The Interactive Term of Debt Servicing and Oil Revenue on Capital Formation in Nigeria

Abstract

Excessive debt servicing can strain government budgets, diverting resources away from critical investments and capital formation. Therefore, this study investigates how the concurrent level of debt servicing affects the relationship between oil revenue and capital formation in Nigeria. The study employs fully-modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) estimation techniques and utilizes time series data covering a period from 1981 to 2022. Results indicate a cointegration relationship among the variables in the model, and the findings reveal that debt servicing negatively and significantly moderates the positive effect of oil revenue on capital formation in Nigeria. Based on these findings, the study recommends that policymakers should carefully manage debt servicing obligations. This may involve exploring strategies to reduce the cost of servicing or optimizing debt repayment schedules to minimize the impact on the country's overall debt burden. Similarly, since the findings suggest that oil revenue has a positive impact on capital formation, policymakers should devise strategies to efficiently manage and diversify the use of oil revenues to enhance overall capital formation.