External Debt Overhang and Crowding Out Effect on Investment in Nigeria Economy

Abstract

This study examines the impact of debt overhang and crowding out effects hypotheses on investment in Nigeria for the period of 1981 to  2018. A three–stage least squares (3SLS) estimation technique was used after the identification condition was carried out. Simulation was  also conducted on the macroeconomic model. The coefficient of the National Income (GDP) is in line with the apriori expectation and also  the other explanatory variables. From the results obtained, the variables were stationary at first difference I(1). From the estimated  model, all the variable became significant at the 0.05 per cent level. There was no autocorrelation in the estimated model. The simulated  results indicate that 10 per cent reduction in the external debt overhang show a negligible impact on investment. When the 50 per cent  reduction of external debt overhang was tested, it indicates a higher level impact of 34.18 per cent. Based on these findings, it is therefore recommended that, the government should ensure that external loans are optimally deployed into investment in order to  increase the volume of export goods and our National Income so as to enable debt repayment and use the balance to increase the  productive investments in the economy.