National Effects Of Exchange Rate Changes On Foreign Debt Service In Nigeria

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National Effects Of Exchange Rate Changes On Foreign Debt Service In Nigeria


Abstract


This Project is on the national effects of Exchange Rate changes on foreign debt services on Nigeria. It run over a time series of nine years and examines how fluctuations on exchange rate has made it difficult for the country’s debt services.

The method use in dreaming these affects is the ordinary least square method of regression Technique. The work shows critically the effects of exchange rate changes on debt services in Nigeria. Through the method used above, the reason for the increase in external debt over the years was discovered. Among them were fared imbalances, fund of Projects that are not feasible, fund of Projects that are not feasible et.

At the end, these factors were analyzed using the ordinary least square (OLS) regressing techniques whereby a linear model was formulated to analyze individual influences of exchange rate changes on some variables such as the debts service payment etc.

After these studies, the researcher recommends that a committee be set up to check excessive borrowings and ensure that borrowed funds are used for projects that initiated the borrowing only investments (project) that are capable of yielding more fund to the government should be pursed.

Also, the improve debt services in the country.

The amount of borrowing form outside country should be reduced and the government should learn to use its own resources i.e. borrow from wealthy individuals and private organs within the country.


Chapter One


Introduction

1.1 Background of the Study

By the year 1970’s and early 1980’s external debt obligation of Nigeria was very significant, but assumed crisis and disagreement in the late 1990’s.

However, external debt or internal debt obligations results from disagreements between the Fiscal operations of the government when the total expenditure exceeds current revenue for a govern fiscal year. Whenever a county witnesses a budgetary gap, the nation can employ domestic or external borrowing to breach the budgetary gap.
Borrowing from external sources by the government constituted the external debt of the public sector and the government owned the obligation of debt servings through series of periodic repayment of interest and capital repayment of the debt.

From the proportion of the gross domestic product (GDP), the external debt outstanding rose, from and average of 7.5 between 1971 and1985 to 91.6 between 1986 and 1994 and it has continues to rise by heaps and bounds every year. The foreign exchange market to ensure reasonable stability. The major element of the deregulation was the re-introduction of the Autonomous foreign exchange market (AFEM). The AFEM is a channel for funding end- users requests for foreign exchange at market-determined rates. The CBN monitors development in the AFEM and take decisions when necessary to keep exchange rates within desired or targeted levels.

Originally, the Fixed exchange rate of $1.00 = N22.00 was retained for eligible public sector transactions including debt services payment and national priority projects.

The are-introduction of the usual exchange rate policy is 1995 brought about by the dismal performance of the 1994 re-regulation policy, especially as it regulated to non-oil exports. This new policy was aimed addressing the substantial depreciation of the Naira exchange rate in the parallel market and achieving rate in the parallel market and achieving efficient allocation and utilization of resources. The dual exchange rate was still obtainable until the end of 1998. While the official rate remained fixed at N21.996 to us $ 1.00 and earmarked for selected necessary government transactions The AFEM exchange rate was largely market – determined and the AFEM rate averaged about N83.80 to us $ 1.00 and latter showed a significant depreciation of about 3.1% to N85.54 to Us $ 1.00.
Since 1998 till date, there has been tremendous changes and fluctuations in the exchange rate of Naira to the Dollar. This has dealt a great blow to the debt service payment of Nigeria go about pleading for debt conciliation and debt forgiveness from the international bodies


1.2 Statement of Problem

This research is designed on the national effect exchange rate in Nigeria became an external debtor in 1958 when Us $ 28 million was contracted for railway construction. This debt however has fully been repaid.

From 1978 onwards, due to the oil glut, which exerted considerable pressure on government finances, it became expedient to borrow for balance of payments and support of project Financing in Nigeria.

This necessity led to the formulation of degree no. 30 of 1978 authorizing the federal government to raise external federal government to raise external loans up to maximum of N5billion.

Consequently, the First major borrowing of US $ 1 billion referred to as the “JUMBO LOAN” was borrowed from the international capital market (1cm) in 1978, increasing the total external debt stock to us $ 2. 2 billion By 1982, the total external debt stock was US 8 13. 1 billion in 1988 and by December 1991 it amounted to US 833.4 billion.
Consequently, these drastic since 1978 from concessionary loans from the intentional capital market and the decline in export earnings made debt servicing burdensome from the 1980’s. The collapse et oil price in 1981 have companioned the problems et an economy that had lost its edibility and led to serious external payments problems, other problems are domestic policy lapses which include

The unstable and unrealistic exchange rate policies have had serious effects on debt servicing, investment and international trade decisions. Thus, the problem of exchange rate policy to debt services payment is that it increases the debt service payment in arrears, and this results in foreign exchange outflow.

In 1992, 30% of the country’s annual foreign earnings was used to service the debt the cost of servicing the debt in 1993 was N94.57 billion which represents 84.36% of total expenditure outlay of the government of N112.1 billion (Guardian, Feb 3. 1993). In 1999, $ 1.5 billion was budgeted for external debt service.


