The National Effects of Exchange Rate Changes on Foreign Debt Service in Nigeria

The National Effects of Exchange Rate Changes on Foreign Debt Service in Nigeria

EVOLUTION OF NIGERIAN’S EXCHANGE RATE POLICY   

Exchange rate policy because necessary when it was discovered that it is a very significant instrument for the Management of macro-economic problems in Nigeria. Frequently, it has been applied in the past to pressure the value of the Naira, maintain a comfortable external reserve position and ensure prices stability and above all determined the price of one currency to another.

The use of exchange rate is determined by the prevailing condition of the economy at any given period and sometimes, in response to the changing exchange rate polices to the rest of the world. To reduce the looming problems of high incidences of foreign currency to the naira exchange quotations, it was agreed in 1985 that a one-currency intervention system be adopted. In this system, the naira exchange rate was quoted against a single intervention currency, the US Dollar. Although this policy worked to some extent during the period but it had the disadvantages of making the Naira to be tied to the fortunes of the dollar i.e. to sink with the dollar in the international foreign Exchange market (IFEM).

Due to fluctuations in the exchange rate, the central Bank had to deregulate the naira exchange system on 5th March 1992 by depreciating the Naira exchange rate at the parallel rate, which was considered the more appropriate indicator of the market perception of the value of the Naira and other currencies. The official exchange rate was suited from N10.56 to N18.00- $1.00 but when the fixed exchange rate system was introduced in 1994 to stabilize and shorten the value of the naira, it was pegged at N22.00 to $1.00.

EXCHANGE RATE REGIMES

All the regimes of exchange rate have aimed at attaining realistic and sustainable exchange rates in the world economy. Choices exist rates either in the context of a system of independence floating or through the adoption of an external standard whereby the domestic currency is standard whereby the domestic currency is pegged to a single intervention currency or to a self-selection basked at currencies. Independent floating could be in either the “Tree” or “Clean” from, or the “deity” or “deity’ or “ managed” from. Clean floating means that the force of demand and supply are left entirely to determine the exchange rate without official intervention in foreign exchange market official intervention in foreign exchange rate fluctuation and correct for the influence of seasonal and other temporary factors.

SOURCES OF NIGRIA’S EXTERNAL BORROWING

Nigeria as a debt Nation has borrowed externally from various sources which confluents; Parish club, contractor Finance, Bilateral agreements (giving rate to bilateral loan), the international monitory fund (IMF), the World Bank groups, internal capital market, African development Bank (ADB) etc.adjustments to the poorer developing  countries under it, loan were granted to member nations to solve their balances of payment problems and sponsor other macro-economics  and structural  Adjustment programmes. The SAF was created with special Drawing Rights of 2.7 billion of resources, which come fund. Their grace period. Nigeria as a seek country in terms of foreign debt have carried out intensive campaign for debt cancellations but parish club has harkened to this on 30, June 2005 by grant 60% debt relief to Nigerian Government

NIGERIA’S EXTERNAL DEBT SERVICING

This shows various attempt made by Nigeria to pay interest and amortization charge due for the borrowed sum over the years. When the government incurs c larger debt through continual net borrowing, the interest Garages on naturally must grow, provided that the interest rate is not falling.

 

From the indication of the Fiscal years budget, Nigeria has set aside the sum of $3 billion for debt services. A peculiar feature of Nigeria’s external (Foreign debt is this general tendency to rise over time, and this had to me matched with corresponding increase in debt service payment. As at 1980, foreign debt service payment amounted to US Dollar 153 million, 1986, I t raised a t this was the accumulation of debt service payment arrears amounting to $14.189 billion at the end of 1997. Debt service obligation due for 1998 was $3.61 billions but only 1.7 billion was provided for debt servicing. In the year 1999 a total of US Dollar 1.5 billion was provided for external debt service payment in 2000, the amount for debt service was &1.74. 3m at the official exchange rate of N105.00 – US $1.00. Between 2003 to 2005, the debt servicing amounted $ 6 billion but only $ 3 billion was provided in the budget .

