Impact Of Foreign Direct Investment (FDI) On Nigeria's Public Debt Stock

Abstract

The rising public debt stock in Nigeria, amid declining foreign direct investment (FDI) inflows, raises growing concerns about fiscal sustainability and the macroeconomic implications of capital movements in a commodity-dependent economy. This study examines the impact of FDI on Nigeria's public debt stock from 1981 to 2024, while accounting for the mediating roles of exchange rate, interest rate, and GDP growth. The study is anchored on Dunning's OLI Framework and the Absorptive Capacity Framework, providing an integrated theoretical lens for interpreting the fiscal implications of foreign capital in the Nigerian context. Using the Augmented Dickey-Fuller (ADF) unit root test, Johansen cointegration test, and Vector Error Correction Model (VECM), the study establishes both short-run dynamics and long-run equilibrium relationships. Results show that FDI significantly reduces public debt in the long run (β = −0.7427, t = −5.194), exchange rate depreciation significantly amplifies debt accumulation (β = 1.746, t = 7.345), and GDP growth exerts a stabilizing debt-reducing effect (β = −1.117, t = −2.403). Interest rates are largely insignificant in the long run but exert meaningful short-run pressure. The error correction term (−0.1344) confirms stable equilibrium convergence at 13.4% annually. The study concludes that FDI can reduce Nigeria's debt burden when accompanied by exchange rate stability and broad-based economic growth. Policy recommendations include attracting diversified and productive FDI, stabilizing the naira, pursuing growth-enhancing structural reforms, and coordinating fiscal and monetary policies.