PUBLIC DEBT AND DOMESTIC INVESTMENT IN NIGERIA

A VECTOR ERROR CORRECTION MECHANISM APPROACH

Abstract

The puzzling reality that Nigeria's debt obligation has been soaring within the past four decades coupled with the need for more investment in the domestic economy prompted this study to examine the impact of public debt on domestic investment in the country in the period 1981-2021. The work is set within the framework of the Keynesian and the debt overhang theories. Time series data were obtained from the Central Bank of Nigeria Statistical Bulletin and analysed using the Johansen cointegration and vector error correction methods owing to the result of the stationarity tests from the Augmented Dickey-Fuller and Phillips-Perron tests. The study finds that domestic public debt stock has a significant negative impact, but external public debt stock has a significant positive impact, on domestic investment in Nigeria both in the short and long runs; and that Nigeria's external public debt service payment is significantly crowding out domestic investment. The study therefore concludes that growth of public debt is inimical to that of domestic investment in Nigeria. As such, the Nigerian government should curtail its domestic borrowing excesses because of the negative influence it exerts on domestic investment over time. second, the government should channel some externally borrowed funds into growing the country's capital formation which is the result of domestic investment owing to the positive relationship between both variables. The government should also cut down on more external borrowing because the resulting debt service payment stifles the growth of domestic investment in the domestic economy.