Impact of Public External Debt on Exchange Rate in Nigeria

Abstract

With continuous increase in public expenditures, and low capital formation in many developing countries, many governments have resorted 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. 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.

Keywords: Public Debt, Foreign reserve, Exchange rate, Expenditure