Exploring the Impact of Inflation and External Debt on Economic Growth in Morocco: An Empirical Investigation with an ARDL Approach

Abstract

This article seeks to empirically assess the effect of inflation and external debt on economic growth in Morocco. The estimates cover the period from 1985 to 2019. The results from the ARDL model show that external debt negatively influences the country's growth in the short and long terms. Due to its direct effect, inflation slows down economic activity and leads to lower GDP growth. The econometric estimate indicates that the low level of inflation leads to difficulties in repaying debt and, consequently, reduced economic growth. Low inflation also hurts economic competitiveness among small and medium enterprises (SMEs). Although the inflation rate is lower than the interest rates, it reduces the profit margins of companies and leads to lower investment. The negative effect on economic competitiveness leads to decreased sectoral added value, reducing future economic growth rates. Based on the results, two main measures are proposed to mitigate the negative effect of inflation and debt on economic growth. First, we must develop better institutional and governance quality. The latter allows debt funds to be well spent on non-rent-producing sectors capable of reviving the Moroccan economy. Second, we have to look for good inflation, in other words, inflation that stimulates economic activity without creating economic distortions.

Does External Debt Worsen Environmental Pollution? Evidence from Morocco

“…These results are supported by two recent studies that used the same method to test this relationship in Ghana and Fiji Islands respectively (Duodu and Baidoo, 2022;Makun, 2021). Aboudi and Khanchaoui (2021) studied the impact of inflation and external debt on economic growth in the case of Morocco from 1985 to 2019. Based on ARDL model, inflation would not only have a significant negative effect on economic growth but also induce difficulties for the government to recover its external debt.…”

Debt Buildup Waves and Economic Growth Nexus: An Empirical Investigation of Morocco

“…Nevertheless, debt servicing has an adverse impact on the economic performance. The second group entails the studies conducted by (Aboudi and Khanchaoui 2021;Msatfa and Meskini 2021; Nor-Eddine and Driss 2019), supporting the negative impact of foreign debt on economic growth in Morocco both in short and long term. Nor-Eddine and Driss ( 2019), analyze the effect of Moroccan public external debt over the period 1988-2016, utilizing ARDL Bound Test, and confirm the existence of a negative effect, which is more important in short term than long term.…”

Effect of External Debt Service on Economic Growth in Nigeria

“…A drawback concerning external borrowing is the currency risk, because external debt service raises the demand for often scarce foreign exchange (Abbas & Christensen, 2010). El Aboudi & Khanchaoui (2021) opined that a high external debt-service can deplete foreign exchange that could have been used in the provision of social services. Depreciation in the local currency will amplify the external debt service which results to macroeconomic instability.…”