THE EFFECT OF DEBT BURDEN ON INVESTMENT IN NIGERIA

Abstract

This study investigates the effects of Nigeria’s debt burden on investment from 1981 to 2022, utilizing an autoregressive distributed lag (ARDL) approach to analyze the short- and long-run relationships between external debt, domestic debt, debt servicing, and investment. The findings reveal that domestic debt significantly boosts private investment and foreign direct investment (FDI), suggesting that domestic borrowing serves as a viable financing mechanism for investment expansion. Conversely, external debt negatively affects private investment, corroborating the crowding-out hypothesis (Majumder, 2007), while debt service does not exhibit a statistically significant impact on investment decisions. Public investment inefficiencies further underscore the need for sound fiscal management. These results emphasize the importance of optimizing domestic debt to support private-sector growth and attract FDI while ensuring external borrowing is effectively allocated to high-return projects. Policy recommendations include enhancing debt transparency, prioritizing concessional external loans, and strengthening institutional frameworks for debt management. Additionally, fostering macroeconomic stability, improving governance, and aligning public investment with private sector needs will be critical to mitigating the adverse effects of external debt. This study contributes to the literature by providing empirical evidence on Nigeria’s debt-investment nexus and offering policy insights to balance debt accumulation with sustainable economic growth. Future research should explore sector-specific debt effects, governance influences, and cross-country comparisons within Sub-Saharan Africa to deepen understanding of debt dynamics and investment behavior.