The Effect of External Debt on Private Investment in Sub- saharan Africa

No Thumbnail Available



Journal Title

Journal ISSN

Volume Title




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.



External Debt, Debt Service, private investment, Debt Overhang and crowding-out effects, Econometric Modeling, Sub-Saharan Africa JEL classfi cation, F34, H54, C33