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

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

INTRODUCTION

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

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. 2013). In 1999, $ 1.5 billion was budgeted for external debt service.

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