Impact of Debt Overhang and Crowding out Effects on Capital Formation

Abstract

The deficiency of savings in Sub-Saharan Africa, as represented by especially Nigeria has led to shortages in funding capital formation, thereby necessitating external borrowing. This has slowed down and restrained economic growth and development due to the twin problems of debt overhang and crowding out effects. The objective of this study is to assess the impact of debt overhang and crowding out effects on capital formation in Nigeria. Vector Autoregressive (VAR) modeling on time series data covering three decades were employed in the study. The results have established that, debt overhang and crowding out effects have significant negative effects on capital formation. The overall implication of the research findings is that speed of capital formation has been retarded by the negative effects of external debts in form of debt overhang and crowding out effects. Measures by the government should be tailored towards improving capital formation by designing policies that will reduce the burden of debt accumulation and reducing the cost of external debt services. This can be done through enhancing the debt management process and improving efficiency in funds utilization.