INTRODUCTION

The Nigerian economy has since the advent of the oil and gas sector become over

dependent on oil-sector of the economy resulting in loss of focus on the other sectors. No

sector of the economy in the opinion of Asagunla and Agbede (2018) is positioned to

perform effectively without adequate funding which, can only be achieved in an economy

with strong financial system. In economic parlance therefore, monetary policy should

be seen as guiding principle or procedure for developing, controlling and sustaining

monetary variables of an economy that induce growth. Extant literature holds that

monetary policy is a key factor of macroeconomic management in opened

economy to stimulate economic stability and to promote economic development through

its impact on economic variables. It is generally believe that monetary policy influences

macroeconomic variables which include employment creation, price stability, gross

domestic product growth and equilibrium in the balance of payment in developing

country (Srithilat & Sun, 2017; Anowor & Okorie, 2016; Precious, 2014).

As a technique of economic management, monetary policy is geared toward achieving

the economic growth and economic performance of an economy. The policy has to

do with the regulation of money supply, inflationary rate, credit supply, interest rate

on credit, external debts and price index. As cited by Nwoko, Ihemeje and Anumadu

(2016), monetary policy refers to the combination of measures designed to regulate the

value, supply and cost of money in an economy in consonance with the level of economic

activities. It can also be described as the art of controlling the direction and
movement of monetary and credit facilities in pursuance of stable price and economic

growth in the economy (CBN 1992). It is the responsibility of the monetary authority of a

country to design and implement the monetary policy. In Nigeria, the Central Bank of

Nigeria (CBN) is charged with this responsibility. The CBN was establishment in

1959 and since its inception; the Central Bank of Nigeria (CBN) has continued to

play the traditional role expected of an apex bank by regulating the stock of money

supply, inflationary rate, credit supply, interest rate on credit, external debts and price

index. This role is anchored on the use of monetary policy that is usually targeted towards

the achievement of full-employment equilibrium, rapid economic growth, price stability,

and external balance. Over the years, the major goals of monetary policy have often

been the two later objectives.

Financial intermediaries hold a very important role in the flow of money in the financial

world. The assistance of a financial intermediary is needed by companies who want

somebody to act as a middle man in raising money from the investors (Siklos, 2001).

Meeting up between these two parties are often very difficult without the help of financial

intermediaries. Types of financial intermediaries are banks, insurance company, non-

banking finance companies, investment brokers, investment bankers and pension funds.

Financial intermediation is a process of redistributing the available funds in the economy

in maximizing its returns which is the principal role of financial intermediaries (Akinjare,

2016). Indeed, the intermediation role if effectively carried has been established to be a

catalyst for economic development of any nation. However, this intermediation role
could be plagued with problems such as lack of strong supervision of banks and

publicly traded companies leading to collapse, inadequate information for proper

efficiency and effectiveness in the economy, fraud and internal control, lack of corporate

governance and poor risk management policies and strategy, lack of skilled personnel

managerial control, political interference, corruption and nepotism (O'Sullivan &

Sheffrin, 2003).

Foreign debt and economic growth

Foreign debt or external debt refers to the portion of a country’s over-all debt that is

borrowed from foreign lenders which include commercial banks, governments or

international financial institutions (Focus Economics, 2019). The international financial

institutions include the World Bank and the International Monetary Fund (IMF). Money

borrowed from foreign lenders (usually European, North American, or Japanese)

involves interest which must be paid in the same currency in which the loan is taken,

therefore, the borrowing country may be required to export its goods to the lender

countries to earn that currency (Business Dictionary, 2019a). The disreputable debt

Management Dynamics in the Knowledge Economy | 295 Vol.7 (2019) no.3, pp.291-306;

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tragedy happens when a certain feeble economy is incapable of meeting up with the debt

servicing obligations, but will resort to accepting socially and environmentally

precarious conditions (Business Dictionary, 2019a).

Another definition puts it that foreign debt is the money that the government and

organizations in a country have borrowed from organizations and governments in other

countries (Cambridge Dictionary, 2019). Foreign debt is the amount a country owes to

other countries either directly in the form of government to government loans or

indirectly due to the negative balance of trade (Business Dictionary, 2019a). However,

due to a shortage of resources and some relative advantages, countries depend on one

another to enhance their economic growth in order to achieve sustainable economic

development (Afolabi et al., 2017). Domestic savings may not be able to provide all the

required infrastructures that can lead to the industrialization of a developing country.

Therefore, developing countries rely on external financing to fill the developmental

vacuum and meet economic growth needs that domestic saving is unable to satisfy.

Debt servicing and economic growth

IMF (2003) defines debt service as the payments required to be made in respect of both

principal and interest for an existing loan. According to Merriam-Webster (2019), debt

service is the amount of interest and sinking fund payments due annually on long-term

debt. Business Dictionary (2019b) refers to debt service as the payment of principal and

interest due on existing debt. IMF (2003) seeks to highlight the difference between actual

debt service and scheduled debt service. According to IMF (2003), actual debt service is

the set of payments actually made to satisfy a debt obligation, including principal,

interest, and any late payment fees. On the other hand, scheduled debt service is the set of
payments including principal and interest, which is required to be made throughout the

life of the debt (IMF, 2003).

The effect on economic growth is that, if debt servicing is judiciously done, it portrays

the borrowing country as a credit worthy country before the creditor countries and other

lending organizations. In other words, the economy grows with the inflow of more

borrowed funds. The danger is that it may lead to too much dependency on foreign loans

and debt overhang. The borrowing country will become so highly indebted, in such a

manner that their available resources may not be able to satisfy the debt obligations.

Management of debt crisis inhibits economic growth because it involves payment of

accumulated interest, principal and interest penalties emanating from failure to keep to

the terms.

Conclusion

This study examined the effect of performance deposit money banks on economic

development in Nigeria. The only significant independent variable is the credit to private

sector (CPS) which has significant positive impact on real gross domestic product. The

result showed that in the short and long run, bank loans and advances (DBLA), bank

reserve (DBR), and real interest rate (INTR) negatively but insignificantly affect the real

gross domestic product (DRGDP). Given the probability of F-statistics values in both the

short run and long run, the study confirmed existence of long-run relationship between

financial institutions intermediation and economic growth, particularly the credit to

private sector. The study attempted to examine the impact of monetary policy on
economic growth of Nigeria using secondary time series data collected from Central

Bank of Nigeria (CBN) statistical bulletin from 1980-2017.