Abstract Developing economies that has high levels of debt caused by foreign currency debt encounter serious fiscal risks due to foreign exchange risks, which have far reaching effects on the domestic debts. The significance of the domestic currency costs for the external debts in Nigeria has not really been extensively researched, especially differentiating between the long run and short run issues. This study used an annual dataset from 1980 to 2024. In addition to this, the study utilized the bounds test procedure within the the error correction model to evaluate both the short and long term impacts of the depreciation of exchange rate on the servicing of external debt. In this study, the key indicators are the exchange rate, external debt stock, foreign reserves, rate of inflation, and the current account balance. The results gotten from this study show that the changes in the naira depreciation have significant effects in the short run on debt servicing through the Balance Sheet Effect. In the longer term, however, the effects are neutral. Both Inflation and deficits are seen to add more pressure on debt because of their effects on the exchange rates in the short term, but the foreign reserves have an opposing effect. In addition to this, the coefficient of the ECM is negative as well as highly significant. It shows that the effects correct by 34% annually. Policy recommendations include the improvement of forex management, the maintenance of reserves, the adoption of hedging tools, and ensuring the stability of prices. These findings are very relevant to the economies of the Sub-Saharan region and also other emerging economies that rely on debt that’s denominated by the Forex. This is because the relationship between Forex and the debt of such economies remains the same.
JACOB CHRIS HASSAN (Tue,) studied this question.