THE FISCAL–FINANCIAL SQUEEZE AND PRIVATE SECTOR DEVELOPMENT IN NIGERIA: DO PUBLIC DEBT AND DEBT-SERVICE BURDENS CROWD OUT PRIVATE-SECTOR BANK CREDIT?

Authors

  • Benjamin O. Idachaba
    Hillside University of Science and Technology
  • Ezekiel Noah
    Hillside University of Science and Technology
  • Temitope S. Odebunmi
    University of Lagos image/svg+xml

Abstract

Nigeria's shallow private credit market has led to fears that the country's increasing public debt-service and borrowing might be limiting business funding. The debate surrounding debt-service pressure and debt stock is often confused when it comes to the issue of credit crowding out: whether crowding out comes from the quantity of debt or the fiscal burden of debt-service. The impact of public debt and interest-service-to-revenue ratio on private-sector bank credit in Nigeria from 1990 to 2023 is considered. The model used is a Bayesian information criterion (BIC) selected autoregressive distributed lag (ARDL) model with robustness tests of unit root, bounds cointegration, diagnostic, structural break, composite-index and dynamic ordinary least squares (DOLS). The trend of the results shows that there is a stable long-term relationship between variables. The public debt has a positive long-run coefficient, which is however statistically insignificant, and the interest-service burden has a negative and highly significant impact on private credit. It is found that, for every increase of one percentage point of interest payments on government revenue, private-sector credit decreases 0.128 percentage point of GDP. The effect of broad money on credit expansion is very high while the effect of long-term lending-rate is small and insignificant. A negative is also registered for the Fiscal–Financial Squeeze Index, but the debt-service is not replicated under DOLS. The study finds that credit constraint on loans is not just about the size of the loans but also about debt affordability, highlighting the need to enhance revenue mobilization, reduce the refinancing pressure, enhance debt maturity management, and deepen financial markets

Dimensions

Abubakar, A. B., & Mamman, S. O. (2021). Effect of public debt on private investment in Nigeria: Evidence from an asymmetric dynamic model. CBN Economic and Financial Review, 59(3), 59–86. https://doi.org/10.33429/1957-2968.2034

Assoum, F., & Alinsato, A. S. (2023). Only under good governance does public debt improve national income: Evidence from a dynamic panel threshold model for sub-Saharan African countries. Journal of Government and Economics, 10, 100078. https://doi.org/10.1016/j.jge.2023.100078 DOI: https://doi.org/10.1016/j.jge.2023.100078

Attout, A., Baldini, A., de O. Schmidt, V. F., & Zwart, S. (2022). Is crowding out of private sector credit inhibiting Africa’s growth? European Investment Bank. https://doi.org/10.2867/041314

Bai, Y., Xu, J., & Jin, C. (2024). The crowding-out effect of government debt: A loan financing-based perspective. Borsa Istanbul Review, 24(5), 1059–1066. https://doi.org/10.1016/j.bir.2024.06.002 DOI: https://doi.org/10.1016/j.bir.2024.06.002

Başkaya, Y. S., Hardy, B., Kalemli-Özcan, Ş., & Yue, V. Z. (2024). Sovereign risk and bank lending: Evidence from 1999 Turkish earthquake. Journal of International Economics, 150, 103918. https://doi.org/10.1016/j.jinteco.2024.103918 DOI: https://doi.org/10.1016/j.jinteco.2024.103918

Colak, G., Habimana, T., & Korkeamäki, T. (2025). The effects of government debt on corporate borrowing in developing economies: Evidence from Africa. Journal of International Business Studies, 56(7), 874–900. https://doi.org/10.1057/s41267-025-00791-1 DOI: https://doi.org/10.1057/s41267-025-00791-1

Demirci, I., Huang, J., & Sialm, C. (2019). Government debt and corporate leverage: International evidence. Journal of Financial Economics, 133(2), 337–356. https://doi.org/10.1016/j.jfineco.2019.03.009 DOI: https://doi.org/10.1016/j.jfineco.2019.03.009

Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(4), 1057–1072. https://doi.org/10.2307/1912517 DOI: https://doi.org/10.2307/1912517

International Finance Corporation. (2025). Nigeria: Country private sector diagnostic: Executive summary. World Bank Group. https://www.ifc.org/content/dam/ifc/doc/2025/nigeria-country-private-sector-diagnostic-summary-en.pdf

International Monetary Fund. (2025). Public finances in modern history [Data set]. IMF DataMapper. https://www.imf.org/external/datamapper/datasets

International Monetary Fund. (2026, June 9). IMF Executive Board concludes 2026 Article IV consultation with Nigeria (Press Release No. 26/190). https://www.imf.org/en/news/articles/2026/06/09/pr26190-nigeria-imf-executive-board-concludes-2026-article-iv-consultation-with-nigeria

Islam, A. M., & Nguyen, H. (2026). Distributional crowding out effects of public debt on private investment in developing economies. Journal of International Money and Finance, 164, 103565. https://doi.org/10.1016/j.jimonfin.2026.103565 DOI: https://doi.org/10.1016/j.jimonfin.2026.103565

Jato, T. P. J., & Nwankwo, N. (2024). Crowding-out effect of public debt on private sector credit in Nigeria. African Journal of Economic Review, 12(3), 57–73. https://doi.org/10.22004/ag.econ.347736 DOI: https://doi.org/10.2139/ssrn.4922693

