TABLE
OF CONTENT
Title Page ……………………………………………………………..li
Certification ……………………………………………………………..ii
Dedication ………………………………………………………………iii
Acknowledgment……………………………………………………….iv
Abstract …………………………………………………………………v
Table of content …………………………………………………………iv
CHAPTER ONE
INTNRODUCTION
1.1
Background of the study
1.2
Statement of problem
1.3
Objective of the study
1.4
Research questions
1.5
Formulation of hypotheses
1.6
Scope band limitations of the study
1.7
Definition of terms
References
CHAPTER TWO
2.1
Literature review
2.2
Evolution of
Nigeria’s exchange rate policy
2.3
Exchange rate regimes
2.4
Commerce of Nigeria’s external borrowing
2.5
Nigeria’s external debt servicing
2.6
Foreign debt management
2.7
Evidence
References
CHAPTER THREE
RESEARCH METHOLOLOGY
3.1
Research design
3.2
Source of data
3.3
Selection of variables
3.4
Estimation procedure
3.5
Methods for evaluation of results
Reference
CHAPTER FOUR
4.1
Presentation of data
4.2
Data evaluation estimation and testing of hypotheses
4.3
Interpretation of data
References
CHAPTER FIVE
5.0 major
findings summary and conclusions
5.1
Major findings
5.2
Recommendations
5.3
Summary
5.4
Conclusions
Bibliography
CHAPTER ONE
INTRODUCTION
1.1 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
1.2
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. 1993). In 1999, $ 1.5 billion was budgeted
for external debt service.
2.2 EVOLUTION OF
NIGERIAN’S EXCHANGE RARTE POLICY Exchange
rate policy because necessary when it was discovered
that it is a very significant instrument for the
Management of macro-economic problems in Nigeria. Frequently, it has been
applied in the past to pressure the value of the Naira, maintain a comfortable
external reserve position and ensure prices stability and above all determined
the price of one currency to another.
The use of
exchange rate is determined by the prevailing condition of the economy at any
given period and sometimes, in response to the changing exchange rate polices
to the rest of the world. To reduce the looming problems of high incidences of
foreign currency to the naira exchange quotations, it was agreed in 1985 that a
one-currency intervention system be adopted. In this system, the naira exchange
rate was quoted against a single intervention currency, the US Dollar. Although
this policy worked to some extent during the period but it had the
disadvantages of making the Naira to be tied to the fortunes of the dollar i.e.
to sink with the dollar in the international foreign Exchange market (IFEM).
Due to
fluctuations in the exchange rate, the central Bank had to deregulate the naira
exchange system on 5th March 1992 by depreciating the Naira exchange
rate at the parallel rate, which was considered the more appropriate indicator
of the market perception of the value of the
Naira and other currencies. The official exchange rate was
suited from N10.56 to N18.00- $1.00 but when the fixed exchange rate system was
introduced in 1994 to stabilize and shorten the value of the naira, it was
pegged at N22.00 to $1.00.
2.3 EXCHANGE RATE
REGIMES
All the
regimes of exchange rate has aimed at attaining realistic and sustainable
exchange rates in the world economy. Choices exist rates either in the context
of a system of independence floating or through the adoption of an external
standard whereby the domestic currency is standard whereby the domestic
currency is pegged to a single intervention currency or to a self-selection
basked at currencies.
Independent
floating could be in either the “Tree” or “Clean” from, or the “deity” or
“deity’ or “ managed” from. Clean floating means that the force of demand and
supply are left entirely to determine the exchange rate without official
intervention in foreign exchange market official intervention in foreign
exchange rate fluctuation and correct for the influence of seasonal and other
temporary factors.
2.4 SOURCES OF
NIGRIA’S EXTERNAL BORROWING
Nigeria as
a debt Nation has borrowed externally from various sources which confluents;
Parish club, contractor Finance, Bilateral agreements (giving rate to bilateral
loan), the international monitory fund (IMF), the World Bank groups, internal
capital market, African development Bank (ADB) etc.adjustments to the poorer
developing countries under it, loan were
granted to member nations to solve their balances of payment problems and
sponsor other macro-economics and
structural Adjustment programmes. The
SAF was created with special Drawing Rights of 2.7 billion of resources, which
come fund. Their grace period. Nigeria as a seek country in terms of foreign
debt have carried out intensive campaign for debt cancellations but parish club
has harkened to this on 30, June 2005 by grant 60% debt relief to Nigerian
Government
2.6
NIGERIA’S EXTERNAL DEBT SERVICING
This shows various attempt made by Nigeria to pay interest
and amortization charge due for the borrowed sum over the years. When the
government incurs c larger debt through continual net borrowing, the interest
Garages on naturally must grow, provided that the interest rate is not falling.
