External Debt Financing and Capital Investment Trends in Nigeria: An Econometric Investigation (1986 – 2024)

Research Problem: Nigeria’s reliance on external debt to finance development has not consistently translated into productive capital investment. Persistent gaps between debt accumulation, debt servicing obligations, and actual capital formation raise concerns about the effectiveness of external financing in supporting sustainable investment. Methods/Theory: This study investigates the relationship between external debt financing and capital investment in Nigeria using annual data from 1986 to 2024. Ordinary Least Squares (OLS) regression with robust standard errors is employed, complemented by unit root tests, cointegration analysis, and diagnostic checks to examine whether external debt, debt servicing, exchange rate, and foreign direct investment (FDI) significantly influence gross capital formation (GCF). Results: The regression results indicate that external debt (–0.108; p = 0.635), debt service (+1.174; p ≈ 0.999), exchange rate (+0.080; p = 0.453), and FDI (–0.099; p = 0.953) all have statistically insignificant short-run effects on GCF, despite some intuitive signs. Unit root tests confirm non-stationarity in levels, while the Engle–Granger residual ADF statistic (–5.20; p < 0.001) establishes a significant long-run cointegrating relationship among the variables. Diagnostic tests show mild autocorrelation (Durbin-Watson = 1.51) but no heteroskedasticity (Breusch-Pagan p = 0.299). Conclusion: The findings suggest that external borrowing has not translated into immediate capital formation in Nigeria, supporting the debt overhang hypothesis. Structural and macroeconomic factors constrain the short-run effectiveness of external debt in promoting productive investment. Key Contribution to Knowledge: This study contributes to the literature by examining the joint effects of external debt, debt servicing, exchange rate, and FDI on gross capital formation over a multi-decade period, highlighting the long-run cointegrating relationship and contextualizing the Nigerian experience within the debt–investment nexus. Recommendation: Policy interventions should focus on improving project appraisal and debt utilization efficiency, managing exchange rate stability, and diversifying FDI into productive sectors to ensure that external debt contributes effectively to long-term capital formation.