Inter-Temporal Perspective of the External Borrowing Effect on Capital Accumulation in Nigeria

Nigeria's sustainable economic growth and sustainability, is highly dependent on the structure of her accumulated capital, which in recent years has been extensively drained. These have resulted in Nigeria’s increasing debt burden, since it is the only reliable source of income for her economic growth. External debt has been steadily increasing, prompting questions about its sustainability. The high debt servicing cost has constrained government spending on social services and infrastructure, limiting capital investment. This study examined the intertemporal impact of external borrowing on capital accumulation in Nigeria for the period of 1981–2023. The dual gap theory and debt overhang model were used as a theoretical framework for this study. Gross fixed capital formation, external debt stock, domestic debt stock, external debt servicing, nominal interest rate, national savings, and exchange rate were the variables used for the analysis. An autoregressive distributed lag (ARDL) regression procedure was employed. The results showed that external debt has a positive and statistically significant impact on gross fixed capital formation in Nigeria in the long run. In contrast, there is a negative and significant impact in the short run. The domestic debt indicated an insignificant negative impact in both the long and short run. The result also indicated an unattainable debt-to-GDP. This study recommended that domestic borrowing should be discouraged and avoided completely if possible. External borrowing is still the most viable source of capital accumulation for investment and infrastructural development. However, external debt servicing is not sustainable in Nigeria current capital accumulation, therefore saving policies should be encouraged, such as the introduction of a sovereign wealth fund and excess crude account.