From the indication of the Fiscal years budget, Nigeria
has set aside the sum of $3 billion for debt services. A peculiar feature of
Nigeria’s external (Foreign debt is this general tendency to rise over time,
and this had to me matched with corresponding increase in debt service payment.
As at 1980, foreign debt service payment amounted to US Dollar 153 million, 1986,
I t raised a t this was the accumulation of debt service payment arrears
amounting to $14.189 billion at the end of 1997. Debt service obligation due
for 1998 was $3.61 billions but only 1.7 billion was provided for debt
servicing. In the year 1999 a total of US Dollar 1.5 billion was provided for
external debt service payment in 2000, the amount for debt service was
&1.74. 3m at the official exchange rate of N105.00 – US $1.00. Between 2003
to 2005, the debt servicing amounted $ 6 billion but only $ 3 billion was
provided in the budget .
2.6 FOREIGN
DEBT MANAGEMENT
Going by the words of a one time central Bank Governor A.
Ahmed, “External debt management is a conscious and carefully planned schedule
of the acquisition, devolvement and retirement of loans acquired either for
developmental proposes or to support the balance of payments. It incorporates
estimates of foreign exchange earnings sources of finance; the projected
retunes form the investment and the repayment schedule.
However, in
1988, Nigeria made following policy objectives as on how to manage external
debt (a) to outline strategies for increasing foreign exchange earnings thereby
reducing the need for external borrowings, (b) to set out the criteria for
borrowing form foreign source and determine the type of project for which
external loan may be obtained, (c) to out-line the mechanism for servicing
external debts of the public and private sectors, (d) to outline the roles and
responsibilities of the various organs of the federal and state g government as
well as the
private sector in the management of foreign debt.
Efforts
made recently by the federal government to reduce foreign debts includes, Debt
rescheduling, this involves changing the maturity structure of debt. Uinterese
payments are usually spread over a longer period until debt is finally
liquidated.
Debt-Buy-Back, which implies the offer of a substantial
discount to pay off an existing debt. This type of arrangement was concluded in
February 1992 when Nigeria bought US $ 3.395 billion commercial debt due to the
London club at 60% discount. In other words, Nigeria paid US $ 1.352 billion to
liquate or buy-back the commercial debt. From the recent 60%
debt relief granted to Nigeria by Paris club, Nigeria has
been asked to pay the remaining 40% through Buy-back arrangement.
Debt
refinery, which involves the procurement of a new loan by a debtor to pay of an
existing debt. This was done in 1983 July, and September the same year through
short-term trade debt.
2.7 EVIDENCE
Research has it that Nigeria is not the only country faced
with heavy debt burden in the world and as well, appropriate exchange rate
policy enquired to service her debt.
For
instance, Argentina is one of such countries fancied with a debt overhang of
& 132 billion and experiencing an economic crisis since 1999. Her currency
peso has been pegged to the les dollar i.e. I peso exchanges for US $ 1.00.
This exchange rate policy prevailed for ten but at about the eight yea, the
country stated facing serious economic crises as a result of reduction in
exports and increased imports which resulted in massive borrowing in order to
offset the trade arrears which was building up.
However,
owing to the adverse effect of this on the nation debt service burden, the new
administration decided to suspend all foreign
debt service payment for some time. Devaluation of a
nations currency raises the domestic price of imports and reduces the foreign
price of exports of the country devaluing its currency in relation to the
currency of another country. This would make imports dearer and exports cheaper
and this helps to reduce the demand for imported goods and boost exportation
(Ihingan 1997: 734).
Some other
highly indebted poor countries include, Brazil and Mexico. They operate under a
fixed exchange rate. Transactions are made through a fixed exchange rte that is
determined by the monetary authorities. The policy of Fixed exchange rate was
adopted in these countries to help exchange rate was adopted in these countries
to help reduce other probabilities or tear of currency deprecation which would
make it more difficult to service debt. The exchange rate system serves as an
“anchor” and imposes a discipline on monetary authorities to follow responsible
financial polices within the country.
The Fixed
exchange rate policy helps to encourage them to borrow some international
institution e.g. IMF, World Bank, IPA etc. An exchange rate has a pronounced
effect on debt services in Nigeria and indeed in some HIPC’S. This is the case
when exchange rates are allowed
to fluctuate freely or are flexible i.e. determined by
either cause the foreign exchange to appreciate or depreciate.
It is
partnent to note that in the year 1980, Nigeria spent a total of N110.4 million
in servicing external debt. 1981 N
513.6m, 1982 N 77.2m, 1983 N1335.2m
respectively 1984, it increased to N2640.5m. it decreased to N2502.2m in 1986.
Increased again to N3574.6m in 21987. This was during the period of structural
Adjustment programme decided on belt-tight tending measures which where to make
the country more self reliant in the procurement of its industrial raw
materials and the patronage of ho me made goods.
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