External debt and economic growth in Sub-Saharan Africa: Does governance matter?

Abstract

This study empirically examined the impact of external debt on economic growth. Also, the interactions of governance, external debt and external debt volatility were further investigated with emphasize on the interective effect of governance as proxied by Kaufmann, D., (2007) quality governance measures such as; government effectiveness, political stability, voice and accountability, regulatory quality and corruption control on economic growth. The study utilized annual time series data, focusing on thirty selected Sub-Saharan African (SSA) countries for the period 1997 to 2020. The Dynamic System Generalised Method of Moments estimation technique was adopted while controlling for conventional sources of economic growth. Empirical findings from the study reveal that external debt and external debt volatility have a negative and significant impact on economic growth in SSA. Furthermore, the interaction of governance indicators, external debt and its volatility, had a positive impact on economic growth in SSA. This study recommends that SSA government should endeavor to avoid excessive external debt to promote the regions’ capacity to invest in her financial prospects, and to circumvent the danger of repayment of loans using her small income. The SSA governments should also improve the quality of governance by ensuring political stability, minimising corruption, implementing sound policies and regulations that can permit and promote economic growth through the development of the private sector. The governments must ensure that every borrowed debt is properly supervised and utilised for its purposes to spur economic growth. More so, the Guidotti-Greenspan rule of Reserve adequacy should be applied to keep excess borrowings in check.

Foreign Aid and External Debt–A Bane or a Boom to the Ghanaian Economy? New Insights

“…These findings corroborate the debt overhang hypothesis that an indebted country will find it difficult to undertake future investment projects since returns from any future investment would be diverted to the creditor in the form of promised payments (debt servicing) thereby creating a disincentive to invest and hence poor growth and development. The results of this study are also in tandem with the findings of previous empirical studies (Adubofour Isaac et al, 2021;Asteriou et al, 2021;Bal & Rath, 2014;Fejzaj et al, 2021;Fosu, 1996;Law et al, 2021;Le & Phan, 2022;Maitra, 2019;Makun, 2021;Manasseh et al, 2022;Pegkas, 2018) in which external debt stock and total external debt services were found to have significant adverse effects on economic growth in both the short and long run.…”

“…Previous studies such as : (Bourne, 1983;Frimpong & Oteng-Abayie, 2006;Owusu-Nantwi & Erickson, 2016;Schclarek & Alfredo, 2004;Siddique et al, 2016) have found that external debt significantly stimulates economic growth. In contrast, (Adubofour Isaac et al, 2021;Asteriou et al, 2021;Bal & Rath, 2014;Fejzaj et al, 2021;Fosu, 1996;Law et al, 2021;Le & Phan, 2022;Maitra, 2019;Makun, 2021;Manasseh et al, 2022;Pegkas, 2018) have also shown that external debt has adverse repercussion on economic growth and developing, in most especially developing countries.…”

Uganda’s Debt Sustainability: Testing The Efficacy of Debt Overhang Theory

“…The external debt of some countries, such as Senegal and Cote D'Ivoire, is expected to grow by more than 10% in the coming years (Nsonwu, 2022). Many African countries have experienced negative effects of debt burdens on their long-term economic growth, such as lower GDP growth, reduced investment and capital formation, and higher taxes to generate more revenue to repay the debts (Manasseh et al, 2022). Recent studies on debt sustainability by the IMF and the Ministry of Finance indicate that Uganda's debt is sustainable at present, but there is a slight possibility that it will become unsustainable in the medium and long term (Mageto, 2022).…”

Nigeria’s External Debt: The Perceived Pros and Cons

“…According to the International Labour Organization (ILO), Sub-Saharan Africa's massive debt burden is a major impediment to job creation and growth because investment resources that should be employed for productive purposes are diverted to fulfill external debt service commitments (Manasseh et al, 2022).…”

“…The increase in external debt stock is being driven by an enormous increase in foreign debt, according to the Central Bank of Nigeria. Increased public spending, particularly on capital projects, loans from the international community at non-concessional interest rates, and an over-reliance on imports, which leads to trade arrears, are all considered major causes of Nigeria's debt situation while rising interest rate movements influenced the size of the external debt stock (Manasseh et al, 2022).…”