Macroeconomic effects of public debt in Nigeria

The purpose of this study was to investigate the impact of domestic and external debt on macroeconomic variables in Nigeria from 1981 to 2020. Annual secondary data on domestic and external debt, inflation, output, investment and consumption sourced from World Development Indicators (WDI, 2021), and CBN Statistical Bulletin (2020) were used. The study employed two-stage least squares method to evaluate the differential effects of foreign and domestic debt on key macroeconomic variables. The findings showed a positive relationship between domestic debt and private consumption in Nigeria, while a negative relationship exists between external debt and private consumption. Also, an increase in external debt led to increased private investment. The study emphasized the importance of prudent debt management in mitigating inflationary pressures. This implied that domestic debt had a more significant negative impact on output and economic growth, while external debt had less immediate adverse effects. Policymakers should balance debt composition and use borrowed funds for purposes for sustainable economic growth.