Government Capital Expenditure and Private Sector Investment in Nigeria: Co-integration Regression and Toda-Yamamoto Causality Analysis

Abstract

This paper analyses the relationship between government capital expenditure and private investment in Nigeria using time series data spanning from 1981 to 2016. Government capital expenditure was disaggregated into different components and ADF unit root test was employed to establish the stationarity properties of the variables in the model. The result of Johanson co-integration test revealed that the variables have long run relationship. Co-integration regression results suggested that capital expenditure on physical assets and defense displaced private sector investment while government capital expenditure on human capital and public debt servicing promote private sector investment in Nigeria. Furthermore, the results of T-Y causality revealed the bidirectional causality private sector investment and government capital expenditure in Nigeria. Based on these findings, the paper recommends that government capital expenditure should be channel to human capital in order to promote private sector investment in Nigeria. In addition, the Nigerian government should pay more attention to capital expenditure on physical assets since it has a significant impact on private sector investment. Lastly, Nigeria government should address the issue of budget delay, corruption, and mismanagement in Nigerian institutions.