PUBLIC DEBT DYNAMICS AND EXCHANGE RATE IN NIGERIA

Abstract

In light of the persistent exchange rate depreciation and growing public debt in Nigeria over the last years, this study examined the dynamics between public debt and exchange rate in Nigeria. The study objective was to look at how external and domestic debts affect exchange rate in Nigeria. Using secondary data analysed through times series analysis with data for 43 years (1981-2023), the ARDL cointegration test was used because the data were composed of I(0) and I(1) variables. The result showed that there is no long-run relationship between public debts and exchange rate. However, there was evidence of a structural break, which then require running a pre and post-structural break analysis. External debt showed to reduce exchange rate pre-structural break, but it was insignificant. After structural break, external debt became positively significant on increasing the exchange rate. Domestic debt shows a positive relationship with exchange rate pre and post structural break. While it was insignificant pre 1999, it became significant after 1999. Debt servicing positively add to increasing exchange rate pre and post structural break but was only significant pre-structural break. Foreign reserve similar to debt servicing also have a positive relationship with exchange rate pre and post-structural break but only significant after the structural break. Using the granger causality test, there was no causation between public debts and exchange rate. Based on the research findings, the study recommends that external debts should be utilised for capital expenditures rather than recurrent expenditures to enhance future economic returns and the productive capacity of the economy. This recommendation is crucial due to the significant burden on Nigeria's reserves from the country's reliance on imports, which contributes to high exchange rates.