The Effect of External Debt on Private Investment in Sub- saharan Africa
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Date
2021-06
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A.A.U
Abstract
This study investigate the E ect of External debt on Private Investment in Sub Sa-
hara.The objective of the study is to investigate whether the SSA external debt burden
has contributed to weak private investment in the country. For this purpose, two hypothe-
ses need to be tested. First, the debt-service ratio is expected to have a negative e ect
on private investment. Second, public investment is hypothesized to have positive e ect
on private investment. The study is carried out using the GMM and FE the time series
panel data analyzed cover the period 2000 - 2019. Gross private investment (PRI) is
speci ed as a function of the debt-service ratio (DSR), gross public investment (PUI),
External debt stock (ED), GDP rate (GDPr), credit to private sector (CPS). The em-
pirical ndings provided evidence for debt overhang problem of the external debt stock
accumulation. However, the empirical analysis reveals that the debt service ratio crowds
out private investment as hypothesized. This would mean that the scarce resources avail-
able in the country are being used to meet the external debt obligations instead of being
allocated to productive investment. Moreover, the results con rmed the positive impacts
of public investment on private investment. The positive impact of public investment on
private investment could also be witness for the absence of crowding out e ect of external
debt servicing. The econometric nding with respect to private sector credit also suggested
the positive contribution on the private investment in sub Saharan African countries. All
in all, the study concludes that the external debt stock overhang and external debt service
ratio crowds out private investment in Sub Saharan Africa. While the Government rec-
ognizes the private sector to be the key engine of economic growth and poverty reduction,
policy makers should raise productivity of capital and increase the demand for the private
sector output. To this e ect, it is also suggested that more resources should be allocated
to the areas of agriculture and infrastructure. These measures would help to enhance
conditions meant to attract more private investment in the countries.
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Keywords
External Debt, Debt Service, private investment, Debt Overhang and crowding-out effects, Econometric Modeling, Sub-Saharan Africa JEL classfi cation, F34, H54, C33