Analysis of the Impacts of Domestic Debts on Private Sector Credit, Lending Rate, and Real Output: Evidence from Nigeria

Aniekan O. Akpansung^1,

¹Department of Economics, Modibbo Adama University of Technology, Yola, Nigeria

Cite this paper:
Aniekan O. Akpansung. Analysis of the Impacts of Domestic Debts on Private Sector Credit, Lending Rate, and Real Output: Evidence from Nigeria. Journal of Finance and Economics. 2018; 6(3):111-123. doi: 10.12691/jfe-6-3-5

Abstract

It is commonly held that excessive domestic debt reduces private sector credit, raise bank lending rates, and shrink output as the Government competes with the private sector for private savings. Using multivariate vector autoregression approach and annual time series data spanning 1981-2016, this paper analysed the dynamic interactions and impacts of domestic debts on private sector credit, prime lending rate, and real output in Nigeria. The stability and higher-order dynamics of the VAR model were also examined. Our results provide evidence that Government domestic debt exerted statistically insignificant positive impacts on both private sector credit and prime lending rate, and a statistically significant negative impact on real output in Nigeria during the period covered by the study. Policy implications and recommendations have been proffered.

Keywords:
domestic debt private sector credit prime lending rate real output vector autoregressive model granger causality

This work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]	Central Bank of Nigeria (2016). Statistical bulletin and annual statements of accounts. Abuja: Central Bank of Nigeria.
[2]	Keynes, J. M. (1929). The German transfer problem. The Economic Journal 39, March: 1-7.
[3]	Panizza, U. (2008). Domestic and external public debt in developing countries. UNCTAD Discussion Paper No. 188, Geneva.
[4]	UNCTAD (2016). Economic development in Africa report 2016: Debt dynamics and development finance in Africa, United Nations, New York.
[5]	Reinhart, C., & Rogoff, K. (2008b). The forgotten history of domestic debt. NBER Working Paper No. 13946, National Bureau of Economic Research, Cambridge, MA.
[6]	Central Bank of Nigeria (2014). 2013 half year economic report. Abuja: Central Bank of Nigeria.
[7]	Bundesbank (2005). Credit growth, bank capital and economic activity. Deutsche Bundesbank Monthly Report, March.
[8]	Engen, E. M., & Hubbard, R. G. (2004). Federal government debt and interest rates. National Bureau of Economic Research, pp. 83-138.
[9]	Anyanwu, J. C. & Erhijakpor, A. E. O. (2004). Domestic debt and economic growth: The Nigerian case. Retrieved from https://www.researchgate.net/publication/263662283.
[10]	Odozi, V. A. (1996). Nigeria’s domestic public debt stock: An assessment. CBN Bullion, 20(2): 11-23.
[11]	Garba, A. G. (1998). Nigerian domestic debt: Resolution of the stock-flow puzzle and generation of credible data set., Nigerian Journal of Economics and Social Studies, 40(3): 313-350.
[12]	Rapu, S. C. (2003). Assessment of Nigeria’s domestic debt sustainability. CBN Economic and Financial Review, 42(2): 41-66.
[13]	Adofu, I., & Abula, M. (2010). Domestic debt and the Nigerian economy. Current Research Journal of Economic Theory 2(1): 22-26.
[14]	Oke, M., & Sulaiman, L. A. (2012). External debt, economic growth and investment in Nigeria. European Journal of Business and Management, 4(11): 67-75.
[15]	Amassoma, D. (2011). External debt, internal debt and economic growth bound in Nigeria using a causality approach. Current Research Journal of Social Sciences 3(4): 320-325.
