DOES PUBLIC SECTOR DEFICIT FINANCING CROWD OUT PRIVATE SECTOR INVESTMENT IN NIGERIA?: EVIDENCE FROM VAR ANALYSIS

Abstract

The paper investigates the consequences of huge government presence in running the economy and tested the hypothesis that public sector deficit financing crowds-out private sector investment in Nigeria. Using structural vector auto regression (SVAR),corroborated by impulse response function (IRF),the result according to the finding shows that the observed variable(s) private sector investment(PSI), and interest(INTR)gives the expected sign in conformity with the submission of theory, government borrowing and gross domestic product are both positive, which is expected. The negative sign of private sector investment, and interest, shows an indication of a crowding-out effect. However, for the negative sign of interest rate, one should expect that the effect of public sector deficit financing be neutralized, hence stimulating private sector investment in Nigeria. Also the result from the impulse response function agrees with the parametric estimates, as the instrumental variables response in the same direction to the shock introduced to public sector deficit. It is evidence from the results that private sector investment is not only interest sensitive, but as well depends on the extent of government involvement and other important explanatory variables. The study recommends therefore that a holistic policy design geared towards boosting private sector investment be put place, instead of concentrating on the conventional interest rate sensitive investment. This will guarantee the synergy between the private and public sector activities in an economy.