Internal Debt, Investment and Economic Growth in Nigeria: An Empirical Analysis

Abstract

This study examined the relationship between domestic debt, investment, and economic growth in Nigeria using annual time series data. The study employed the Augmented Dickey–Fuller (ADF) unit root test, the Autoregressive Distributed Lag (ARDL) model, and the Bounds testing approach to cointegration in order to analyze both the short-run and long-run dynamics among the variables. The unit root results revealed mixed stationarity among the variables, as some were stationary at level while others became stationary after first differencing, thereby justifying the use of the ARDL technique. The bounds test results confirmed the existence of long-run relationships among the variables in both the investment and economic growth equations. The long-run investment equation showed that real interest rate, export performance, inflation rate, and employment positively influenced investment in Nigeria, while the ratio of domestic debt to government revenue exerted a negative effect on investment. The results further revealed that real interest rate, export performance, and employment significantly influenced investment, while inflation and domestic debt to revenue ratio were statistically insignificant. Similarly, the long-run GDP equation indicated that infrastructure development, technological advancement, domestic debt to revenue ratio, and human capital development positively influenced economic growth in Nigeria, whereas the ratio of domestic debt to GDP and real exchange rate negatively affected economic growth. Among these variables, infrastructure development, human capital development, and exchange rate were found to be statistically significant determinants of economic growth in the long run. The study concludes that while domestic debt can support economic growth when effectively managed and channelled into productive investment.