Impact of External Debt on Nigeria’s Foreign Reserve Portfolios

Abstract

This study examines the impact of external debt and external debt servicing on the international reserves of Nigeria. The theoretical underpinning of the study was anchored on dual gap theory and the self-insurance theory of external reserves. The after effect research design was adopted to examine the components of the study in retrospect. Historical data spanning 1981 to 2018 was collated from the World Development indicators and analyzed using the error correction mechanism as the unit of analyses and estimated employing the least square technique. The empirical findings indicate that external debt stock exert a negative and statistically significant impact on Nigeria's foreign exchange reserve portfolios. It further emerged that external debt service payments exert a positive but statistically insignificant impact on the international reserves of Nigeria. The study concludes that external debt stock and external debt service payments has no significant impact on the international reserve portfolios of Nigeria. The study recommends that, the fiscal managers of Nigeria should exercise cushion in external borrowing in order to ensure that concomitant external debt service payments does not deplete the international reserves of the country.

Effect of External Debt on External Reserves in Nigeria

“…The effect of Nigeria's external debt and external debt servicing on the country's foreign reserves was studied by Peter and Dumani (2020). The dual gap theory and the self-insurance idea of external reserves served as the study's theoretical pillars.…”

“…This suggests that most government revenue in developing countries-tax revenue, crude oil proceeds, and proceeds from other natural endowments-is insufficient to promote sustainable growth. Developing nations engage in deficit spending to fill the funding gap for public expenditures due to tax shortfalls and the need to boost investment in public works (Peter & Dumani, 2020). This deficit spending is financed through domestic and external financial markets.…”

“…Most of the previous studies carried out like Saheed et al (2015); Peter and Dumani (2020); and Jibrin and Aliyu (2020) conducted on external reserves were carried out on reserve accumulation and utilization, the demand for international reserves, the impact of reserve holding, implications for investment, inflation, and so on, without assessing the plausible interplay between external debt and external reserve in Nigeria. While some other studies carried out in Nigeria like Asogwa et al (2018); Ndubuisi (2017); Nwanne and Eze (2015); Anidiobu and Okolie (2016) have made considerable efforts in the extant literature on studies that focused on external debt and external reserve using mostly Ordinary Least Squares regression after running cointegration.…”

Effect of Debt Servicing on External Reserves in Nigeria

“…Some studies have discussed debt servicing and external reserves, like Osadume and Ovuokeroye (2021) who examined external debt, external reserves, debt service costs and economic growth: Implications for the Nigerian transport sector using ordinary least square, granger causality and engle-granger cointegration. Peter and Dumani (2020) studied the impact of external debt on Nigeria's foreign reserve portfolios using an error correction mechanism and least square technique. However, both Osadume and Ovuokeroye (2021) and Peter and Dumani (2020) used ordinary least squares to test their hypotheses which did not account for the problem of endogeneity and serial correlation which are associated with time series data.…”

“…Peter and Dumani (2020) studied the impact of external debt on Nigeria's foreign reserve portfolios using an error correction mechanism and least square technique. However, both Osadume and Ovuokeroye (2021) and Peter and Dumani (2020) used ordinary least squares to test their hypotheses which did not account for the problem of endogeneity and serial correlation which are associated with time series data. Therefore, this study used Fully Modified Ordinary Least Squares (FMOLS) estimation to estimate the relationship between debt servicing and external reserves after checking for cointegration among variables.…”