Does debt servicing matter for capital formation in Nigeria?

Taofik Ibrahim () and Mohammed Shuaibu
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Taofik Ibrahim: Department of Economics, Ahmadu Bello University

Economics Bulletin, 2023, vol. 43, issue 4, 1601 - 1613

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.

Keywords: External Debt Service; Capital Formation; Non-Linear ARDL (search for similar items in EconPapers)
JEL-codes: H6 H8 (search for similar items in EconPapers)
Date: 2023-12-30
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