Description
Abstract
One of the primary goals of most developed and developing economies such as Nigeria is to achieve a favorable foreign exchange rate regime, as well as other macroeconomic indices, which may be presumed as the precondition that must be met for investment to come about. Clearly, the economic breakthrough envisaged for Nigeria is sustainable economic growth and development driven by domestic capital formation, investment, as well as application of laudable fiscal policies. Serving external debt may involve demand for foreign currency which tends to affect the exchange rate of the country. Hence, this study examines the impact of public external debt on exchange rate in Nigeria. Using the Ordinary Least Square, on the secondary data sourced from the CBN and DMO among other sources, findings reveals that all the dependent variables, that is, external debt, debt service payment and foreign reserve proved to be statistically significant in explaining exchange rate fluctuation in Nigeria within the period of observation, with debt service payment having the strongest effect (Coeff: 0.4443). Based on the finding, the study recommends that government should ensure that all public borrowing, where and when necessary, be directed towards productive economic activities which can generate returns to service and pay up the debt at maturity.
Table Of Content
Title Page
Certification
Dedication
Acknowledgment
Abstract
Table Of Content
Chapter One
1.0 Introduction
1.1 Background Of The Study
1.2 Statement Of the Problem
1.3 Objectives Of The Study
1.4 Research Questions
1.5 Formulation Of Hypotheses
1.6 Scope Band Limitations Of The Study
1.7 Definition Of Terms
Chapter Two
2.0 LITERATURE REVIEW
2.1 Review of related studies
2.2 Meaning of debt
2.3 Foreign Exchange Rate
2.4 Historical Perspective on Nigeria’s Exchange Rate Policy
2.5 Exchange rate regime
2.6 Nigeria external debt servicing
2.7 Nigeria’s External Debt
2.8 Commerce of Nigeria’s external borrowing
2.9 Foreign Debt Management
Chapter Three
3.0 Research Methodology
3.1 Research Design
3.2 Source Of Data
3.3 Selection Of Variables
3.4 Estimation Procedure
3.5 Methods For Evaluation Of Results
Chapter Four
4.1 Presentation Of Data
4.2 Data Evaluation Estimation And Testing Of Hypotheses
4.3 Interpretation Of Data
Chapter Five
5.0 Conclusions And Recommendations
5.1 Conclusions
5.2 Recommendations
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Historically, in Nigeria, like so many other developing countries, public expenditure has recorded a continuous increase over time, especially, as the government assumes an active role in the development of the economy by trying to put in place the infrastructure and institutional superstructure necessary for economic growth and development. The tendency of increasing public expenditure can be attributed to factors like the growing population and increasing urbanization, which require increase in the sheer of scale of state services and traditional functions, including defence particularly where the country faces one form of crisis or the other. For instance, the insurgences from the Niger Delta militants, and the current Boko Haram crisis in some states in the north-eastern part of Nigeria has forced the government to increase its spending on defence. Meanwhile, better quality services imply a higher cost (Bhatia, 2010).
Most less developed countries are characterized by a shortage of capital resources to meet the increasing public expenditures. Since primary products consitute a large fraction of the exports of most developing countries, the drastic decline in the prices of primary products in the 1980 means reduction in the foreign reserve use for financing external payments, and it is generally expected that developing countries, facing a scarcity of capital, will acquire external debt to supplement domestic saving (Aliko and Arowolo, 2010). Hence, resorting to public borrowing.
The issue of Nigeria’s public debt became important in recent times especially prior to the period of debt forgiveness because of its magnitude and the amount which was required to service such debts, as well as, its attendant possible effects on different operating sectors of the economy especially the banking sector and the growth of the economy at large.
One of the primary goals of most developed and developing economies such as Nigeria is to achieve a favorable foreign exchange rate regime, as well as other macroeconomic indices, which may be presumed as the precondition that must be met for investment to come about.Clearly, the economic breakthrough envisaged for Nigeria is sustainable economic growth and development driven by domestic capital formation, investment,as well as application of laudable fiscal policies (Ijeoma, 2013).Unfortunately, the mono product structure of Nigerian economy that is devoid of robust industrial base, driven by volatile price regime and its attendant changeable export revenue inevitably create “savings – investment” imbalance which makes foreign debt an irresistible funding option. Also, the unending yearns for foreign debt follow from the need to make up the foreign exchange shortfall that persistently results from imbalances in trade relations. Nigeria from time-to-time witnesses balance of payment deficits that restrict substantial inflow of foreign exchange to her economy. Although the country has since 1956 utilized foreign loan, the desirable transformations in to improved infrastructures, stable exchange rate, robust industrial base, increased productive capacity, among others are far from being realized.
