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Nigeria is confronted with the issue of limited capital and has to resort to foreign debt in order to augment domestic savings, balance of payment deficits, and shortfall in revenue which induce continuous raise in the debt stock at an alarming rate. In the light of this, this study assesses the impact of public debt on external reserve in Nigeria. The objectives of this study include the assessment of the trends and relationship between public debt and external reserve in Nigeria, using the Johansen cointegration and FMOLS technique on the secondary data from 1981 to 2013. The result revealed that public debt has a positive and significant effect on external reserve stock in the long run suggesting that the nation’s debt crisis can be attributed to both exogenous and endogenous factors such as the nature of the economy, economic policies, high dependence on oil, and swindling foreign exchange receipt. This study recommends that the federal government should employ more superior method to negotiate for fixed interest payment and varying amortization schemes, as well as seek multiyear rescheduling rather than year by year basis.

Debt has no precisely fixed meaning but may be regarded essentially as that which a person or group of people legally owes another or an obligation that is enforceable by legal action to make payment for money owed to another [

On the other hand, external reserves consist of official public sector foreign assets that are readily available to and controlled by the monetary authorities, for direct financing and regulating of payment imbalances through intervention in the exchange markets [

Essentially, Obaseki [

Moreover, most of the previous studies conducted on external reserves were merely 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 public debt and external reserve of Nigeria. Thus, the role of public debt as a determinant of external reserve has been underemphasized; this study is aimed at filling the gap in this area.

Therefore, the main objectives of this paper are to examine the trends and relationship between public debt and external reserves in Nigeria as well as the statistical interactions between them.

Rollover risk faced by the government in an economy is a major reason for the theory of optimum reserves. This elementary model spreads to a dynamic structure to provide a theory for the rise in external reserves and the pattern of abrupt stops in developing economies as pointed by Hur and Kondo [

Similarly, final output and residual reserves are the only resources available to make final payments. The model suggests a condition which requires that the interim rollover policy is to roll over the loan if and only if rolling over yields a higher payment than calling the loan in the interim.

Furthermore, several studies have been conducted on both external reserve and public debt but there is a dearth of studies critically assessing the link between the two despite their huge importance. Akpan and Ala [

Alfaro and Kanczuk [

Zhou [

Guangqing [

Conclusively, these empirical reviews revealed different variables that may affect external reserve holdings of any nation but most of them did not capture the influence of public debt on external reserve holdings in any economy.

Trends of External Reserve and Public Debt of Nigeria (in US$ million). Source: CBN Annual Statistical Bulletin [

Also, the external reserve fell from about US$53 billion in 2008 to about US$32 billion in 2010 even when the crude oil price was over US$80 per barrel during this period [

This study employed econometric technique to assess the interplay between external reserve and public debt among other associated variables. The descriptive method consists of trend graph as shown in Figure

The theoretical framework employed is the theory of optimal reserves allocation which exists in an environment where governments face rollover risk in the form of debt rescheduling. This basic model extends to a dynamic framework to provide a theory for the increase in reserves and the pattern of sudden stops in emerging. It posits that while interim reserves, interim liquidation, and the interest rate are functions of the aggregate liquidity shock, the rollover policy is a function of both the aggregate state and the individual liquidity shock of an investor. A debt contract is resource feasible. In other words, initial reserves and invested capital cannot exceed the loan amount; and interim reserves and interim payments cannot exceed initial reserves and interim output. Obviously, the main friction here is that the government cannot lend the interim against the future output from the initial investment. Hence, liquidation and reserves are the only resources available to make interim payments. Similarly, final output and residual reserves are the only resources available to make final payments. The model suggests a condition which requires that the interim rollover policy is to roll over the loan if and only if rolling over yields a higher payment than calling the loan in the interim.

In an attempt to assess the relationship between government total borrowing and external reserves, this study takes a clue from the theory of optimal reserves allocation in analyzing this relationship; the first is external reserves usually denominated in foreign currencies and kept in banks in developed economies. The second is the borrowing by the government from both domestic and external sources summed up as public debt. The model formulation is specified as follows:

This study assumes a nonlinear model structured which in its explicit form becomes

The test conducted is used to derive solutions from the analysis of data to enable the verification of both theoretical and statistical validity of our coefficients. This study employed Johansen cointegration estimation technique to determine the existing long run relationship between external reserve and public debt in Nigeria using E-views 9 Statistical Package.

