Public Debt, Institutional Quality and Economic Growth in Nigeria

Nigeria’s persistent accumulation of public debt has raised concerns about its capacity to generate sustainable economic growth. This issue are caused by the weaknesses in institutional quality, debt servicing pressures and macroeconomic instability that limit the effectiveness of borrowed funds. This study examined the effect of public debt and institutional quality on economic growth in Nigeria from 1996 to 2025. The study employed the Autoregressive Distributed Lag (ARDL) modelling after the Augmented Dickey-Fuller test established that the variables were integrated at levels and first differences. The Bounds test confirmed the existence of a long-run relationship among the variables, while the error correction mechanism was used to examine short-run dynamics. The findings revealed that total debt stock had a positive and significant long-run effect on economic growth (α = 0.9981; p = 0.0000), while its immediate short-run effect was positive but insignificant (α = 0.1095; p = 0.0678). However, the lagged effect of total debt stock was negative and significant (α = -0.4966; p = 0.0002). Institutional quality exerted a positive and significant long-run effect on economic growth (α = 0.6974; p = 0.0407), but its short-run effect was positive and insignificant (α = 0.1005; p = 0.3791). Debt servicing had a positive but insignificant long-run effect (α = 0.1418; p = 0.0599), while interest rate had a negative and significant long-run effect (α = -0.0982; p = 0.0082). Inflation exerted a negative but insignificant long-run effect (α = -0.0269; p = 0.0680). The error correction coefficient was negative and significant (α = -0.6359; p = 0.0000), confirming stable adjustment towards long-run equilibrium. The study concludes that public debt can support economic growth when effectively managed and complemented by strong institutions. The study recommended that Government should ensure that borrowed funds are channelled primarily towards infrastructure, human capital development, productive sectors and projects capable of generating sufficient economic returns. Borrowing for excessive recurrent expenditure should be discouraged.