1.2 Statement of the problem
The functionality of government across the world depends solely on the various revenue sources and budgeting strategies. However, the inability to meet the expenditure aspects of the budget forced many governments to borrow domestically and internationally. Borrowing bridges the wider gap between expected revenue and proposed expenditure of the government which is known as budget deficit. In the literature, borrowing is referred debt which means the obligations or promises to be fulfilled in the nearest future. Meanwhile, the privilege to enjoy certain amount of funds and make repayment in the future is referred debt but absolutely different from deferred payment that is related to goods and services. Debt could be contacted by different economic agents such as firms, household and government or simply put private and public sector of the economy for different purposes. In this paper the focus is in the debt contacted by the public sector or government. Relative to public sector, debt can be classified into internal and external debt that is fully repaid by the successive government in the nearest future Central Bank of Nigeria, (2015).
With continuous increase in public expenditures, and low capital formation in many developing countries, many governments have resulted into borrowing either or both within and outside the country. However, most borrowings come with interest attached, which results in debt servicing. Serving external debt may involve demand for foreign currency which tends to affect the exchange rate of the country. Hence, this study examines the impact of public external debt on exchange rate in Nigeria.
1.3 Objectives of the study
The objectives of this study are:
- To investigate the effect of exchange rate on foreign debt services in Nigeria
- To investigate the effect of debt service payment on exchange rate in Nigeria
- To study the effect of foreign reserve on exchange rate in Nigeria
1.4 Research questions
At the end of this work, this study will provide answer to the following questions:
- What is the effect of exchange rate on foreign debt services in Nigeria?
- What is the effect of debt service payment on exchange rate in Nigeria?
- What is the effect of foreign reserve on exchange rate in Nigeria?
1.5 Formulation of Hypothesis
The following hypotheses are formulated which is in line with the study objectives:
Hi: There is significant effect of exchange rate on foreign debt services in Nigeria
1.6 Scope of the study
Every developing country can involve in domestic or foreign debt. The attendant high level foreign debt service obligation restrains developing country such as Nigeria from making huge domestic investment that could have boosted economic growth and stabilize the foreign exchange rate (Ezeanyejiet al., 2016). The scope of this work only covers only the impact of exchange rate on foreign debt services in Nigeria
Definition of the study
FOREIGN DEBT: is debt owed to a lender from another country.
DOMESTIC DEBT: is the component of the total government debt in a country that is owed to lenders within the country
EXCHANGE RATE: is the rate at which one currency can be exchanged for another between nations or economic zones.
CHAPTER FIVE
Conclusion and Recommendation
5.1 Conclusion
Foreign debt is a phenomenon of global interest therefore; the significance of this paper may not be in doubt. First, the findings of this work will serve as useful reference materials to scholars for further research activity on the subject matter or related areas in future, thereby adding to the very limited literature on Nigeria’s debt issues. This could be in the area of providing new empirical evidence to the body of knowledge, or by either validating or invalidating the findings of previous studies. It is therefore expected that the entire academic class: researchers, lecturers and students would benefit from the empirical and methodological postulations of the paper. Second, it is hoped that the findings of the study could help shape the policy frame work of the Federal Government of Nigeria(FGN) as far as formulating and implementing robust economic policies and programmes are concerned. It could further provide direction required to tackle persistent naughty debt challenges in order to witness desired economic turnaround in Nigeria. It is worthy of mention that the dwindling revenue profile of the FGN may remain a night mare to our political leaders thereby making foreign loan the only saving grace in funding myriad of government projects.
However, this study cannot claim to have taken into account holistically the equilibrium analysis in the area of foreign debt. It was rather restricted to partial equilibrium analysis of the topic investigated. Among other limitations, this includes inability to improve on the currency of relevant data generated for analysis.
Based on the analysis carried out on the secondary data sourced from the Central Bank of Nigeria, it is observed, in the context of this study, all the explanatory variables examined, have a statistically significant effect on exchange rate within the period of observation. However, debt service payment has the strongest effect on exchange rate fluctuation in Nigeria.
5.2 Recommendation
The following recommendations are made based on findings of this study:
- In order to achieve the goal of a realistic exchange rate in Nigeria, foreign borrowing should be geared towards increased production in the non-oil sectors, e.g. agriculture and solid minerals, less imports and increased exports. This is intended to strengthen the value of the naira in relation to other major international currencies like US dollar, euro, etc.
- Government must adopt fiscal adjustment programme that can improve its revenue base by intensifying productive export activities in the non-oil sector. The will engender favorable trade balance, strengthen and stabilize the exchange rate in favor of the naira.
- Policy makers should ensure that borrowed funds are deployed to cardinal sectors of the economy such as agriculture and manufacturing. Stepping up these activities could lead to optimal harnessing of productive resources to boost economic development of the country.
- In order to use foreign debt to maximize the productive potential of our country, and indeed other highly indebted jurisdictions, fiscal prudence and great sense of responsibility in managing public funds should be the ethical standard of these countries leadership.
- It is also recommended that external debt, where and when necessary, should be directed towards only productive economic activities, which can generate enough returns to upset the debt servicing and principal.
