CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Economies with a shortage of capital commonly turn to domestic borrowing to supplement national savings. In principle, such borrowing is justified when the funds are put to uses that earn a return higher than the cost of borrowing, because the added capacity then raises output and the debt can be serviced from the growth it creates. The difficulty arises when borrowing is used mainly to cover recurrent spending and budget deficits rather than productive investment, because the debt grows faster than the capacity to repay it.

In Nigeria, domestic debt is raised mainly through marketable government securities, namely treasury bills, treasury bonds and, historically, treasury certificates (Udo Oji & Emmanuel John, 2022). A government runs a deficit when its spending exceeds its revenue, and the gap can be closed by borrowing at home, borrowing abroad or drawing on reserves. Each route carries costs. Domestic borrowing in particular can push up interest rates, as Yusuf (2019) found when he established a positive and significant effect of public domestic debt on interest rates in Nigeria, which is why he argued that the growth of domestic debt needs to be managed. Higher rates raise the cost of capital for firms, and banks that find government securities attractive have less incentive to lend to businesses. This is the crowding-out mechanism, in which public borrowing reduces the funds and the credit available for private investment (Jato & Nwankwo, 2024).

The literature identifies other channels through which a large debt stock can discourage private investment. Under the debt overhang argument, a heavy debt burden signals future taxation, so private investors hold back for fear that their returns will be taxed away. Under credit rationing, a highly indebted government competes with firms for scarce funds and the private sector is left with a smaller share. Debt service payments also absorb revenue that might otherwise finance infrastructure, which investors rely on (Abubakar & Mamman, 2021).

The composition of Nigeria's borrowing has changed over time. Yusuf (2019) observes that after 2004 domestic borrowing took on greater prominence in the government's financing mix, with consequences for debt-servicing costs and for the possible displacement of private investment. This trend has intensified in recent years. According to data released by the Debt Management Office (DMO), Nigeria's total public debt reached ₦159.28 trillion at the end of December 2025, and domestic debt accounted for 53.27 per cent of it. Domestic debt rose to ₦84.85 trillion, an increase of ₦10.47 trillion, or 14.1 per cent, over the ₦74.38 trillion recorded in December 2024 (Tunji, 2026).

The empirical evidence on what this means for private investment is mixed. Abubakar and Mamman (2021), using linear and non-linear ARDL models on data from 1981 to 2018, found that total debt, external debt and debt service adversely affect private investment, whereas the effect of domestic debt is asymmetric, so that reducing domestic debt benefits investment more than accumulating it harms it. By contrast, Simon, Ibenta, Yua and Clement (2023), covering 1990 to 2019, reported that private investment is a significant negative function of changes in domestic debt in the long run, while foreign debt has a positive relationship with it. Studies of private sector credit point the same way: Jato and Nwankwo (2024) found a significant crowding-out effect, with a one-unit rise in public debt associated with a 1.49-unit fall in private sector credit. Udo Oji and Emmanuel John (2022) added that a long-run relationship exists between domestic debt and economic growth in Nigeria.

Given this background and the continuing escalation of domestic borrowing, it is important to examine afresh the structure and composition of Nigeria's domestic debt and to determine how it affects private investment, both domestic and foreign.

1.2 Statement of the Problem

Nigeria's domestic debt has grown rapidly and now makes up the larger share of the country's public debt. The DMO figures show that domestic debt stood at ₦81.82 trillion at the end of September 2025, of which Federal Government bonds were about ₦61.9 trillion, or roughly 80 per cent, and treasury bills ₦12.68 trillion, or 16.3 per cent, with Sukuk bonds valued at ₦1.29 trillion (Tunji, 2026). By December 2025 the domestic stock had risen to ₦84.85 trillion, of which the Federal Government owed about ₦80.49 trillion and states and the Federal Capital Territory ₦4.36 trillion (Tunji, 2026). The domestic debt market therefore depends heavily on long-dated bond issuance, and the stock is increasing at a pace that raises questions of sustainability and of what it implies for the private sector.

A substantial part of this borrowing finances budget deficits rather than specific income-generating projects. Where that is so, the debt adds to servicing obligations without a matching expansion of productive capacity, and the interest paid is revenue diverted from capital spending (Abubakar & Mamman, 2021). Borrowing at this scale also affects interest rates (Yusuf, 2019) and the availability of credit to businesses (Jato & Nwankwo, 2024), which are central to private investment decisions.

The existing studies do not agree. Some conclude that domestic debt accumulation does not harm private investment (Abubakar & Mamman, 2021), while others find a significant long-run negative relationship (Simon et al., 2023). Many also treat total public debt or private sector credit as the dependent concern, so that the separate effects of domestic debt on domestic private investment and on foreign private investment, and the part played by the structure of the debt, receive limited attention. Most of the available evidence also ends well before the sharp expansion of the domestic debt stock in recent years.

