Domestic Debt Market and Public Investment Decision: Evidence from Nigeria

Abstract: This study explores the relationship between Nigeria’s domestic debt dynamics and public investment decisions, considering their implications for economic development and fiscal sustainability. Theoretical frameworks from Keynesian economics and the crowding-out hypothesis provide the foundation for understanding the relationship between domestic debt dynamics and public investment decisions. Empirical studies offer mixed findings, underscoring the need for context-specific analysis in Nigeria. Despite growing literature, significant gaps remain, including the lack of comprehensive studies specific to Nigeria’s context and the neglect of sectoral differences in investment outcomes. Drawing on a robust financial time series methodology and secondary data from reputable sources, including the Central Bank of Nigeria, the study covers the period from 1986 to 2022. Key financial instruments such as Treasury Bonds, Treasury Bills, and Federal Government Bonds are examined as proxies for domestic debt, while public investment decisions are assessed through expenditures in the public transportation sector. The methodology employs unit root tests, co-integration analysis, Error Correction Models (ECM), and Granger Causality analysis to explore the relationship between domestic debt dynamics and public investment decisions. The results indicate significant influences of lagged Treasury Bills, lagged Federal Government Bonds, and the error correction mechanism on public transportation expenditure. However, the difference in lagged Treasury Bills does not appear to have a statistically significant effect. The model explains approximately 67.38% of the variation in public transportation expenditure, with no significant autocorrelation present in the model residuals. In conclusion, the study contributes to understanding the intricate relationship between domestic debt market dynamics and public investment decisions in Nigeria. It provides evidence-based insights that can inform policy interventions aimed at promoting fiscal sustainability and economic development.