Content area
Full Text
ABSTRACT
The rapid increase in Nigeria's domestic debt has raised many questions about fiscal sustainability of current economic policies which is intensified by short maturity period of most government domestic debts, and the fact that the banking sector still remains the dominant holder of Federal Government domestic debt instruments to finance huge fiscal deficits have negative implications on the private sector in Nigeria. Hence, this study examines the impact of domestic debt on credit to private sector on Nigeria's economic growth between the periods of 1970 to 2015 adopting the Structural VAR technique of estimation to investigate the response of credits to private sector to innovations from domestic debt. This study concludes that since domestic debt induces prolonged crowding out effect on the credits to private sector in Nigeria, the federal government should carryout fiscal reforms in order to stem the current crowding out effect of domestic debt policy through restructuring and rescheduling of domestic debt.
JEL Classification: E51; H63; H68.
Keywords: Domestic Debt; Private Credit; Sustainability; Structural VAR; Nigeria.
1. INTRODUCTION
The growth and unsustainability of domestic debt of many countries has raised concern about the impact of domestic debt on private sector investments, economic growth and government's ability to provide basic infrastructures for their citizens, hence necessitate the need for debt sustainability across the globe. Domestic borrowings can be healthy but excessive borrowing has some distortionary effects in the economy (Adofu & Abula, 2010).
If government becomes heavily indebted domestically and inflation and interest rate rises, government will have to pay high to service this domestic debt. In most cases, domestic debts cannot be defaulted or reschedule unlike external debt. This is because domestic debt is mostly held by the banking sector and default may trigger a banking crisis (Heidari et al., 2013; Katircioglu, 2012). However, in Nigeria, the increase in domestic debt has raised many questions about fiscal sustainability of current economic policies (Katircioglu, 2010). The fears about sustainability have also been intensified by a very short maturity period of most of the government domestic debts, and the fact that the banking sector remains the dominant holder of Federal Government domestic debt instruments, which may have negative implications for the private sector in Nigeria (CBN report, 2012). For instance, the domestic...