FOREIGN DEBT MANAGEMENT

Going by the words of a one time central Bank Governor A. Ahmed, “External debt management is a conscious and carefully planned schedule of the acquisition, devolvement and retirement of loans acquired either for developmental proposes or to support the balance of payments. It incorporates estimates of foreign exchange earnings sources of finance; the projected retunes form the investment and the repayment schedule.

However, in 1988, Nigeria made following policy objectives as on how to manage external debt (a) to outline strategies for increasing foreign exchange earnings thereby reducing the need for external borrowings, (b) to set out the criteria for borrowing form foreign source and determine the type of project for which external loan may be obtained, (c) to out-line the mechanism for servicing external debts of the public and private sectors, (d) to outline the roles and responsibilities of the various organs of the federal and state g government as well as the private sector in the management of foreign debt.

Efforts made recently by the federal government to reduce foreign debts includes, Debt rescheduling, this involves changing the maturity structure of debt. Uinterese payments are usually spread over a longer period until debt is finally liquidated.

Debt-Buy-Back, which implies the offer of a substantial discount to pay off an existing debt. This type of arrangement was concluded in February 1992 when Nigeria bought US $ 3.395 billion commercial debt due to the London club at 60% discount. In other words, Nigeria paid US $ 1.352 billion to liquate or buy-back the commercial debt. From the recent 60% debt relief granted to Nigeria by Paris club, Nigeria has been asked to pay the remaining 40% through Buy-back arrangement.

Debt refinery, which involves the procurement of a new loan by a debtor to pay of an existing debt. This was done in 1983 July, and September the same year through short-term trade debt.

EVIDENCE

Research has it that Nigeria is not the only country faced with heavy debt burden in the world and as well, appropriate exchange rate policy enquired to service her debt.

For instance, Argentina is one of such countries fancied with a debt overhang of & 132 billion and experiencing an economic crisis since 1999. Her currency peso has been pegged to the les dollar i.e. I peso exchanges for US $ 1.00. This exchange rate policy prevailed for ten but at about the eight yea, the country stated facing serious economic crises as a result of reduction in exports and increased imports which resulted in massive borrowing in order to offset the trade arrears which was building up.

However, owing to the adverse effect of this on the nation debt service burden, the new administration decided to suspend all foreign debt service payment for some time. Devaluation of a nations currency raises the domestic price of imports and reduces the foreign price of exports of the country devaluing its currency in relation to the currency of another country. This would make imports dearer and exports cheaper and this helps to reduce the demand for imported goods and boost exportation (Ihingan 1997: 734).

Some other highly indebted poor countries include, Brazil and Mexico. They operate under a fixed exchange rate. Transactions are made through a fixed exchange rte that is determined by the monetary authorities. The policy of Fixed exchange rate was adopted in these countries to help exchange rate was adopted in these countries to help reduce other probabilities or tear of currency deprecation which would make it more difficult to service debt. The exchange rate system serves as an “anchor” and imposes a discipline on monetary authorities to follow responsible financial polices within the country.

The Fixed exchange rate policy helps to encourage them to borrow some international institution e.g. IMF, World Bank, IPA etc. An exchange rate has a pronounced effect on debt services in Nigeria and indeed in some HIPC’S. This is the case when exchange rates are allowed

to fluctuate freely or are flexible i.e. determined by either cause the foreign exchange to appreciate or depreciate.

It is partnent to note that in the year 1980, Nigeria spent a total of N110.4 million in servicing external debt. 1981 N 513.6m, 1982 N 77.2m, 1983 N1335.2m respectively 1984, it increased to N2640.5m. it decreased to N2502.2m in 1986. Increased again to N3574.6m in 21987. This was during the period of structural Adjustment programme decided on belt-tight tending measures which where to make the country more self reliant in the procurement of its industrial raw materials and the patronage of ho me made goods.

