Assessing the Effect of International Lending Interest Rate Volatility on Government Infrastructural Expenditure

Abstract

Spending on government infrastructure in Nigeria is faced with several economic challenges among which international lending rate volatility is significant. This study focuses on determining the effect of interest rate fluctuation on government infrastructural expenditure between 1993 and 2022. Its theoretical footing is the loanable fund theory, as it employs the Vector Error Correction framework to analyse the various data sourced from the World Development Indicators. The stationarity test confirmed that all the data were stationary at levels. Empirical results confirmed that international lending rate fluctuation has insignificant positive impact on public infrastructural spending (government infrastructural expenditure) in Nigeria. It was also observed that a long run relationship exists between international lending interest rate fluctuation and infrastructural development in Nigeria. It was therefore recommended that the regulatory authorities should strive to maximize this opportunity to design appropriate long term policies that can enhance infrastructural expansion through the appropriate modelling of international interest rate regime rather than putting in place short term measures that are not sustainable to infrastructural development. This paper proposes an innovative bond, the floating-interest infrastructure bond, which could attract private finance in infrastructure projects. This paper explains how private finance can be channelized into infrastructure investment by the sharing of spillover tax revenues between the government and the investors using a floating-interest-rate infrastructure bond. The private sector, such as banks and postal banks, will develop long-term deposits to provide loans for infrastructure development. Unlike the usual government bond, which provides a fixed interest rate, the proposed floating-interest-rate infrastructure bond pays a floating interest. Spillover effect depends on a number of factors, suc