EXCHANGE RATE AND EXTERNAL DEBT IN NIGERIA 1980-2017

CHAPETR ONE

INTRODUCTION 

1.1        Background of the study

1.2        Statement of problem

1.3        Objective of the study

1.4        Research Hypotheses

1.5        Significance of the study

1.6        Scope and limitation of the study

1.7       Definition of terms

1.8       Organization of the study

CHAPETR TWO

2.0   LITERATURE REVIEW

CHAPETR THREE

3.0        Research methodology

3.1    sources of data collection

3.3        Population of the study

3.4        Sampling and sampling distribution

3.5        Validation of research instrument

3.6        Method of data analysis

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

4.1 Introductions

4.2 Data analysis

CHAPTER FIVE

5.1 Introduction

5.2 Summary

5.3 Conclusion

5.4 Recommendation

Appendix

Abstract

The study examined foreign exchange management and the Nigeria economic growth from 1980 to 2017. The scope of the study is limited to Nigeria. The study investigated the impact of external debt on economic growth in Nigeria for the period 1980-2017. Data on external debt stock and external debt service was used to capture external debt burden. The study set out to test for both a long run and causal relationship between external debt and economic growth in Nigeria. The researcher put forth four research objective and hypotheses were tested with the aid of SPSS statistical package, appropriate interpretation was given to the data analyzed and a conclusion was drawn for the study.

CHAPTER ONE

                                        INTRODUCTION

1.1 Background of the study

Exchange rate is the price of one country’s currency expressed in terms of some other currency. It determines the relative prices of domestic and foreign goods, as well as the strength of external sector participation in the international trade. Exchange rate regime and interest rate remain important issues of discourse in the International finance as well as in developing nations, with more economies embracing trade liberalization as a requisite for economic growth (Obansa, Okoroafor, Aluko and Millicent, 2013). In Nigeria, exchange rate has changed within the time frame from regulated to deregulated regimes. Ewa, (2011) agreed that the exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom era and when agricultural products accounted for more than 70% of the nation’s gross domestic products (GDP). In 1986 when Federal government adopted Structural Adjustment Policy (SAP) the country moved from a peg regime to a flexible exchange rate regime where exchange rate is left completely to be determined by market forces but rather the prevailing system is the managed float whereby monetary authorities intervene periodically in the foreign exchange market in order to attain some strategic objectives (Mordi, 2006). This inconsistency in policies and lack of continuity in exchange rate policies aggregated unstable nature of the naira rate (Gbosi, 2005). Benson and Victor, (2012) and Aliyu, (2011) noted that despite various efforts by the government to maintain a stable exchange rate, the naira has depreciated throughout the 80’s to date.  Human wants are insatiable and the means or resources available for the satisfaction of wants are limited in their supply (Olukunmi, 2007). In individual and national lives, the above assertion is true. To meet national wants amidst limited resources, nations might resort to borrowing. Borrowing creates debt. Debt is the aggregate of all claims against the government held by the private sector of the economy or by foreigners, whether interest bearing or not less, any claim held by the government against private sectors and foreigners (Oyejide, Soyede and Kayode, 1985). Shortfall in domestic savings to finance productive activities compels nations to borrow (Ezeabasili, 2006 and Momodu, 2012). Debt could be from within a nation’s boarder (Internal) or from outside (External). External debt may be defined as debt owed to non-residents repayable in terms of foreign currency, food or service (World Bank, 2004). The effect of external debt on investment and economic growth of a country has remained questionable for policy makers and academics alike. There has not  been consensus on the impact of external debt on economic growth. External debt may be used to stimulate the economy but whenever a nation accumulates substantial debt, a reasonable proportion of public expenditure and foreign exchange earnings will be absorbed by debt servicing and repayment with heavy opportunity costs (Albert, Brain and Palitha, 2005). Excessive external debt constitutes obstacle to sustainable economic growth and poverty reduction (Maghyere and Hashemite, 2003; Sanusi, 2003 and Berensmann, 2004). Those who argue that external debt has positive effect on the economy do that from the stand point that external debt will increase capital inflow and when used for productive ventures, accelerates the pace of economic growth. The capital inflow may be associated with managerial know-how, technology, technical expertise as well as access to foreign market. The above is in agreement with the views of the Keynesian Theory of capital accumulation as a catalyst for economic growth. However, external debt may have negative impact on investment through debt overhang and credit-rationing problem (Eduardo, 1989). Debt overhang phenomenon is where substantial resources are used for debt servicing such that it stifles economic growth. It becomes a tax on domestic production such that the amount spent hampers meaningful economic growth activities as it reduces resources available to government to implement growth oriented economic policies. External debt is a major source of public receipts and financing capital accumulation in any economy (Adepoju et al, 2007). It is a medium used by countries to bridge their deficits and carry out economic projects that are able to increase the standard of living of the citizenry and promote sustainable growth and development. Hameed, Ashraf and Chaudary (2008) stated that external borrowing ought to accelerate economic growth especially when domestic financing is inadequate. External debt also improves total factor productivity through an increase in output which in turn enhances Gross Domestic product (GDP) growth of a nation.  The exchange rate is the rate at which one currency is exchanged for another. It is the price of one currency in terms of another currency ( Jhingan, 2005). Exchange rate is the price of one unit of the foreign currency in terms of the domestic currency. The debate over what determines the choice of exchange rate regimes has continued unabated over some decades now. Friedman (1953) argued that in the presence of sticky prices, floating rates would provide better insulation from foreign shocks by allowing relative prices to adjust faster. His popular support for floating exchange rate stipulates that in the long run the exchange rate system does not have significant real consequences. His reasoning is that the exchange rate system is ultimately a choice of monetary regimes. In the end, monetary policy does not matter for real quantities, but in the short run it does. While Mundell’s (1963) posits that in a world of capital mobility, optimal choice of exchange rate regime should depend on the type of shocks hitting an economy: real shocks would call for a floating exchange rate, whereas monetary shocks would call for a fixed exchange rate.

