National Effects Of Exchange Rate Changes On Foreign Debt Service

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.