RISING EXTERNAL DEBT AND EXCHANGE RATE: EMPIRICAL EVIDENCE FROM NIGERIA

Abstract

The fluctuating exchange rate and massive debt burden of Nigeria necessitates a thorough investigation of trends in her foreign debt levels, its underlying causes, and implications for economic growth. This study, therefore, investigated the impact of rising external debt on the exchange rate in Nigeria with annual data from 1980 to 2021. The motivation for this study was premised on inculcating government spending and inflation rate into the traditional analysis of exchange rate volatility in Nigeria using data sourced from CBN statistical bulletin (2020), DMO (2020), and WDI (2021). The data obtained were analyzed using the Augmented Dickey-Fuller (ADF) unit root test, Autoregressive Distributed Lag (ARDL) technique, and the stability and diagnostic test in the analysis. Based on the outcomes of the preliminary test analysis, the results show that external debt has a negative but insignificant effect on the exchange rate in Nigeria. Also, external debt has a positive and significant effect on the inflation rate in Nigeria. In light of these findings, the study concluded and recommended that the Nigerian government and/ or Central Bank of Nigeria should ensure that all borrowed funds are effectively channelled into viable projects that will yield returns to service the debts as well as pay up the debt at maturity, which puts pressure on the foreign exchange market in the short term and consequently results in exchange rate fluctuations in terms of the depreciation of the naira in the country.
 Keywords: External debt stock, Debt service payment, Inflation rate, Exchange rate, Nigeria.
 JEL Classifications: E31, 34, 43, F31.