Currency Depreciation Shocks and Sovereign Debt Sustainability: Empirical Insights from Nigeria.

Abstract:

Nigeria's external debt over the years has been relatively high, and there has not been a favorable exchange rate recently. This study examined the impact of the exchange rate on sovereign debt sustainability in Nigeria using the Autoregressive Distributed Lag (ARDL) estimation technique. Time series data on an annual basis were used on selected variables: exchange rate, external debt, government expenditure, foreign reserve, external debt servicing, interest rate, and inflation. The results from the long-run and short-run estimation revealed that the exchange rate and government expenditure had a direct and significant impact on external debt in Nigeria. Also, the inflation rate had a negative and significant impact on external debt in Nigeria during the period of study. The result of the correct ECM revealed the adjustment speed in the face of disequilibrium within the period. The study therefore advocates for strict economic policies with emphasis on stabilization of the naira vis-à-vis major trading partners’ currencies. This is because the increase in the country's exchange rate consequently increases external debt accumulation and its burden.