Public Debt and Domestic Private Investment: A Crowding Effect in Nigeria

Abstract

This study investigated the relationship between public debt and domestic private investment in Nigeria from 1980-2018. The objectives of the study are: determine the extent to which external debt significantly impacts on domestic private investment in Nigeria, examine if there is any significant impact of domestic debt on domestic private investment in Nigeria; ascertain the extent at which debt servicing significantly impact on domestic private investment in Nigeria and explore if there is any significant causal relationship between public debt and domestic private in Nigeria. The paper applied the following statistical and econometric tests: stationarity test, co integration test, VECM test and VEC Granger causality. Results indicated that external debt has negative significant impact with domestic private investment, domestic debt has negative significant effect on domestic private investment. Debt servicing has a negative insignificant impact on domestic private investment. And there is no directional causality between public debt and domestic private investment. Some of the implications of the results is significant unproductive influence of public debt on domestic private investment, as such most borrowed fund are not invested in choice investment. Sourcing fund for private investment is compromised by high level of government involvement in loanable fund, meaning that since domestic borrowing is mostly done by government due to their trusted repayment plan, domestic private investors will be left with unattainable or difficult conditions that will not allow access to those credit facilities. The researcher concluded that public debt crowds out domestic private investment in the long run in Nigeria within the period of the study.