Kilinc, M., & Tunc, C. (2026). Debt service channel for external debt and growth in developing countries. Journal of Macroeconomics, 87, 103738. https://doi.org/10.1016/j.jmacro.2026.103738 DOI: https://doi.org/10.1016/j.jmacro.2026.103738

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(1–3), 159–178. https://doi.org/10.1016/0304-4076(92)90104-Y DOI: https://doi.org/10.1016/0304-4076(92)90104-Y

Liu, Q., Bai, Y., & Song, H. (2023). The crowding out effect of government debt on corporate financing: Firm-level evidence from China. Structural Change and Economic Dynamics, 65, 264–272. https://doi.org/10.1016/j.strueco.2023.03.005 DOI: https://doi.org/10.1016/j.strueco.2023.03.005

Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.1111/j.1540-6261.1952.tb01525.x DOI: https://doi.org/10.1111/j.1540-6261.1952.tb01525.x

Narayan, P. K. (2005). The saving and investment nexus for China: Evidence from cointegration tests. Applied Economics, 37(17), 1979–1990. https://doi.org/10.1080/00036840500278103 DOI: https://doi.org/10.1080/00036840500278103

Ohlin, B. (1937). Some notes on the Stockholm theory of savings and investment I. The Economic Journal, 47(185), 53–69. https://doi.org/10.2307/2225278 DOI: https://doi.org/10.2307/2225278

Ojeka, O. J., Egbetunde, T., Okoduwa, G. O., Ojeyode, A. O., Jimoh, M., & Ogunbowale, G. O. (2024). Moderating effect of institutional quality on the influence of debt on investment in sub-Saharan Africa. Future Business Journal, 10, 76. https://doi.org/10.1186/s43093-024-00362-0 DOI: https://doi.org/10.1186/s43093-024-00362-0

Pedersoli, S., & Presbitero, A. F. (2023). Public debt management and private financial development. Economic Systems, 47(1), 101010. https://doi.org/10.1016/j.ecosys.2022.101010 DOI: https://doi.org/10.1016/j.ecosys.2022.101010

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616 DOI: https://doi.org/10.1002/jae.616

Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335–346. https://doi.org/10.1093/biomet/75.2.335 DOI: https://doi.org/10.1093/biomet/75.2.335

Stock, J. H., & Watson, M. W. (1993). A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica, 61(4), 783–820. https://doi.org/10.2307/2951763 DOI: https://doi.org/10.2307/2951763

Tobin, J. (1958). Liquidity preference as behavior towards risk. The Review of Economic Studies, 25(2), 65–86. https://doi.org/10.2307/2296205 DOI: https://doi.org/10.2307/2296205

Togo, E., Miao, H., Anthony, M. L., Kim, M. S., Kogan, J., & Luo, S. (2025). Restructuring sovereign domestic debt in developing countries (IMF Working Paper No. 2025/202). International Monetary Fund. https://doi.org/10.5089/9798229028158.001 DOI: https://doi.org/10.5089/9798229028158.001

Wicksell, K. (1936). Interest and prices: A study of the causes regulating the value of money (R. F. Kahn, Trans.). Macmillan. (Original work published 1898)

World Bank. (2026). World Development Indicators [Data set]. https://databank.worldbank.org/source/world-development-indicators

Yusuf, A., & Mohd, S. (2023). Nonlinear effects of public debt on economic growth in Nigeria. SN Business & Economics, 3(4), 88. https://doi.org/10.1007/s43546-023-00468-7 DOI: https://doi.org/10.1007/s43546-023-00468-7

Zivot, E., & Andrews, D. W. K. (1992). Further evidence on the Great Crash, the oil-price shock, and the unit-root hypothesis. Journal of Business & Economic Statistics, 10(3), 251–270. https://doi.org/10.1080/07350015.1992.10509904 DOI: https://doi.org/10.1080/07350015.1992.10509904

Published

2026-10-21

How to Cite

Idachaba, B. O., Noah, E., & Odebunmi, T. S. (2026). THE FISCAL–FINANCIAL SQUEEZE AND PRIVATE SECTOR DEVELOPMENT IN NIGERIA: DO PUBLIC DEBT AND DEBT-SERVICE BURDENS CROWD OUT PRIVATE-SECTOR BANK CREDIT?. FUDMA Journal of Business Management, 4(2), 519-536. https://doi.org/10.70882/fjbm.2026.v4i2.153

Issue

Vol. 4 No. 2 (2026): FUDMA Journal of Business Management

Section

Articles
Copyright & Licensing

Copyright (c) 2026 Benjamin O. Idachaba, Ezekiel Noah, Temitope S. Odebunmi (Author)

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

How to Cite

Idachaba, B. O., Noah, E., & Odebunmi, T. S. (2026). THE FISCAL–FINANCIAL SQUEEZE AND PRIVATE SECTOR DEVELOPMENT IN NIGERIA: DO PUBLIC DEBT AND DEBT-SERVICE BURDENS CROWD OUT PRIVATE-SECTOR BANK CREDIT?. FUDMA Journal of Business Management, 4(2), 519-536. https://doi.org/10.70882/fjbm.2026.v4i2.153

Most read articles by the same author(s)