Public Debt and Economic Performance of Nigeria: A VECM Analysis

Public debt has been a veritable fiscal tool for governments worldwide to finance public expenditure and stimulate economic growth. This study investigates the impact of public debt—comprising domestic and external debt—on Nigeria’s economic performance from 1981 to 2022. Employing a vector error correction model (VECM) alongside causality analysis, the research examines both the short- and long-term relationships between different debt types and economic growth. Descriptive and inferential statistics, including stationarity tests and Cointegration analysis, were used to analyze the data obtained from the Central Bank of Nigeria and Debt Management Office. The findings indicate that external debt exerts a positive and significant influence on Nigeria’s economic performance, primarily when allocated to productive sectors. Conversely, domestic debt exhibits a negative and significant relationship, likely due to crowding-out private investment and fiscal strains. The study emphasizes the need for strategic debt management and allocation policies to sustain economic growth. Recommendations include aligning borrowing with productive investments, maintaining debt sustainability thresholds, and ensuring efficient utilization of borrowed funds to foster Nigeria’s long-term economic stability and development.