1.2 STATEMENT OF THE PROBLEM

Foreign exchange is said to be an important element in the economic growth and development of a developing nation. Foreign exchange policies influence the economic activities and to a large extent, dictate the direction of the macroeconomic variables in the country. The mechanism of exchange rate determination are different systems of managing the exchange rate of a nation’s currency in terms of other currencies and this should be properly done in a way that will bring about efficient allocation of scarce resources so as to achieve growth and development. Jhingan (2005) posited that to maintain both internal and external balance, a country must control its exchange rate. “Huge external debt does not necessarily imply a slow economic growth; it is a nation’s inability to meet its debt service payments fueled by inadequate knowledge on the nature, structure and magnitude of the debt in question” (Were, 2011). It is no exaggeration that this is the major challenge faced by the Nigerian economy. The inability of the Nigerian economy to effectively meet its debt servicing requirements has exposed the nation to a high debt service burden. The resultant effect of this debt service burden creates additional problems for the nation particularly the increasing fiscal deficit which is driven by higher levels of debt servicing. This poses a grave threat to the economy as a large chunk of the nation’s hard earned revenue is being eaten up. Nigeria’s external debt outstanding stood at US$28.35 million in 2001 which was about 59.4% of GDP from US$8.5 million in 1980 which was about 14.6% of GDP (WDI 2013). The debt crisis reached its maximum in 2003 when US$2.3 billion was transferred to service Nigeria’s external debt. It is in view of this that this study intend to examine exchange rate and external debt in Nigeria.

1.3 OBJECTIVE OF THE STUDY

The main objective of this study is to examine the examine exchange rate and external debt in Nigeria from 1980-2017, the specific objectives are;

1. i) To examine the effect of external debt on the economic growth of Nigeria within the study period 1980-2017
2. ii) To ascertain if there is any significant relationship between exchange rate and economic growth in Nigeria

iii) To ascertain if there is any impact of external debt on the gross domestic product GDP of Nigeria between 1980-2017

1. iv) To examine the role of government policies in regulating exchange rate fluctuation

1.4 RESEARCH QUESTION

The following research questions were formulated by the researcher to aid the completion of the study;

1. i) Is there any effect of external debt on the economic growth of Nigeria within the study period 1980-2017?
2. ii) Is there any significant relationship between exchange rate and economic growth in Nigeria?

iii) Does external debt has any impact on the gross domestic product GDP of Nigeria between 1980-2017?

1. iv) Does government policies play any role in regulating exchange rate fluctuation?

1.5 RESEARCH HYPOTHESES

The following research hypotheses were formulated by the researcher to aid the completion of the study;

H₀: There is no significant relationship between exchange rate and economic growth in Nigeria

H₁: There is a significant relationship between exchange rate and economic growth in Nigeria

H₀: Government policies do not play any role in regulating exchange rate fluctuation

H₂: Government policies do play a role in regulating exchange rate fluctuation

1.6 SIGNIFICANCE OF THE STUDY

The burden of External debt has been a matter of great concern to the Government of Nigeria and the nation as a whole which has resulted in embarking upon drastic actions like dividing the nation’s scarce resources in servicing of debts annually. This action has thus led to disinvestment in the economy, and as a result a fall in the domestic savings and the overall rate of growth. This study seeks to investigate the direct impact of external debt burden on economic growth in Nigeria by finding a long run and causal relationship between external debt and economic growth. This study is significant as its findings will provide a basis which will aid policy makers in proffering polices aimed at managing the debt crisis situation in Nigeria.

This study is imperative given the recent efforts by monetary authorities in Nigeria to revive the economy through the financial sector reform which among other things sought to maintain stability in exchange rate. Consequently, this study will assist the nation’s economic planners in their economic development planning. Specifically, the outcome of this study would provide a basic understanding of the dynamics of exchange rate and the key macroeconomic variables in Nigeria and it also contribute to knowledge.

1.7 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers exchange rate and external debt in Nigeria 1980-2017. In the course of the study, there are some factors that limit the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Organizational privacy: Limited Access to the selected CBN and national bureau of statistics makes it difficult to get all the necessary and required information concerning the activities.

1.8 OPERATIONAL DEFINITION OF TERMS

Exchange rate

An exchange rate is the value of one nation’s currency versus the currency of another nation or economic zone. For example, how many U.S. dollars does it take to buy one euro

External debt

External loan is the total debt a country owes to foreign creditors; its complement is internal debt which is owed to domestic lenders. The debtors can be the government, corporations or citizens of that country.

Economic growth

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.

GDP

Gross domestic product is a monetary measure of the market value of all the final goods and services produced in a specific time period, often annually

1.9 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study

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