The external debt burden and economic growth in Africa: a panel data analysis

Manamba Epaphra and William Mesiet
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Manamba Epaphra: Institute of Accountancy Arusha, Tanzania
William Mesiet: Institute of Accountancy Arusha

Theoretical and Applied Economics, 2021, vol. XXVIII, issue 2(627), Summer, 175-206

Abstract: Motivation for the study: External debt is a serious problem that needs to be addressed, and hence there is a need for further empirical studies investigating the effect of external debt on African countries’ growth, leading to policy formulation that would address external debt burden in Africa. Research purpose: This paper examined the effect of external debt on economic growth and public investment in Africa, covering 45 African countries over the 1990 to 2017 period. The paper also examined the im-pact of external debt and debt services on public investment, which in turn affects growth. Design/methodology/approach: For inferential analysis, this paper used fixed effects (FE) and random effects (RE) panel data models. The Hausman test was used to determine the preferred model. For the growth model, the fixed effects regression is appropriate while for the public investment analysis, we applies the random effects model. Main findings: Based on the preferred models, it is revealed that relative-ly low levels of external debt-to-GDP ratio have a positive effect on eco-nomic growth and public investment in Africa. However, considerably high levels of external debt are likely to hamper both economic growth and public investment. Similarly, the debt service-to-export ratio tends to have a deleterious effect on public investment, which consequently results in lower economic growth. Practical/managerial implications: The burden of external debt and debt payments has been a remarkable cause of insufficient funds for public investments and growth, thus African countries need to expedite effective and efficient external debt management strategies that will favour timely repayment. The fact that trade has a positive impact on both investment and economic growth; growth activities in African countries should be financed through increased export earnings spearheaded by export-led-growth strategy as these would be the best alternative to external debt in the long-run. Pursuing policies that strengthen exports, sound exchange rate, and effective use of the labour force will lead to an improvement in economic growth. Contribution/value-add: The paper provides insight to policy-makers in Africa in making sound and relevant decisions on external borrowings, debt payments, and public investment.

Keywords: economic growth; external debt; debt service; public investment. (search for similar items in EconPapers)
Date: 2021
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