An analysis of the nexus between public debt and private investment: Evidence from Namibia
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Date
2022
Authors
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Publisher
University of Namibia
Abstract
Public debt in Namibia has been rising over the years and the question is whether the
persistently high debt level can negatively affect private gross fixed capital formation or not.
Applying the Autoregressive Distributed Lag (ARDL) model for cointegration on data for the
period 2010Q1 to 2019Q4, this study empirically examined the nexus between public debt and
private gross fixed capital formation in Namibia. The ARDL test results revealed the existence
of a long-run relationship between the variables. Domestic debt and interest rate were found to
have a statistically significant negative effect on private gross fixed capital formation in the
long-run. These findings are consistent with the Classical and Neoclassical Views, which state
that domestic debt crowds-out private investment. Moreover, the Granger Causality test was
employed as a confirmatory test to determine the direction of causality between public debt
and private gross fixed capital formation. The Granger Causality test results show the presence
of no causality between public debt and private investment in Namibia. A bi-directional
relationship was, however, found to exist between interest rate and private gross fixed capital
formation. Moreover, a statistically significant bi-directional causal relation was also
discovered between gross domestic product and gross fixed capital formation. Policy
implications from these findings are that proper debt management to support private gross fixed
capital formation in Namibia is fundamental. Furthermore, the newly established revenue
agency could create new avenues to raise funds to widen the revenue base. Finally, the
government could moderately increase external borrowing, albeit with caution, as external debt
can be susceptible to external shocks, which affect debt service cost
Description
A thesis submitted in partial fulfilment of the requirements for the Degree of Master of Science in Economics
Keywords
Nexus, Public debt, Private investment, Namibia, University of Namibia