1.3 Objectives of the Study

The primary objectives of this study is to examine the national effects of exchange rate changes on foreign debt service in Nigeria.

Specifically, the study seeks to:

  1. Examine the relationship between foreign debt services and exchange rate
  2. Examine the relationship between exchange rate and debt service ratio from
  3. Examine the relationship between exchange rate and debt service payment from

1.4 Research Question

The following questions guide this study:

  1. What is the relationship between foreign debt services and exchange rate?
  2. Examine the relationship between exchange rate and debt service ratio?
  3. Examine the relationship between exchange rate and debt service payment?

1.5 Research Hypotheses

The following null hypotheses are formulated and tested in this study:

  • H01: There is no relationship between foreign debt services and exchange rate
  • H02: There is no relationship between exchange rate and debt service ratio
  • H03: There is no relationship between exchange rate and debt service payment

1.6 Significance of the Study

This study will be of immense benefit to the government and its parastatal to come to the understanding of the negative effects of for foreign debts on the economy of the country and as well help them to work towards improving the country’s currency to help boost exchange rate of Nigeria currency with that of other countries.

This study will also add to existing literatures on this topic and serve as a reference material to scholars, researchers and students who may want to carry out further research on this topic or similar domain.


1.7 Scope of the Study

This study focuses on investigating the national effects of exchange rate changes on foreign debt service in Nigeria from 1994-2003.


1.8 Limitation of Study

The major factors that posed a challenge to the researcher while carrying out this study are; insufficient fund, limited time frame, inadequate materials and generation of data for analysis


1.9 Definition of Terms

Effect:

A change which is a result or consequence of an action or other cause.

Exchange Rate:

An exchange rate is the value of one nation’s currency versus the currency of another nation or economic zone.

Foreign Debt:

Is the total debt which the residents of a country owe to foreign creditors.


Chapter Five


Major Findings, Summary and Conclusions

5.1 Major Findings

  1. That constant flections of exchange rate has had serious consequences on the nations debt servicing such that the external debt service payment I Naira increased as a result of the depreciation of Naira exchange rate
  2. That the nation had not recouped from projects financed with borrowed finds and that the output of such projects sold domestically ran into problems of generation enough finds to service their debts.
  3. That the rapid increase in external debt of the country is caused by excessive borrowing, importation in excess of exportation as well as trade imbalance.
  4. That those who manages external borrowing funds are not judiciously utrtlizing them.
  5. That the amount or sum of money mapped out for debt servicing is too poor to curtail the debt owned by the nation.

5.2 Recommendations

Considering the findings above, they suggests that certain policy measures should be employed to solve the nations external debt problem (s) .

On the basis of these findings, the following sets of solutions are recommended.

  1. Nigerian government should set up high powered committee who would ensure that External borrowings are mainly utilized for projects that necessity the borrowing arrangement.
  2. THE External debt should be related to the foreign exchange earnings power and economic growth prospects of the nation. This would help in achieving reasonable level of domestic savings since our indigenes who operate foreign accounts would be discouraged to do so because of the better economy and stronger banks operating in the country.
  3. The committee form should equally ensure that there should be strict adherence to the CBN’s monetary policy guidelines by both the public and private sectors, As this would help to arrest the problem of excess borrowing for speculative purchases at foreign exchange.
  4. Nigeria should equally learn how to live or be contended with what she have. By this should not resort to borrowing immediately as if it is the only means of survival or the only way of sourcing fund
  5. Exchange rate which is the major cause of high debt service payment should be uniform among the nations wishing to borrow or lend to one another, but if there must be a difference, it should be an acceptable exchange rate to ensure that fluctuations of exchange rate is controlled.
  6. Nigeria should allocate certain tolerable portion of her annual foreign exchange earnings to debt service. This would enable the country to accommodate the creditors requirements without provoking adverse domestic fall-out

5.3 Summary

RESULT OF THE INVESTIGATION CARRIED OUT ON THE NATIONAL EFFECTS OF EXCHANGE RATE ON DEBT SRIVES PAYMENT IN Nigeria shows that external debt service payment had a positive relationship with exchange rate that is, they are closely and directly related. This means that debt service payments in Naira will increase as the Naira depreciates.

Basically, it is this effect that worsens the inflationary level of the economy of Nigeria.

Because of this effect, we have suggested that a committee should be constituted to ensure that external borrowings should only such borrowings, which their feasibilities has been approved.


5.4 Conclusion

To avoid the national effects of external debt on future Nigeria, the borrowed funds should be used to Finance new investment that yields a rate of return in excess of the interest and amortization charges on the borrowing. In this case, the borrowing pays higher real income for the country without forcing nurture bell tightening to repay the loan and keep up interest payment.

Finally, Exchange rate should not be neglected whenever the nations want to go into borrowing arrangement with any Nation.


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