Government Domestic Borrowing and Private Sector Credit Crowding out: Empirical Evidence from Nigeria

Abstract

The impact of government domestic borrowing on the private sector credit has been a subject of great interest to researchers in finance. This study looked at the impact of government domestic borrowing on private sector credit in Nigeria. Government domestic borrowing can affect the private sector by crowding out private sector credit directly or indirectly through rising interest rates. The study employed an ex-post research methodology. Secondary data was collected from the Debt Management Office Nigeria and the Central Bank of Nigeria. The study covered a 10-year period from 2009 to 2018. An OLS multiple regression model was used. Government domestic borrowing was proxied by federal government bond issuances as the dependent variable. The deposit money banks’ prime lending rates, private sector lending by the banks, the bank’s investment in treasury bills and government bonds were the independent variables. The data was tested for heteroscedasticity, stationarity, normality, multicollinearity and serial correlation to examine the robustness of the model. The results showed that prime lending rate has a positive effect on government bond issuance although not significant. The findings also indicated that there is a negative relationship between government domestic bond issuance and the banks credit to private sector. However, this relationship is not statistically significant implying that government borrowing may not have crowded-out private sector. The relationship between government bond issuances and bank investment in treasury bills and government bond is negative although not significant. The findings of this study suggest that government domestic borrowing in Nigeria may have resulted in the reduction of private credit and this works through the credit channel and the interest rate channel.