Debt Sustainability and Economic Growth: Evidence from Low Income Sub Saharan Africa countries
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Date
2019-06
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Addis Ababa University
Abstract
There exist mixed evidential outcomes on the effect of external debt on economic growth. With
high saving gaps in low-income SSA countries, it seems plausible that external borrowing can
affect growth positively if well utilized or negatively as the debt becomes a burden. As a result,
the purpose of this study is to examine the effect of external public debt on economic growth and
to assess the debt sustainability of twenty-four SSA countries over the period 2000-2017 using
descriptive trend analysis and panel data analysis. The trend and descriptive analysis assessed
the behavior of external public debt and economic growth while the empirical analyses employed
panel data regression in which a fixed effect model is estimated. The study found that external
public debt, external public debt service, and trade openness have a negative and significant
effect on the economic growth of low income SSA countries. However, investment and domestic
debt have a positive and significant impact on the economic growth of the countries that the
study covers. Additionally, the inflation rate and population growth have no significant effect on
economic growth. For the purpose of examining the debt sustainability of chosen countries,
various tests were undertaken. The study concludes that the external debt of low income SSA
nations is unsustainable. In light of these findings, selected SSA countries should adopt a
balance between external and domestic debt to ensure sustainable economic growth. They
should also implement measures to promote export and expand domestic investment.
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Keywords
Debt sustainability, Fixed Effect Model, Housman test