Domestic Debt and Economic Growth in Nigeria: Decades of Unending Dilemma

Abstract This study examines the empirical relationship between domestic debt and the performance of the Nigerian economy using annual time series data obtained from various editions of the Central Bank of Nigeria’s Statistical Bulletin, the Debt Management Office, and the World Development Indicators (WDI). Gross Domestic Product (GDP) is used as a proxy for economic growth and serves as the dependent variable, while domestic debt, debt servicing, interest rate, exchange rate, capital (proxied by gross capital formation), and labor (proxied by the labor force participation rate) are the independent variables. The study employs unit root tests for co-integration and the autoregressive distributed lag (ARDL) technique as its estimation methods. The findings reveal that domestic debt has a significant positive impact on economic growth; however, the growth-enhancing effect of domestic debt is substantially diminished by debt servicing obligations. The policy implication of this result is that the government should ensure domestic debt management strategies align with the optimal debt threshold that maximizes growth. In addition, the government is encouraged to implement fiscal reforms aimed at improving domestic debt management and accelerating economic growth, especially in light of recent trends indicating that excessive debt servicing poses a threat to economic expansion.