Empirical Evidence on the Effect of Sovereign Debt on Private Sector Credit in Nigeria: A Crowding-Out Analysis

Government borrowing from the domestic banking system may crowd out private sector credit, constraining investment and growth, and the empirical magnitude of this crowding-out effect in Nigeria's banking sector requires rigorous estimation. This study provides empirical evidence on the effect of sovereign domestic debt accumulation on private sector credit in Nigeria for the period 2005 to 2022, using quarterly time-series data from the Central Bank of Nigeria Statistical Bulletin and the Debt Management Office. Private sector credit was measured by the ratio of commercial bank credit to the private sector to GDP. Sovereign domestic debt was measured by the stock of domestic government securities held by the banking system. The autoregressive distributed lag bounds testing approach and generalised method of moments estimation were employed. Results confirmed a significant negative long-run effect of sovereign domestic debt on private sector credit (coefficient = -0.47, p < 0.01), implying that a 10% increase in government domestic borrowing from banks reduces private sector credit by 4.7 percentage points in the long run. Short-run crowding-out effects were also significant but smaller in magnitude. The crowding-out effect was more pronounced in periods of high fiscal deficits corresponding to the 2016 to 2017 recession and the COVID-19 period. The study fills an important empirical gap and concludes that fiscal consolidation is essential to protecting private sector credit supply in the Nigerian banking system, recommending deficit reduction benchmarks in the Fiscal Responsibility Act. Keywords: sovereign debt, crowding-out, private sector credit, fiscal deficit, Nigeria