This study responds to these gaps. It examines the structure and composition of Nigeria's domestic debt and its effect on domestic and foreign private investment over a period that includes the recent surge in borrowing, so that policy makers have current evidence on which to base debt management decisions.

The study is guided by the following research questions:

1. What is the impact of domestic debt on domestic private investment in Nigeria?
2. What is the impact of domestic debt on foreign private investment in Nigeria?
3. What is the long-run relationship between domestic debt and private investment in Nigeria?
4. What methods are used to finance and manage domestic debt in Nigeria, and how is the debt structured?

1.3 Objectives of the Study

The broad objective of the study is to investigate the structure and composition of domestic debt and its impact on private investment in Nigeria. The specific objectives are to:

1. establish the impact of domestic debt on domestic private investment in Nigeria;
2. investigate the impact of domestic debt on foreign private investment in Nigeria;
3. ascertain the nature of the long-run relationship between domestic debt and private investment in Nigeria; and
4. describe the methods of financing and managing domestic debt in Nigeria.

1.4 Research Hypotheses

In line with the objectives, the following hypotheses, stated in null form, will be tested:

H₀₁: Domestic debt has no significant impact on domestic private investment in Nigeria.

H₀₂: Domestic debt has no significant impact on foreign private investment in Nigeria.

H₀₃: There is no significant long-run relationship between domestic debt and private investment in Nigeria.

The fourth objective and research question are descriptive. They are addressed through analysis of the composition and management of the debt and are therefore not subjected to statistical testing.

1.5 Significance of the Study

The study is relevant from a policy perspective, especially for a developing economy such as Nigeria. It offers an up-to-date picture of the structure and composition of domestic debt and of its relationship with private investment. The Debt Management Office, the Federal Ministry of Finance, the Central Bank of Nigeria and state governments can draw on its findings in designing borrowing strategies that support, rather than displace, private sector activity.

Investment analysts and business owners will find the results useful in assessing how government borrowing affects interest rates, credit availability and the investment climate. Researchers and students will benefit from a study that extends the analysis to recent data and separates domestic from foreign private investment, and it may stimulate further work in this field. On the whole, the study will be beneficial to investment analysts, policy makers, the government and the public in general.

1.6 Scope of the Study

The study covers the structure and composition of domestic debt and its impact on private investment in Nigeria. It is a time series study, and the data span the period 1970 to 2024. The choice of this period is informed by the availability of consistent annual data and by the need to include the recent rise in domestic borrowing.

The variables of interest are domestic debt, domestic private investment, foreign private investment, nominal exchange rate, interest rate, inflation rate, external debt, national savings, debt servicing and real gross domestic product. These variables are selected on the basis of the theoretical and empirical literature reviewed, with a few additions to meet the objectives of the study.

References

Abubakar, A. B., & Mamman, S. O. (2021). Effect of public debt on private investment in Nigeria: Evidence from an asymmetric dynamic model. CBN Economic and Financial Review, 59(3), 59–86. https://dc.cbn.gov.ng/efr/vol59/iss3/3

Jato, T. P. J., & Nwankwo, N. (2024). Crowding-out effect of public debt on private sector credit in Nigeria. African Journal of Economic Review, 12(3), 57 onwards.

Simon, E. O., Ibenta, S., Yua, H., & Clement, N. (2023). Domestic and foreign debt dynamics and nonlinear effects on private investments in Nigeria: Evidence with asymmetric ARDL and causality. African Journal of Accounting and Financial Research, 6(2). https://doi.org/10.52589/AJAFR-LCLPU429

Tunji, T. (2026, April 15). Nigeria's public debt rises to ₦159.28 trillion in December 2025 – DMO. Nairametrics. https://nairametrics.com/2026/04/15/nigerias-public-debt-rises-to-n159-28-trillion-in-december-2025-dmo/

Tunji, T. (2026, February 20). Nigeria's public debt hits ₦153.29 trillion in Q3 2025 – DMO. Nairametrics. https://nairametrics.com/2026/02/20/nigerias-public-debt-hits-n153-29-trillion-in-q3-2025-dmo

Udo Oji, G., & Emmanuel John, C. (2022). Domestic debt effect on Nigeria's economic growth. International Journal of Business Management, 5(3), 1–15.

Yusuf, D. B. (2019). Public domestic debt and interest rate in Nigeria: An ARDL bounds test analysis. La Revue Économique de l'Afrique de l'Ouest, 6(1).