On the robust drivers of public debt in Africa: Fresh evidence from Bayesian model averaging approach

Abstract

While economic theory suggests a wide range of potential drivers of public debt, there is little consensus regarding the most relevant ones. This paper analyzes the determinants of the public debt in Africa. This is done by adopting a Bayesian Model Averaging (BMA) approach applied to data of 51 African countries, spanning the period 1990-2018. Our results suggest that, among the set of twentyseven (27) regressors considered, those reflecting international financial and institutional conditions as well as internal economic prospects tend to receive high posterior inclusion probabilities. Then, the study explores the effect of these regressors on public debt by employing the fixed effects (FE) and the system Generalized Method of Moments (GMM) estimators. The results reveal that, foreign aid, fiscal deficit, trade openness, military expenditure, interest and exchange rates, debt-service, domestic credit, government stability index, political regime type and socioeconomic crises are the main and robust drivers of public debt accumulation in African countries. These findings are robust to changes in the model specification, the inclusion of socioeconomic crises and regional heterogeneities.

The impact of government debt on economic growth in Nigeria

“…The result confirmed the crowding-out and debt overhang hypothesis which argued that when government debt accumulation trend borders on financial profligacy, the debilitating effect of servicing such debt constitute a drain of scarce foreign exchange that could have been used for productive investment in infrastructure thereby impeding growth. The result is consistent with the findings of Saxena and Shanker (2018) and Madow et al (2021) who reported a significant negative impact of debt service payment on long-term economic growth in India and African countries, respectively.…”

“…Capital flight in turn reduces domestic savings and investment, thus reducing growth, the tax base and debt servicing capacity. The diversion of foreign exchange to debt servicing also limits import capacity, competitiveness, and investment and thus growth (Madow et al, 2021).…”

“…To investigate the impact of government debt on economic growth in Nigeria, an open multivariate debt-growth model allowing for key control variables was specified following the lead of Gómez-Puig and Sosvilla-Rivero (2017) with slight modifications to suit the requirements of the current study. Recent studies such as Madow et al (2021) suggest that it is better to focus on a core set of explanatory variables that have been shown to be consistently associated with growth and evaluate the importance of other variables conditional on inclusion of the core set. The choice of the dependent and independent variables used in this study considered underlying economic theories and available empirical literatures on the impact of government debt on economic growth in developing countries.…”

“…The justification for government borrowing has its foundation in the neoclassical growth models, which prescribes the need for capital scarce countries to borrow to increase their capital accumulation and steady-state level of output per capita (Madow et al, 2021). The occurrence of global economic crises has provided further impetus for countries (especially the developing ones) to borrow as they are often confronted with the need for increased expenditure levels and declining capital inflows (Ogbonna et al, 2019).…”

Determinants of local government deficit: evidence from Spanish municipalities

“…Understanding the determinants of fiscal deficits is important given that persistent deficits quickly lead to the accumulation of public debt, especially in low- and middle-income countries ( World Bank-IMF, 2018 ). Public deficits also influence the level of a country’s public debt ( Bittencourt, 2015 ; Gargouri and Ksantini, 2016 ; Delgado-Téllez and Pérez, 2020 ; Ioannou, 2022 ; Nagou et al., 2021 ). In order to cover its deficit, the government needs to accumulate public debt, having to borrow money from third parties.…”