Debt, institutions, and growth: Exploring the interplay between external debt, institutional quality, investment, and industrial growth

Abstract A plethora of studies have examined the effect of external debt on economic growth using panel econometric data. However, time-series studies investigating the moderating role of institutional quality and investment on the effect of external debt on industrial growth at the country level are scarce. This study takes a step further to explore the moderating role of institutional quality and investment on the effect of external debt on industrial growth in Nigeria. The paper-utilized time-series data spanning from 1981 to 2023, an ARDL approach augmented by Fully Modified Ordinary Least Squares (FMOLS) was employed as the estimation strategy. The findings reveal that, in the long run, external debt significantly impedes industrial growth, whereas investment and institutional quality separately exert a positive effect. Notably, the adverse effect of external debt is mitigated by robust institutional architecture and investment. However, the current level of institutional quality in Nigeria, particularly in terms of corruption control, falls short of the threshold required to effectively leverage external debt for industrial growth. The findings imply that Nigeria’s industrial growth strategy should prioritize improving institutional quality, particularly corruption control, and promoting investment to mitigate the negative effects of external debt. Policymakers should focus on strengthening institutional architecture and creating an enabling environment for investment, as these factors can help offset the adverse impacts of external debt. However, given the current institutional quality shortcomings, caution should be exercised in relying heavily on external debt for industrial growth, and efforts should be directed toward achieving the required threshold of institutional quality to maximize the benefits of external debt.