The Effect of External Debt on Economic Growth and its Sustainability in Sub-Saharan Africa
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Date
2019-05
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Addis Ababa University
Abstract
To date, the impact of external debt on economic growth is still ambiguous. On one hand, there exist copious and mixed evidential outcomes on the effect of external debt on economic growth. On the other hand, the contradiction prevailed between the linear and non-linear effect of external debt on economic growth. The objective of this study is twofold. First, to investigate the effect of external debt on economic growth in Sub-Saharan Africa (SSA). Second, to examine the sustainability of external debt in the region. A large panel data set of 41 SSA countries over the period of 2000-2017 is employed to estimate the effect of external debt on economic growth. The panel threshold model developed by Hansen (1999) is applied to analyze the effect of external debt on economic growth. The study adopts the bootstrap method developed by Hansen (1999) to test the statistical significance of the threshold effect. The empirical result revealed that there is a statistically significant non-linear relationship between external debt and economic growth in SSA, implying that a negative impact of external debt on economic growth at a higher level. The study finds strong evidence that there is a single threshold level of external debt-to-GDP ratio. The threshold level of external debt-to-GDP ratio for SSA works out to be 21.78 percent, beyond which the negative effect of external debt on economic growth is observed and the level of external debt is unsustainable. In addition, external debt sustainability is analyzed based panel unit root tests and panel co integration test. According to these test results, external debt is unsustainable in SSA. In light of these findings, this study recommended that governments of SSA countries should utilize their external borrowed resource in productive and development purposes, and should adopt sound external debt management policy in terms of structure and composition of external debt.
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Debt sustainability, Economic growth, External debt