Debt and Economic Development in Nigeria: Is Domestic Investment a Mediator?

Abstract

Abstract

This study examines the direct and indirect links of debt-economic development nexus against the backdrop of the worrisome growing dimensions of both domestic and foreign debt of Nigeria’s economy. Employing Fully Modified Ordinary Least squares technique which is proven to be robust for endogeneity and heterogeneity concerns in regression and utilizing time series data spanning 1980 to 2021 in Nigeria, the study found; (1) the links between debt and economic development in Nigeria are both direct and indirect (2) exploring the direct linkage, both components of total debt (domestic and foreign) negatively influences economic development in Nigeria (3) domestic investment mediates debt-economic development relations in Nigeria in different ways depending on the sources of the debt. Increasing domestic debt positively influences economic development via enhancement of domestic investment while increasing foreign debt negatively affect economic development via the reduction in domestic investment in Nigeria (4) population growth also undermines the positive effect of domestic investment on economic development in Nigeria. From the results, the continuous fiscal deficit financing which has been mostly from foreign debt accumulation to consummate recurrent expenditure continues to undermine the attempt by Nigeria to meeting the sustainable development goals. Therefore, prudence in the management of debt and the efficient allocation of debt to capital expenditures, productive and vulnerable sectors of the economy would be needed to reap the gains of debt on economic development in Nigeria.

Keywords: Domestic Debt, External Debt, Investment, Economic Development

JEL Classification: C22, C51, H30, H63