Secondary data for this study were sourced from Central Bank of Nigeria Statistical Bulletin 2013 published by CBN [

This study deals with the presentation of data, analysis of data, and interpretation of findings from the model put forward as well as testing of the research hypothesis. The parameter estimates were subject to various economic and econometric tests. The logarithms of the variables were obtained to bring the time-series data on the variables to the same base.

These statistics are used to describe the main features of the data set which include measures of central tendency (mean, median, and mode); measures of variability (standard deviation, variance); the minimum and maximum values of variables (kurtosis and skewness) providing summary of samples and observations which forms the basis for the description of the data set.

Table

Summary statistics of variables in the model.

Variables | EXTR | PDEBT | M2 | NEXCR |
---|---|---|---|---|

Mean | | | | |

Median | | | | |

Maximum | | | | |

Minimum | | | | |

Std. deviation | | | | |

Skewness | | | | |

Kurtosis | | | | |

Jarque-Bera | | | | |

Probability | | | | |

Sum | | | | |

Sum sq. dev. | | | | |

Observation | 33 | 33 | 33 | 33 |

Source: author’s computation using E-views 9.0.

Skewness shows the degree of asymmetry of the distribution and this could be negatively or positively skewed, and kurtosis measures the degree to which the frequency distribution is focused about its mean or the peakedness of the distribution and it could be mesokurtic (when the kurtosis coefficient is =0), platykurtic (when the kurtosis coefficient is <0), and leptokurtic (when the kurtosis coefficient is >0). Looking at the skewness, all variables were all positively skewed and examining the kurtosis; all variables had their entire kurtosis coefficient >0 which shows that they are leptokurtic.

The correlation matrix determines the degree of relationship existing between two random variables of a data set involving dependence and thus computes the correlation coefficients of

Correlation coefficient matrix determine the strength and direction of linear relationship between two variables that lines between

Correlation matrix for variables in the model.

Variables | EXTR | PDEBT | M2 | NEXCR |
---|---|---|---|---|

EXTR | 1.000000 | 0.831559 | 0.836028 | 0.460382 |

PDEBT | 0.831559 | 1.000000 | 0.851745 | 0.527093 |

M2 | 0.836028 | 0.851745 | 1.000000 | 0.437655 |

NEXR | 0.460382 | 0.527093 | 0.437655 | 1.000000 |

Source: author’s computation using E-views result.

The results of the Augmented Dickey Fuller (ADF) unit root test show that all the variables are stationary at first difference. Table

ADF unit root test and order of integration.

Variables | ADF | 5% critical value | Remark | Order of integration |
---|---|---|---|---|

| | | Stationary | I( |

Lextrv | | | Nonstationary | I( |

| | | Stationary | I( |

Lm2 | | | Nonstationary | I( |

| | | Stationary | I( |

Lpdebt | | | Nonstationary | I( |

| | | Stationary | I( |

Lnexcr | | | Nonstationary | I( |

Source: author’s computation from E-views (2016).

A variable is stationary when the absolute value of ADF

The cointegration test establishes whether a long run equilibrium relationship exists among the variables of interest.

Summary of cointegration results.

Max rank | Eigenvalue | Trace statistics | Prob. | 5% critical values | Max-Eigen statistic | Prob. | 5% critical values |
---|---|---|---|---|---|---|---|

None | 0.4871 | 48.30750 | 0.045 | 47.85613 | 28.69996 | 0.0448 | 27.58434 |

At most 1 | 0.3974 | 27.60754 | 0.0876 | 29.79707 | 15.70159 | 0.2428 | 21.13162 |

At most 2 | 0.2580 | 11.90595 | 0.1615 | 15.49471 | 9.254710 | 0.2656 | 14.26460 |

