EFFECT OF PUBLIC DEBT ON PUBLIC INVESTMENT IN NIGERIA

Abstract

Public investment in Nigeria has remained persistently low despite rising domestic and external debt accumulation. The government’s increasing debt service obligations have created a fiscal squeeze, raising concerns that borrowed funds are not translating into productive capital formation. This study examines the effect of public debt on public investment in Nigeria Specifically, it assesses the effect of domestic debt on public investment, and assesses the effect of external debt on public investment. The study adopts an ex post facto research design using annual time‑series data from 1985 to 2025 sourced from the Debt Management Office and Central Bank of Nigeria. The Vector Error Correction Model is employed following unit root and Johansen cointegration tests, with optimal lag length selected by Akaike Information Criterion. Both domestic and external debt have statistically significant negative long‑run effects on public investment. External debt also has a significant negative short‑run effect, while domestic debt has no significant short‑run impact. The study concludes that public debt in Nigeria, particularly external debt, crowds out public investment both immediately and over the long run, consistent with the crowding‑out hypotheses. The Debt Management Office should limit new domestic borrowing, cap debt‑service‑to‑revenue ratios, prioritise concessional external loans over commercial debt, and ensure borrowed funds are allocated to high‑return infrastructure projects that generate sufficient future revenue to cover debt service.