Assessing the impact of debt overhang on public investment and economic growth in Nigeria

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Type of the article: Research Article

Abstract
This study assesses the impact of debt overhang on Nigeria's public investment and economic growth. The paper utilized the Autoregressive Distributed Lag (ARDL) with annual time-series data from 1981 to 2024 and Myers' debt overhang, fiscal sustainability, and crowding-out effect theories. Public investment growth and economic growth rate were dependent variables, while debt overhang was independent. The control variables included interest rate, exchange rate, and inflation rate. The two models demonstrated a long-term cointegration connection. The results demonstrate a paradox which has practical implications because debt overhang produces statistically significant effects which show opposite results through its impact on both dependent variables.. Specifically, a unit increase in debt overhang is associated with a 0.744-unit increase in public investment (β = 0.744, p < 0.05) and a 0.153-unit decrease in economic growth (β = –0.153, p < 0.05). The findings support the efficiency trap hypothesis by determining that debt accumulation leads to increased investment but does not produce matching economic growth due to inefficient resource allocation in debt financing. In the short run, debt overhang negatively affects both variables, with the error correction term confirming rapid adjustment to equilibrium. Therefore, Nigeria is operating in an “efficiency trap.” The debt used to finance investment does not translate into economic growth due to poor project selection, resource misallocation, and inefficient project implementation. The null hypotheses for both models were of no significant effect and were rejected. We recommend that policymakers prioritize project appraisal methods and ensure that borrowed funds are directed toward quality investments.

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    • Figure 1. Conceptual framework
    • Table 1. Summary of variables
    • Table 2. Unit root test results
    • Table 3. ARDL bounds test
    • Table 4. Long-run findings (long run ARDL estimates: Combined results)
    • Table 5. Error correction model (ECM)
    • Table 6. Hypotheses testing results
    • Conceptualization
      Diekola I. Adewuyi, Oyinlola Morounfoluwa Akinyede
    • Formal Analysis
      Diekola I. Adewuyi, Taofeek Sola Afolabi
    • Methodology
      Diekola I. Adewuyi, Oyinlola Morounfoluwa Akinyede
    • Project administration
      Diekola I. Adewuyi, Taofeek Sola Afolabi
    • Software
      Diekola I. Adewuyi
    • Validation
      Diekola I. Adewuyi
    • Writing – original draft
      Diekola I. Adewuyi
    • Supervision
      Oyinlola Morounfoluwa Akinyede, Taofeek Sola Afolabi
    • Writing – review & editing
      Oyinlola Morounfoluwa Akinyede, Taofeek Sola Afolabi
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Public and Municipal Finance
Public and Municipal Finance