This study empirically investigates the impact of bilateral debt on Nigeria’s economic growth from 2007Q1 to 2024Q2, employing the Autoregressive Distributed Lag (ARDL) bounds testing method. The analysis is grounded in the Endogenous Growth and Debt Overhang theories, with real GDP modelled as a function of bilateral debt stock, debt service payment, exchange rate, inflation, and gross capital formation. Quarterly data sourced from the Central Bank of Nigeria, Debt Management Office, and World Bank were tested for stationarity using ADF, PP, and KPSS tests, while model robustness was validated through diagnostic and stability checks, including CUSUM and CUSUM of Squares tests. The findings reveal that bilateral debt and debt servicing exert significant negative effects on Nigeria’s economic growth in both the short and long run, supporting the Debt Overhang Hypothesis. Exchange rate depreciation similarly suppresses growth by amplifying debt burdens, while inflation has a modest positive short-run impact but is contractionary in the long run. Conversely, gross capital formation consistently drives economic growth across all time horizons, highlighting the necessity of channeling debt into productive investment. The error correction term (-0.407) confirms a stable long-run equilibrium, with about 41% of short-run disequilibria corrected each quarter. The study recommends prudent bilateral debt management, prioritization of concessional loans tied to productive projects, stabilization of the exchange rate through export diversification and foreign reserve accumulation, and strengthening of the Debt Management Office’s oversight. Capital formation must remain central to borrowing strategies to mitigate debt overhang effects and foster sustainable growth.