Domestic Debts and Private Lending in Nigeria: Is There a Crowding Out Effect?

Abstract

The impact of domestic debt on private sector credit was examined with the background of the Theory of Crowding-out Effect using annual data from 1981 to 2018. Co-integration regression and Autoregressive distributed lag error correction model were used to analyze the long run and short run relationships between Credit to private sector and various components of domestic debts. Findings showed that domestic debt held by commercial banks and nonbank public has significant positive long run effect on private sector credit while domestic debt held by the Central Bank had a significant negative long run effect on credit to private sector. In the short run, domestic debt held by commercial banks and the public had significant positive impact on credit to private sector at zero lag. But at one lag, domestic debt held by commercial banks and the public had significant negative effect on credit to private sector respectively, showing evidence of crowding-out effect, which was connected to the maturity period of government debt instruments. It was recommended that realized funds from government debt instrument should be used to finance projects that enhance private investment activities so that the crowding- out effect of private credit do not have adverse effect on private investment and that effort should be made to involve domestic private firms in the process of executing government projects through public-private partnership.