Public Debt and Domestic Investment Nexus: X-Raying the Nigerian Experience (1980-2024)

This study empirically investigated the public debt and domestic investment nexus using timeseries data spanning from 1980 to 2024. The research was motivated by the persistent fiscal challenge of escalating public debt profiles alongside stagnating domestic capital formation. To achieve the research objectives, the study employed a dual econometric framework: Pairwise Granger Causality tests were utilized to determine the directional predictive power and causal pathways among the variables, while Ordinary Least Squares regression analysis was applied to quantify the structural long-run impacts of public debt and key macroeconomic indicators on Domestic Investment (DINV). The model accounted for critical fiscal and monetary components, specifically focusing on Debt Servicing (DBS), Domestic Debt Stock (DMD), and External Debt Stock (EXD), while controlling for Exchange Rate (EXCH), Gross Domestic Product (GDP), Inflation (INF), and Interest Rates (INTR). The empirical findings from the OLS estimation revealed a highly robust model fit, with an Adjusted R-squared showing that 82.0% of the systematic variations in domestic investment are explained by the model. Individually, Domestic Debt Stock and External Debt Stock exert highly significant negative pressures on domestic capital formation. Crucially, Debt Servicing acts as a severe macroeconomic bottleneck, confirming a profound liquidity-squeeze effect on the economy. Conversely, the Exchange Rate displayed a positive and significant relationship with investment, indicating that currency realignments have historically boosted domestic competitiveness and localized import-substitution projects. The Pairwise Granger Causality tests further illuminated these dynamics by revealing distinct causal mechanisms. A unidirectional causality running from domestic investment to domestic debt instruments indicates that local borrowing has historically been used defensively to plug structural investment gaps. However, a highly significant bidirectional feedback loop was established between External Debt Stock and Domestic Investment, strongly validating both the Debt Overhang Hypothesis and the Chenery-Strout Dual-Gap Theory. This confirms that while a domestic savings-investment gap forces the economy to rely heavily on foreign borrowing, the accumulation of external liabilities subsequently acts as a structural deterrent that dampens long-term investor confidence. Based on these outcomes, the study concludes that public debt accumulation has crossed sustainable thresholds and now actively undermines domestic capital accumulation. Consequently, the study recommends: (i) the enforcement of strict statutory legislative caps on domestic debt expansion; (ii) the restructuring of domestic bond maturities alongside the creation of an independent, asset-backed Sinking Fund to mitigate the crippling effects of debt servicing; (iii) a policy shift away from sovereign external borrowing toward Public-Private Partnerships (PPPs) to close the savings-investment gap without accumulating debt.