Empirical Investigation of the Relationship Between Public Debt and Private Investment Crowding Out in Nigeria

The crowding-out hypothesis predicts that government borrowing crowds out private investment through interest rate and credit availability channels, and empirically testing this relationship for Nigeria provides evidence for fiscal consolidation and debt management policy. This study empirically investigated the relationship between public debt and private investment in Nigeria using annual data from 1985 to 2022. Public debt was decomposed into domestic and external components to assess differential crowding-out effects. Private investment was measured as gross private capital formation as a share of GDP. Control variables included real interest rate, credit to the private sector, inflation, and trade openness. An ARDL bounds test and error correction model were applied. Results confirmed a significant long-run negative relationship between domestic public debt and private investment (coefficient = -0.48, p < 0.001), consistent with the crowding-out hypothesis. External debt showed a positive but non-significant long-run relationship, suggesting lower crowding-out from external borrowing. The error correction speed of adjustment was -0.37. Real interest rate showed a significant negative relationship with private investment. Domestic debt above 18 percent of GDP threshold was associated with significantly accelerated crowding-out effects. The study provides empirical evidence filling the Nigerian crowding-out literature gap and recommends the Debt Management Office targeting domestic debt reduction below the crowding-out threshold, diversifying debt portfolio toward external concessional borrowing, and implementing fiscal rules that protect private sector credit space. Keywords: crowding out, public debt, private investment, Nigeria, ARDL model