Revisiting external financing and environmental sustainability nexus: The role of quality institution

Abstract

This study revisits external financing, institutional quality, and environmental sustainability in Nigeria from 1990 to 2024. The study employed autoregressive distributive lag bounds approaches to unravel complex external financing-environmental dynamics. The findings reveal that external financing significantly increases CO2 emissions and natural resource depletion, with institutional quality playing a pivotal moderating role. The study validates the Kuznets hypothesis, demonstrating that the environmental impact of financial mechanisms is contingent upon robust governance frameworks. The study concludes that the environmental impact of external financing is not automatic but rather conditional upon the strength of existing institutional mechanisms, challenging simplistic assumptions about financial flows and environmental outcomes. This study provides compelling evidence that external financing inflows to Nigeria have significant environmental consequences, contributing to both increased carbon emissions and accelerated natural resource depletion over the study period. The practical implication is that policymakers must recognize that attracting external financing without corresponding institutional strengthening exacerbates environmental degradation, while international financial institutions should condition such financing on demonstrable improvements in environmental governance. The validation of the Kuznets hypothesis further suggests that economic development financed through external sources can ultimately benefit the environment, but only if accompanied by parallel investments in governance infrastructure that enable effective environmental management.