THE ROLE OF CENTRAL BANK OF NIGERIAN IN THE MANAGEMENT OF THE NATIONS FOREIGN DEBT

CHAPTER ONE

INTRODUCTION

The central bank’s responsibility for the management of the nation’s external debt started at the inception of the bank itself in July 1959 when it took off Nigerian’s share of the sterling assets of the nations external reserves in the bank in 1962. The responsibility was enlarged through it’s two comes prudent banks the bank of England and the federal reserves bank of new York.

The bank invested the external reserves largely in sterling and in dollar securities of not more than 10-years maturity.

The primary consideration in its choice of investment were liquidity, security and yield.

The central problem

The central problem of managing reserves during this period was one of maintenance of adequate reserve to meet Nigerian’s external obligation for instance, in 1960 Nigeria’s external assets were adequate to meet her import bill for 9.5 months at the average rate of N3.6m per month. But with the increase in her external assets to N197 million in 1963 only 4.3 months of imports could be safety covered.

Restriction were imposed in the third /quarter of that year to reduce imports and by 1967 the average monthly bill was forced down to N37 million.

But the reserves declined during the same period and at N120m could finance approximately 3 months imports

Again in 1977 as a result of assets at the beginning of 1977 declined to a level, which could only purchase to a level, which could only purchase some four months imports at the end of that year.

Nigeria experience multiple increase in external reserves from N37.3m in December of 1972 to N3.38m in December 1975 as a result of oil reserves.

This called for a new strategy in the management of external reserves.

There were also increase in uncertainties following glowing inflation and devaluation in reserve currencies. These represented new challenges to the central bank which must now manage the enlarge external reserve to

1. Ensure relative stability in the purchasing power of the reserves.

2. Minimize losses arising from currency fluctuation.

3. Explore new opportunities for increased earnings prior to this period of excessive reserves, the problems of trying to invest the reserves never caused much concern because the bank had no surplus to invest.

1. Okigbo PNC Nigeria financial system, structure and growth (Long man Limited, Burnt Hill, Harlow, Essex, U.K. 1981.

The available reserves were invested in sterling and dollar assets. Sterling demonstrate weakness, and a result of its devaluation in November 1967 Nigeria lost a reasonable amount of money in sterling value.

But Nigeria has already finalized sterling guarantee agreement with the United Kingdom in September 1969. With this agreement Nigeria was to keep an agreed proportion of her total reserves in sterling. This agreement was renewed according to the proportion of stating holdings and has been reduced to 48 percent. The guarantee later change from United states dollar to baskets of currencies of countries comprising United Kingdom and our other trading partners. With the weakening of pound sterling as reduced by its declining value since June 1972, Britain changed the agreement in1974, sterling which until 1973 accounted for some 59% of Nigeria’s total external reserves become completely unstable and between 1971 and 1976 its depreciation against other major currencies rose to 48 percent immediately the central bank reduced its sterling holdings from 37.9 percent total external reserves in in 1971 to 28.2 percent in 1976, and this was invested in United State dollar securities which raised holdings in dollar from 10.3 percent in 1971, to some 44percent of Nigerians total external reserves in 1976.

2. Central Bank of Nigeria Economic and finance Review 1985-1988      

3. Daily Times of Niger’s ltd Business Times 1985-1988.

PROBLEM DEFINITION

At the macro level, external debt management is a crucial tool of all economic management to the extent that a sustainable balance of payment position over the long form enhances management overall economics.

Debt management also becomes an important adjust of balance of payments arises an effective debt management strategy can help not only in restoring the balance of payments to equilibrium but also in achieving the overall macro economic objectives of the economy.

Generally too a debt problem signals liquid problems in a country’s balance of payment. The significance of debt service in the balance of payment arises from the fact that debt service payments are fixed contractual obligations.

This implies that the country has to set aside a given amount of its earned foreign exchange resources to meet that service payment it is generally the responsibility of a central bank to maintain and adequate volume of external resources in order to safe guard this acting as a manager and custodian of nations currency this acting as a manager and custodian of nations gold foreign exchange for approved foreign payments.

In most developing countries like Nigeria, receipts of foreign exchange is usually inadequate to meet current or and future demand for foreign payments. In addition, a nation needs to conserve or hold foreign or hold foreign exchange resources at a level that her trading partners do not have doubts as to her ability to meet her international financial obligations.

It is therefore to protect the country’s balance of payments and to maintain stability in the domestic economy that exchange control measure were introduced under the Nigeria exchange control. The central bank can only affect sales of foreign currency against an exchange control approval.

Approval has to be obtained before foreign exchange is allocated and disbursed to organizations and individuals. The bank carries out regular allocation of foreign exchange to authorized deals.

1.3 Objective of the study

The main objective of the study is to examine The Role Of Central Bank Of Nigerian In The Management Of The Nations Foreign Debt. Specifically, the study aims:

1. To what extent has CBN played its role in foreign debt management in Nigeria

2. To examine the problem faced by CBN in managing foreign debt in the country

3. To examine if the strategies CBN apply in managing foreign debt in Nigeria is effective

1.4 Significance Of Study

This research is of both theoretical and practical significance to the students, policy makers, the Debt Management Office (DMO), economists as well as the general public. Theoretically, this research work seeks to fill a gap in existing literature relating to Nigeria’s foreign debt profile and management strategies. Practically, this study attempts to provide vital information for future academic research bordering on the topic and other related issues/topics. The findings of this study will be relevance to policy makers, diplomatic personnel engaged in negotiating debt on behalf of Nigeria, as well as the Debt Management Office that is saddled with the responsibility of prudently managing Nigeria’s debt in order to achieve the nation’s objectives as regards to debt management.

1.5 Research hypothesis

The following hypotheses were formulated and tested

Ho1: The central bank of Nigeria has not played significant role in The Management Of The Nations Foreign Debt

H1: The central bank of Nigeria has played significant role in The Management Of The Nations Foreign Debt

Ho2: The strategy employed by the central bank of Nigeria is not effective in The Management Of The Nations Foreign Debt

H2: The strategy employed by the central bank of Nigeria is effective in The Management Of The Nations Foreign Debt

1.6 scope/Limitation of the study

This study on the role of central bank of Nigerian in the management of the nations foreign debt will focus the roles, problems and strategies central bank of Nigeria adopt in the management of the nations foreign debt. The scope of this study will cover a time frame of 25 years period, it will cover between 1985-2010. This study respondents will be limited to all CBN staff in Abuja branch.