Domestic Debt and Exchange Rate Stability in Nigeria (1980 - 2021)

Abstract

This study investigated the relationship between domestic debt and exchange rate stability in Nigeria using data for the period 1981 to 2021. Domestic debt was disaggregated into treasury bills (TBILLS), treasury bonds (TBONDS) and Federal Government bonds (FGNB) as well as other sources of debt (OTHERS). Exchange rate stability was proxied by Nigerian naira/US dollar exchange rate. Data was collected from the Central Bank of Nigeria Statistical Bulletin 2021 and analyzed using a combination of Johansen cointegration, granger causality and co- integrating regression adopting the fully modified ordinary least square (FMOLS) technique. The findings showed that there is no long-run relationship between domestic debt and exchange rate stability. Also, TBILLS, TBONDS and OTHERS positively and significantly affect exchange stability in the short run at 5% level of significance while FGNB has a positive but insignificant short run relationship with exchange rate stability at 5% level of significance. It was also revealed that domestic debt variables (TBILLS, TBONDS and FGNB as well as OTHERS), does not granger cause exchange rate stability at the 5% level of significance. The study concluded that domestic debt significantly affects exchange rate stability in the short run but domestic debt has no long-run relationship with exchange rate stability, and there is no causal relationship between domestic debt and exchange rate stability. The study recommended among others that domestic debt variables are actually contracted using short term instruments. Thus, they should be used to maximally ensure short- and medium-term stability in exchanges.