Abstract

This study investigates the impact of domestic debt on the Nigerian economy using annual time series data from 1980 to 2022. A growth model function is specified and estimated, incorporating disaggregated components of domestic debts and control variables such as Total Revenue Generated, total GDP, GDP Growth Rate, Treasury Bills, Treasury Certificate, Treasury Bonds, Treasury Development Stock, and Promissory Notes. The ARDL cointegration approach is employed for data analysis after achieving data stationarity.Empirical results reveal that external debt hampers long-term economic growth while its short-run effect enhances growth. Domestic debt significantly affects Nigeria's economic growth in the long-run, but curbs growth in the short-run. Debt payment significantly reduces growth in both the long- and short-run, while foreign reserves position and gross domestic investment accelerate growth in both periods. Interest rates significantly improve long-run growth but inhibit short-run growth. Foreign direct investment inflow exhibits a crowding-out effect on long-run growth, while its short-run effect is significant and positive. The coefficient of co-integrating equation indicates a moderately fast adjustment speed parameter of 63% convergence to long-run equilibrium after a shock, and parameter stability and robustness checks affirm the model's structural and dynamic stability.The findings highlight the significant relationship between domestic debt and economic growth, the impact of domestic debt on Nigeria's economic growth, and the relationship between domestic debt and Gross Domestic Growth (GDP).Based on the study's findings, several policy recommendations are made. The government should maintain a debt bank deposit ratio below 35 percent and increase the use of tax revenue to finance projects. The government should divest itself of projects that the private sector can handle and focus on providing an enabling environment for private sector investors. A proper balance between short-term and long-term debt instruments is recommended, with long-term instruments dominating the debt market to improve the investment climate. Proper appraisal of projects financed with government borrowing is crucial to ensure their technical feasibility, financial viability, and economic desirability. Domestic debt is more likely to stimulate higher economic growth in Nigeria compared to external debt. Fiscal reforms that boost domestic revenue generation and ensure productive investment of borrowed funds are encouraged to achieve debt sustainability and sustainable growth. However, it is essential to approach the study's results with caution, considering country-specific characteristics, data limitations, and the chosen econometric methodology.