External Debt and Economic Growth: Two-Step System GMM Evidence for Sub-Saharan Africa Countries

Abstract

This paper examines external debt and economic growth relationship in a panel of 48 Sub-Saharan Africa countries (SSA) for the period 1990-2017 using a two-step system General Method of Moments (GMM) technique. Our study shows that contemporaneously, external debt has a negative and statistically significant impact on GDP growth. However, the first lag of external debt variables stimulates GDP growth. The implication is that external debt accumulated in the previous period makes funds available for growth enhancing expenditure in the next period. Furthermore, our study found no evidence of a non-linear relationship between debt and economic growth. Lastly, we found that the deleterious impact of external debt on GDP growth does not preclude poor or rich SSA countries. We recommend the adoption of state-of-the-art measures in collecting domestic revenue to complement external revenue sources. In addition, we advocate for strong macroeconomic environment in SSA so that yield negotiation on the debt will not dissipate the coffers of SSA countries via high debt servicing cost. Contribution/Originality: This study uses new estimation methodology to unravel the external debt and economic growth nexus in Sub-Saharan Africa countries. 1. INTRODUCTION Sustainable economic growth and development is the main concern for all economies worldwide , especially Sub-Saharan Africa (SSA) 1 countries that happen to find themselves at the lower end of the growth chart. The quest to achieve these goals of economic growth and sustainable development calls for huge outlays which invariably comes from external sources with high servicing cost which perhaps, has plunged SSA into an uncomfortable fiscal position. Researchers like (Eaton, 1993) argues that external debt complements domestic savings and investment, hence it enhances growth. Of different opinion is Krugman (1988) who posits that debt servicing causes disruptions in an economy, hence it discourages investment and economic growth. The impact of the global economic downturn in the mid-1980s on developing economies, including the debt crisis, was such that the 1980s is often referred to as the lost decade for Africa (Iyoha, 1999). The debt burden on SSA after the lost decade has stagnated many of its economies which led to the adoption of SAPS 2 aimed at reducing the SSA fiscal imbalances. However, the pace of 1 According to the United Nations, Sub-Saharan Africa countries are all African countries who are fully or partially located south of the Sahara.

Impact of Foreign Capital Inflow on Economic Growth in Ecowas Sub-Region

“…The major finding above (external debt had a negative but significant impact on real GDP growth rate) conforms to Asafo et al (2019) who investigated the impact of external debt on economic growth in 46 sub-Saharan African (SSA) countries, using panel data for a period of 1990-2017, and estimated by twostep general method of moments (GMM). Our major finding also agrees with Senadza et al (2018) who studied the impact of external on economic growth in 39 SSA countries using panel least square from 1990 to 2013, and estimated by general method of moments (GMM) technique.…”

Exploring the Channels of Transmission between External Debt and Economic Growth: Evidence from Sub-Saharan African Countries

“…The hypothesis that debt at moderate levels enhances growth, while in contrast, high debt stock depresses growth. In this strand of the empirical literature, studies by Asafo et al (2019); Blavy (2006); Schclarek (2004); Schclarek and Ramon-Ballester (2005); Senadza et al (2018) and Soydan and Bedir (2015) do not find evidence of a non-linear relationship between external debt and economic growth. In contrast, other studies, such as those by Adam and Bevan (2005); Cordella et al (2005); Deshpande (1997); Pattillo et al (2002), as well as Qureshi and Liaqat (2020), claim that the nexus follows a non-linear pattern.…”

Debt Sustainability and Economic Growth in Nigeria

“…Despite these assertions, the empirical evidences on whether the debt's influence on economic growth is linear or non-linear have been inconsistent, but much of the documented findings have so far, supported the nonlinear hypothesis [22,23,6,21,24]. In contrast, few studies have failed to establish that debt has a non-linear effect on economic growth [see 25,26,27].…”