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Does debt servicing matter for capital formation in Nigeria?

Author

Listed:
  • Taofik M Ibrahim

    (Department of Economics, Ahmadu Bello University)

  • Mohammed Shuaibu

    (Department of Economics University of Abuja)

Abstract

Public borrowing is recognized as an important source of capital financing especially in developing countries where revenue gaps constrain investment. This paper examines the nexus between debt servicing and capital formation in Nigeria using an asymmetric time series model to analyse data for the period 1980-2021. The results show that there is a long-run asymmetric link between debt servicing and capital formation. Debt service was found to exert a negative and significant impact on capital formation in the short- and long-run. Findings also indicate that while there is a considerable difference between the cumulative sum of negative and positive changes in debt servicing strategy in the long-run with the magnitude of the former being relatively more pronounced, the contemporaneous model reveals there is no significant divergence. This suggests that debt servicing potentially crowds out investment in capital formation and therefore, alternative financing strategies are required to sustainably build up capital in Nigeria.

Suggested Citation

  • Taofik M Ibrahim & Mohammed Shuaibu, 2023. "Does debt servicing matter for capital formation in Nigeria?," Economics Bulletin, AccessEcon, vol. 43(4), pages 1601-1613.
    • Handle: RePEc:ebl:ecbull:eb-23-00285
    as

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    References listed on IDEAS

    as
    1. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
    2. Chukwunenye N Kocha & Marshal Iwedi & James Sarakiri, 2021. "The Dynamic Impact of Public External Debt on Capital Formation in Sub-Saharan Africa: The Pooled Mean Group Approach," Journal of Contemporary Research in Business, Economics and Finance, Learning Gate, vol. 3(4), pages 144-157.
    3. Serven, Luis & Solimano, Andres, 1993. "Debt crisis, adjustment policies and capital formation in developing countries: Where do we stand?," World Development, Elsevier, vol. 21(1), pages 127-140, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    External Debt Service; Capital Formation; Non-Linear ARDL;
    All these keywords.

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H8 - Public Economics - - Miscellaneous Issues

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