Many economies in Sub-Saharan Africa have been experiencing high external debt stocks
over the past three or so decades, thereby deepening the problem of debt burden in the
Region. Growth performance, however, remains relatively moderate over the years. The
relationship between economic growth and external debt as espoused in theoretical and
empirical literature remains unclear. Whilst a school of thought postulate that external debt
supplements savings and investment, and hence promotes economic growth, others claim that
external debt serves as a substitute to savings and investment and hence impedes economic
growth. Moreover, some posit that there is an optimal level of debt that promotes growth and
beyond that threshold, debt is deleterious to growth. Earlier studies on debt-growth nexus
have suggested controversy in empirical literature. Most studies concluded that debt
negatively affects economic growth, some aver that debt positively affects growth whilst
others claim that debt has no influence on economic growth but most of these studies focused
on the developed economies. Some studies on Sub-Saharan Africa concluded that external
debt is deleterious to growth, but these studies are very scanty. This study uses a sample of 39
SSA countries for 24 years (1990-2013) to examine the effect of external debt on economic
growth in SSA.
System GMM estimation technique was adopted in the empirical analysis to obtain robust
estimates of the effect of external debt on economic growth. The study accounts for
unobserved country-specific time invariant effects, time series variations in the data, controls
for endogeneity, autocorrelation, heterogeniety and other biases that may characterize panel
estimation model. The estimation results reveal that external debt negatively affects economic
growth in SSA. Moreover, country classification based on the level of per capita income does
not significantly influence the external debt-growth relationship in the region. Furthermore,
the estimation result does not support a non-linear relationship between external debt and
economic growth. The study shows that control variables such as labour force, investment,
and export growth all have positive and significant effects on economic growth.
The study found that the Direct Effect of Debt Hypothesis (DEDH) holds for SSA. The
DEDH postulates that external debt discourages long term investments that is crucial for
growth. It is hence recommended that governments of SSA countries should channel
borrowed external funds into long-term investment projects to make up for the investment
loss, which also would generate sufficient future cash flow for amortization of the debt,
negotiate with creditors for more debt relief programmes, and pursue export-led growth
strategy and policies that would solve structural imbalances in their economies, improve their
tax efforts, and maintain macroeconomic stability.
SSA, R (2021). THE EFFECT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICA. Afribary.com: Retrieved April 10, 2021, from https://afribary.com/works/the-effect-of-external-debt-on-economic-growth-in-sub-saharan-africa
Research, SSA. "THE EFFECT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICA" Afribary.com. Afribary.com, 01 Apr. 2021, https://afribary.com/works/the-effect-of-external-debt-on-economic-growth-in-sub-saharan-africa . Accessed 10 Apr. 2021.
Research, SSA. "THE EFFECT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICA". Afribary.com, Afribary.com, 01 Apr. 2021. Web. 10 Apr. 2021. < https://afribary.com/works/the-effect-of-external-debt-on-economic-growth-in-sub-saharan-africa >.
Research, SSA. "THE EFFECT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICA" Afribary.com (2021). Accessed April 10, 2021. https://afribary.com/works/the-effect-of-external-debt-on-economic-growth-in-sub-saharan-africa