At most 3 | 0.0819 | 2.651243 | 0.1035 | 3.841466 | 2.651243 | 0.1035 | 3.841466 |

Note that “

Another way to check for the presence of cointegration is the use of Unrestricted Cointegration Rank Test (maximum Eigen value). Here, the Max-Eigen statistic (28.699) is greater than 5% critical value (27.584). Hence, reject the null hypothesis of no cointegrating equations and accept the alternate hypothesis of the presence of cointegration. Also, the

Therefore, it is concluded that both unrestricted cointegrating rank test (trace) and unrestricted cointegrating rank test (Max-Eigen) confirmed the presence of cointegrating equations. Hence, there is a long run relationship between the dependent variable (Lextrv) and the independent variables (LM2, LNEXCR, and LPDEBT).

The FMOLS was employed to evaluate the long run impact of the independent variables on the dependent variable since Johansen cointegration test confirms the presence of long run association of the variables employed. From the FMOLS results in Table

FMOLS result.

Variable | Coefficient | Std. error | | Prob. |
---|---|---|---|---|

LM2 | 0.001597 | 0.000364 | 4.384688 | 0.0001 |

LNEXCR | 10.95699 | 24.95413 | 0.439085 | 0.6640 |

LPDEBT | 1.804218 | 0.430598 | 4.190032 | 0.0003 |

| 1544.229 | 1623.164 | 0.951370 | 0.3496 |

| 0.746468 | Mean dependent var | 15262.94 | |

Adjusted | 0.719304 | SD dependent var | 17239.94 | |

SE of regression | 9133.848 | Sum squared resid | | |

Long run variance | 23394611 |

Source: author’s computation from E-views (2016).

Dependent variable: Lextrv; method: Fully Modified Least Squares (FMOLS); sample (adjusted): 1982–2013; included observations: 32 after adjustments; cointegrating equation determinants:

The probability value of the individual explanatory variable reveals that all the explanatory variables (broad money supply and public debt) are statistically significant at 5 percent significant level except normal exchange rate to US dollar which is insignificant. Specifically, 1 percent raise in public debt could induce 1.80 percent increase in external debt in the long run. This implies that foreign currency debt issuance can induce increase in external reserve but it can bring serious difficulties in evaluating reserve adequacy since increasing debt could raise the uncertainty in external reserve dynamics.

Also, 1 percent increase in broad money supply could induce 0.0016 percent rise external reserve in the long run. This suggests that the influence of broad money supply is inconsequential since broad money supply which is an indicator of resident capital flight does not Granger-cause change in external reserve [

Nigeria public debt and broad money supply exert a long run positive and significant effect on external reserve while nominal exchange rate was insignificantly related to external reserve. This study shows the extent to which the Nigerian’s outstanding public debt reflects on the economy’s external reserve particularly from the time of the outbreak of oil crisis in 1981. Besides rapid accumulation of trade arrears from 1982 the issue of debt resulted from fall in crude oil prices, collapse in commodity prices, and the protracted softening of the World market since 1981 causing reduction in external exchange earnings and balance of payment. Also, the debt crisis of Nigeria constitutes exogenous and endogenous such as the nature of the economy, economic policies, high depending on oil, and swindling of foreign exchange receipt. Thus, from the key findings of the study, the analysis reveals that the economic variables used have high influence on the external reserve from the model specified.

Based on key findings of this study, the study recommends that the Nigeria Debt Management Office should lay down healthy guideline for public loans, outlining the purpose, time frame, moratorium necessities and commitments, negotiation fees, and so forth as well as the conditions in which the administration can admit and guarantee loans particularly for external debt. Also, new and superior technique to assign fixed interest payment and unstable amortization systems must be employed. Funds from external debt must be channeled towards projects with high returns devoid of misappropriation in the long run; economic policies should also be channeled towards export promotion and import substitution as this would increase the level of productivity and economic activities thereby resulting in an improvement in external reserve, a favorable balance of payment and increase in foreign exchange earnings.

The authors Victoria Senibi, Emmanuel Oduntan, Obinna Uzoma, Esther Senibi, and Akinde Oluwaseun declare that there are no competing interests regarding the publication of this article.