Does Debt Servicing Crowd-Out Federal Government Expenditures in Nigeria?

In the past few decades, trillions of Naira have been spent by Federal Government of Nigeria to services its domestic and foreign debts. In this regard, this study tested crowding out hypothesis among federal capital, non-debt servicing recurrent and debt serving expenditure components using Auto Regressive Distributive Lag (ARDL) Bound-Testing technique to Cointegration and Toda-Yomamota test of Granger non-causality over the period 1961-2018. Long-run and short-run parameters estimates show that, a 1 percent rises in debt servicing expenditure component decrease federal non-debt servicing recurrent expenditure by about 0.18 and 0.15 percent and capital expenditures by about 0.23 and 0.28 percent respectively; 1percent increase in federal non-debt servicing recurrent expenditure reduced capital expenditures by about 0.52 percent and a 1 percent increase in federal capital expenditure can increase federal non-debt servicing recurrent expenditure by almost 0.34 percent in the long-run. These results are further confirmed by Toda-Yomamota test of Granger non-causality, which suggest bidirectional causality among the three expenditure components. Overall, evidences are in support of crowding-out hypothesis among the three expenditure components in Nigeria. The policy implications are these: the current federal government fiscal stance (sustained increase in public debt stock and resultant debt servicing) can have short term and long-term adverse effect on capital and non-debt servicing recurrent expenditure. Thus, an optimal combination of increased revenue generation, debt and non-debt deficit financing are required