DISAGGREGATING DOMESTIC DEBT: EVIDENCE ON OPEN MARKET BORROWING, WAYS AND MEANS AND ECONOMIC DEVELOPMENT IN NIGERIA

Abstract

Nigeria’s rising domestic debt has become a major policy concern, yet the different channels through which it affects economic development remain poorly understood. In particular, the distinction between market-based domestic borrowing and direct monetary financing through Ways and Means Advances has received limited attention. This study therefore examined the effect of domestic open market borrowing and Ways and Means Advances on economic development in Nigeria from 1981 to 2025. Using per capita income as a proxy for economic development, the study employed the Autoregressive Distributed Lag, ARDL, model to estimate both long-run and short-run relationships. The results show that both components of domestic debt undermine economic development. In the long run, a 1% increase in Ways and Means Advances reduces per capita income by 1.08%, while a 1% increase in domestic open market borrowing reduces it by 0.37%. Both effects are statistically significant, suggesting that monetary financing is about three times more damaging to welfare than market borrowing. In the short run, Ways and Means Advances also exert an immediate negative effect, whereas gross capital formation provides a positive but temporary boost. The error correction term of -0.55 confirms a stable long-run relationship, with about 55% of disequilibrium corrected each year. The study therefore concluded that Nigeria’s continued reliance on Ways and Means Advances has come at a high cost to economic development. As such, it recommended strict enforcement of the 5% limit in the CBN Act 2007, improved revenue mobilization to reduce borrowing needs, and channeling borrowed funds into productive capital projects.