Crowding-out Effect of Public Debt on Private Sector Credit in Nigeria

Abstract

This paper investigates the effect of public debt on private sector credit in Nigeria, aiming to determine if public-sector borrowings crowd out private sector credit through rising interest rates. Utilizing the quantile autoregressive distributed lag (QARDL) model, the study examines the long-term equilibrium effect of public debt on private sector credit across various quantiles. The Wald test was employed to assess the time-varying relationship and the constancy of integrating coefficients across quantiles. To address potential contemporaneous correlations between variables, a projection method is used to derive a QARDL-ECM model. Findings indicate a significant crowding-out effect, with a one-unit increase in public debt leading to a 1.49-unit decrease in private-sector credit. This negative impact is observed both in the short and long run, and the effect varies across quantiles, from positive at lower quantiles to negative at higher quantiles. Additionally, per capita GDP positively influences private sector credit, while interest rates and institutional quality index have negative effects of varying magnitudes. The study concludes that public-sector borrowings indeed crowd out private-sector credit in Nigeria. It is recommended among others that the Nigerian government should adopt strategies to manage and reduce public debt to mitigate its negative impact on private-sector credit and diversify its sources of funding to reduce reliance on borrowing.