LITERATURE REVIEW

There are clear indications that a workable exchange rate system should be able to revive an economy and lead to the achievement of exchange rate stability. Also, realistic exchange rate system would bring about the attainment of balance of payment (Bop) other socio-economic developments.

A lot of conditions must be met in order to achieve designed Micro- economic balances. From time, government has made different restrictive demand management polices which is seen in form of monetary, fiscal policies and other restrictive measures imposed on importations and exportations of goods and services.

However, the rate of domestic productivity must be stepped up while a tight hold should be put on money supply so as to discourage. Unfavourable exchange rate which have made things difficult for our great country Nigeria. Exchange rate is the determinant factor of international transactions. A comprehensive research on the subject matter showed that highly indebted nations finds it difficult to progress despite their incessant efforts as a result of fluctuations on the exchange rates. Again most countries currency is regarded as Hard currencies i.e. they are internationally of great demand due to the fact that they are appreciable in nature.

Nigeria do not consider the exchange rate of these currencies with our Naira before going into debt contract with theses countries. Today, fro, the look of things, the high exchange rate of these hand currencies has made Nigeria debt to grow more than it could bear.

Another major f actor affecting the level of debt services payment in Nigeria at any given year are the level of external debt, the exchange rate and the interest rate attached on the outstanding debt which are almost the same with the principal. Sum.

On the theory of flexible exchange rate shomen (1961) emphasized that if Nigeria was to reduce its debts burden and attract new capital from abroad, it must convince its international partners via, the World Bank that it is committee to sound exchange rate policy.

Shomen was optimistic that a counties by covering her interest r ate would call for outflow of capital by way of borrowing which would rise productivity and cause export to rise and imports to fall drastically the reduction in import would equally reduce the debt of some heavily indebted countries including Nigeria.

Other authorities like sodesten (1994:450) had a country view to that of shomen.  He believes that flexible exchange rates increase uncertainty for

 

traders both internally and externally and also has a hash effect on the volume of foreign trade which might eventually lead to depression and unwanted inflation. The control authorities must determine the total amount of foreign exchange to be allotted to the main categories of external payments so as to reduce its national effects in the country.

 

Obi (1991:134) stated that, in a situation where the intervention currencies are floating independtly given differential rates of inflation at home and aboard resulting from the pursuit of differing national policies, deviations of the real effective exchange rate from some appropriate standards can be expected to occur form time to time. These deviations on the effective exchange rate gives rise to in balances in the external payment position of the country. We also expect t ha t the USD dollar exchange values as against Naira would influence the level of debt services.

Empirical studies reviles that although the stroke of external debt reduce from $33.36 billion in 1992 to $27.566 in 1993, The debt- servicing obligation in naira increase by about 70% (Orewa 1997). The depreciation of   a nation’s exchange rate is as a result of its deficits, however, this will increase the debt service payment in domestic currency.

In addition, Komoloape (1996) streased that the objective of the exchange rate policy is derined from the overall objective of macro-economic management to achieve internal balance and external balance in the medium term. In the case o external debt the state has to have the necessary foreign exchange at its disposal for its debt services payments; Economist and other potential finance officers are of the view that devaluation aggravates the domestic currency burden obligations because of its deepening effects on the nation.

Kene (1996) noted that the debt service burden grew faster partly because of the further increase, but largely because of policies of exchange rate derives we know that the impotence of exchange rate derives from the fact that it made it possible for international payments, debt service payment borrowing etc. Again appropriate exchange rate polices can work through various channels to effect increases in the allocations to meet external debt and other foreign currency payments. …………………………………………………………

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  This article was extracted from a Project Research Work Topic

THE NATIONAL EFFECTS OF EXCHANGE RATE CHANGES ON FOREIGN DEBT SERVICE IN NIGERIA

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The National Effects of Exchange Rate Changes on Foreign Debt Service in Nigeria

One Comment on “The National Effects of Exchange Rate Changes on Foreign Debt Service in Nigeria”

  1. i want to know the name of the author and the year of publication please!

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