The Asymmetric Effect of External Debt Service on Real Effective Exchange Rate in Nigeria

Abstract

Given that economic relationships are intractably nonlinear; this study adopted an asymmetric approach to investigating the effect of External Debt
Service (EDS) on Real Effective Exchange Rate (REER) in Nigeria for the period 1981 to 2020 using annual data sourced from the World Bank. Other
variables used in the study were External Debts (EXD), Official Development Assistance (ODA), Foreign Reserves (FRZ), and Trade Balance (TBAL). The
variables were found to be stationary and co-integrated warranting the use of error correction and Nonlinear Autoregressive Distributed Lag (NARDL) models to ascertain both their long-run and short-run effects on REER. It was found that, in the short-run initial REER leads to significant depreciation of REER while, FRZ did so non-significantly even as short run impacts of other variables were nonexistent. Results of the NARDL showed that, ODA and EXD improved REER significantly while TBAL and FRZ did so non significantly. Although, it was found that both the positive and negative changes in EDS had significant depreciating impact on REER of Nigeria; the impact of the positive changes in EDS were higher. The study recommended that, the government should revamp the manufacturing sector to improve TBAL, boost ODA through public accountability, augment her FRZ to improve REER, and curtail EXD since the impact of EDS has neutralized the benefits of EXD in Nigeria.