An ARDL Analysis of External Debt Servicing, Debt Stock, and Signalling Effects on Investment Growth Rate in Nigeria.

Abstract

This study examines the relationship between external debt and investment growth in Nigeria from 1986 to 2022, recognizing that the country's growing debt profile has become a source of concern for policymakers and investors alike. While Nigeria has borrowed heavily over the years to finance development, the critical question is whether this debt has helped or hindered the kind of investment that drives economic progress and focuses on three key dimensions of external debt: debt service relative to government revenue, debt service relative to export earnings, and the total debt stock relative to the size of the economy. These were analyzed alongside investment growth, monetary policy rates, and real GDP to paint a complete picture of the dynamics at play using the Autoregressive Distributed Lag (ARDL) approach, which is well-suited for handling variables that are stationary at different levels. The robustness of the findings was confirmed using Dynamic Ordinary Least Squares (DOLS).The findings tell a revealing story. A higher debt service burden on government revenue was found to significantly constrain investment growth, confirming fears that debt repayment crowds out public spending on infrastructure and other productive ventures. Similarly, a large overall debt stock relative to GDP sends negative signals to investors, creating uncertainty that discourages both domestic and foreign capital. The implications is that Nigeria's external debt problem is not simply about how much the country owes, but about how the burden of that debt is structured and what it signals to those considering where to place their investment capital. The study recommends a strategic shift toward reducing the revenue burden of debt servicing, pursuing export diversification to strengthen foreign exchange earnings, and managing the overall debt stock to levels that do not spook investors. Without such measures, the very borrowing meant to foster development may continue to undermine the investment needed to achieve it.