance and managing director of World bank, Dr. Ngozi Nkojo-Iweala observes in anticipation that, the accumulating domestic debt of Nigeria rising to $26billion in the current year could pose to the economy unpleasant economic and political consequences; as the negative effect can be perceived on the nation’s Gross Domestic Production.

This was followed by a further warning from the Debt Management Office that internal debt represents about 75% of the nation’s internal debt with the remaining 15% for the external one. The office noted that this phenomenon has menacing economic implications toward the country; as the debt witnesses uprising from to have risen from N1.7tri, N2.1tri and N3tri in the year 2007,2009 and 2010 respectively.   

Historically, internal debt was traditionally exercised by the American government during the war, to be repaid thereafter. However, this seems to have gained new fashion, as the repayment  becomes a problem.   As against the analysis of J.L. Hanson who sees Internal debt as involving a series of transfers of wealth within the country, i.e., from lender to government and then later on at the time of redemption from government to lender.  Money is thus transferred from one section of the community to other sections.  In this case, to Hanson, the money burden on the economy is zero.

Economists have critically identified such situations that could warrant an internal debt to include wars, budget deficit, public welfare schemes, urge for economic growth among others. They further introduce two determinant factors through which the debt sustainment level of a nation could be accessed or predicted, namely: Total debt servicing outlays (=interest payments) and Total government income.

It should be clearly stated that Domestic debt could pose to a nation both positive and negative shortcomings. If such debt is effectively manned, it can help both the public and private sectors of the economic most especially, to: bridge the gap between revenue and expenditure, reduce economic depression, curb inflation rises, mobilize resources, stabilize people’s income, manage monetary and fiscal policies, bridge the gaps between the poor and the rich, enhance public facilities. All these would consequently enhance and stimulate economic growth and development of the nation concerned.

On the other hand, ineffectiveness in the management of internal debt would result to the debt crisis situation. In this circumstance, a nation could witness such awful development as rising taxes to pay interest and debt, cut back on government services, debt default, printing of more money by the central bank as it happened in Weimar Germany, Zimbabwe, Argentine among  others.

Norinson (2010) used the term “internal debt trap” to describe internal debt crisis. In his analysis, internal debt trap is a situation where a nation incurs a large amount of debt in comparison to it total income. In this case, to Norinson, the interest payment on debt reduces spending on government services such as road construction, highway power plants and employment of civil service workers.

He further noted that with the neglection of due care, a  nation could witness some of the negative consequences of internal debt crisis such as fast reduction in foreign investments, declining in national credit rating, reduction in productive investments which the nation’s citizens demand, exhaustive food importation, rising inflation, rates as the cost of imports overshadows that of export, and non- servicing external debts.

Question often arises as what are the causes of internal debt trap? Debt trap argues to occur when the government borrowed on consumption rather that investment. Borrowing is traditionally meant for the government productive sector.  Despite the nation’s needs for capital investment, majority of government spending is always on pure consumption, which indicates that they disappear once they are used up and serve not future production needs. In this circumstance, debt repayment would pose a negative choice.
 Ayo Teriba, a managing director and Economic Associate, noted that “the nation, at the moment, is not borrowing to invest. Instead we are borrowing to pay pension allowances, to get voters register and the likes. It shows the lack of vision on the part of the nation’s leadership,”

Another cause of the internal debt crisis is accumulating government debt which can destroy the economy if faced with high debt burdens. Higher interest rates can also pose a dangerous situation, if an economy has most of its debts in short term paper and outstanding debts are allowed to matured many years before repayment.

Others causes include increase inefficiencies of public organization, mismanagement of public fund. The Debt Management Office (DMO) has identified among other problems corruption, fiscal prudence, recurrent expenditure over years, bloated government bureaucracy.

Therefore, in attempts to resolve the forgoing problems, it is observed that government should venture into constructive borrowing for the right reasons; government should put necessary measures in place to check this alarming domestic debt profile; government should ensure proper supervision and utilization of funds; efforts should be made toward the payment of interest and repayment of the debt, a good effort should made to curd corruption in this nation.

Abubakar Jimoh
University of Abuja
[email protected]

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