[16]	Wosowei, E. (2013). Fiscal deficits and macroeconomic aggregates in Nigeria. Kuwait Chapter of Arabian Journal of Business and Management Review 2(9):72-82.
[17]	Ekperiware, M. C., & Oladeji, S. I. (2012). External debt relief and economic growth in Nigeria: 1975-2005. American Journal of Economics 2(7). August.
[18]	Onyeiwu, C. (2012). Domestic debt and the growth of Nigerian economy. Research Journal of Finance and Accounting. 3(5).
[19]	Essien, S. N., Agboegbulem, N. T. I., Mba, M. K., & Onumonu, O. G. (2016). An empirical analysis of the macroeconomic impact of public debt in Nigeria. CBN Journal of Applied Statistics 7(1(a)) (June): 125 -145.
[20]	Debt Management Office(DMO) (2016). Annual report and statement of accounts. Abuja, Nigeria: Debt Management Office.
[21]	Panizza, U. (2007). Is domestic debt the answer to debt crises? Initiative for Policy Dialogue. Working Paper Series. December.
[22]	Reinhart, C. M., Kirkegaard, J. F. & Sbrancia, B. (2011). Financial repression redux. Finance and Development, 48(2): 22-26.
[23]	King, R. G., & Levine, R. (1993). Finance and growth: Schumpeter might be right. The Quarterly Journal of Economics,108(3): 717-737.
[24]	Anyanwu, J. C (1998). Do large fiscal deficits produce high interest rate? The case of Nigeria, Ghana and the Gambia. CBN Financial Economic Review, 36(1): 51-84.
[25]	Christensen, J. (2005). Domestic debt markets in Sub-Saharan Africa. IMF Staff Papers 52 (3): 518-538.
[26]	Abdel-Kader, K., (2006). Private sector access to credit in Egypt: Evidence from survey data. The Egyptian Center for Economic Studies Working Paper No. 111.
[27]	Abbas, A., & Christensen, J. (2007). The role of domestic debt markets in economic growth: An empirical investigation for low-income countries and emerging markets. IMF Working Paper No. 07/127.
[28]	Mukhtar, T., & Jakaria, M. (2008). Budget deficits and interest rates: An empirical study for Pakistan”, Journal of Economic Cooperation, 29: 2.
[29]	Obi, B., & Nurudeen, A. (2008). Do fiscal deficits raise interest rates in Nigeria? A vector auto regression approach. Journal of Applied Quantitative Methods, 4(3): 306-316.
[30]	Maana, I., Owino, R., & Mutai, N. (2008). Domestic debt and its impact on the economy – the case of Kenya. Paper presented during the 13th Annual African Econometric Society Conference in Pretoria, South Africa, 9- 11th July.
[31]	Emran, M. S., & Farazi, S. (2009). Lazy Banks? Government borrowing and private credit in developing countries. Institute for International Economic Policy: The George Washington University.
[32]	De Bonis, R. & Stacchini, M. (2010). What determines the size of bank loans in industrialized countries? The role of government debt. Working Papers No.39, Money and Finance Research Group.
[33]	Baldacci, E. & Kumar, M., S. (2010). Fiscal deficits, public debt, and sovereign bond yields. IMF Working Paper 10/184.
[34]	Fyed, M. E. (2012). Crowding out effect of public borrowing: The case of Egypt. Faculty of Economics and Political Science, Economics Department, Cairo University.
[35]	Claeys, P., Moreno, R. & Suriñach, J. (2012). Debt, interest rates, and integration of financial markets. Economic Modelling, 29: 48-59.
[36]	Obiwuru, T. C., Okwu, A. T., & Ekezie, J. O. (2013). Effects of domestic debt on economic growth of Nigeria. Journal of Strategic and International Studies, IX(1): 44-60.
[37]	Shetta, S. & Kamaly, A. (2014). Does the budget deficit crowd-out private credit from the banking sector? The case of Egypt. Topics in Middle Eastern and African Economies 16(2): 251-279.
[38]	Cebula, R. J. (2015). On the nominal interest rate yield response to net government borrowing in the U.S.: GLM estimates, 1972-2012. International Journal of Applied Economics, March, pp. 1-15.
[39]	Ahmed, J. (2016). Credit conditions in Pakistan: Supply constraints or demand deficiencies? The Developing Economies 54(2): 139-161.
[40]	Choudhary, M. A., Khan, S., Pasha, F., & Rehman, M. (2016). The dominant borrower syndrome. Applied Economics 48 (49): 4773-4782.
[41]	Okwu, A. T., Obiwuru, T. C., Obiakor R. T., & Oluwalaiye, O. B. (2016). Domestic debt and economic growth in Nigeria: Data-based evidence, Greener Journal of Economics and Accountancy. 5 (1), 001-012.
[42]	Anyanwu, A., Gan, C., & Hu, B. (2017). Government domestic debt, private sector credit, and crowding out effect in oil-dependent countries. Journal of Economic Research 22: 127-151.
[43]	Prah, D., & Tenakwah, E. J. (2017). Impact of government domestic borrowing on interest rate. International Journal of Advanced Research and Development, 2(5): 86-91.
[44]	Djankov, S., McLiesh, C. & Shleifer, A. (2007). Private credit in 129 countries. Journal of Financial Economics, 84 (2): 299-329.
[45]	Sims, C. A. (1980). Macroeconomics and reality. Econometrica, 48, 1-48.
[46]	Kilian, L., & Lütkepohl,, H. (2016). Structural vector autoregressive analysis. Cambridge: Cambridge University Press.
[47]	Gorgi, P., Koopman, S. J., & Schaumburg, J. (2017). Time-varying vector autoregressive models with structural dynamic factors. Vrije Universiteit Amsterdam and Tinbergen Institute. The Netherlands September 27.
[48]	Jones, P. M., Olson, E., & Wohar, M. (2015). A reexamination of real stock returns, real interest rates, real activity, and inflation: Evidence from a large dataset
[49]	Breusch, T. (1978). Testing for autocorrelation in dynamic linear models. Australian Economic Papers, 17: 334-355.
[50]	Godfrey, L. (1978). Testing against general autoregressive and moving average error models when the regressors include lagged dependent variables. Econometrica, 46:1293-1302.
[51]	Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2): 335-346.
[52]	Kwiatkowski, D., Phillips, P.C.B., Schmidt, P., & Shin, Y. (1992). testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics, 54: 159-178.
[53]	Pfaff, B. (2007). Analysis of integrated and cointegrated time series. The 1st International R/Rmetrics User and Developer Workshop, 8–12 July, Meielisalp, Lake Thune, Switzerland.
[54]	Gimeno, R., Manchado, B., & Minguez, R. (1999). Stationarity in financial time series. Physica A, 269: 72-78.
[55]	Baum, C. F. (2013). VAR, SVAR and VECM models. EC 823: Applied Econometrics. Boston College, Spring.
[56]	Bjørnland, H. C. (2000). VAR models in macroeconomic research. Statistics Norway, Research Department.
[57]	Lütkepohl, H. (1991). Introduction to multiple time series analysis. Berlin: Springer-Verlag.
[58]	Lütkepohl, H. (2005). New introduction to multiple time series analysis. Berlin: Springer-Verlag.
[59]	Pandit, R. (2005). The impact of fiscal deficit on long-term nominal interest rate in Nepal. Economic Review, Occasional Paper No. 17, Nepal Rastra Bank, Kathmandu.
[60]	Bayat, T., Kayhan, S., & Senturk, M. (2012). Budget deficits and interest rates: An empirical analysis for Turkey. Eurasian Journal of Business and Economics, 5 (9): 119-128.
[61]	Chakraborty, L. (2012). Interest rate determination in India: Empirical evidence on fiscal deficit-interest rate linkages and financial crowding out. Economics Working Paper Archive WP 744. The Levy Economics Institute, New York.
[62]	Turner, D., & Spinelli, F. (2013. The effect of government debt, external debt and their interaction on OECD interest rates. OECD Economics Department Working Papers, No. 1103, OECD Publishing, Paris.