Empirical Analysis of the Impact of External Debt on Capital Formation in Sub-Saharan Africa: The Moderating Role of Institutional Quality

Yusuf Shamsuddeen Nadabo and Muhammad Mustapha Abdullahi
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Yusuf Shamsuddeen Nadabo: Department of Economics, Umaru Musa Yar’adua University, Katsina
Muhammad Mustapha Abdullahi: Department of Economics, Umaru Musa Yar’adua University, Katsina

International Journal of Research and Innovation in Social Science, 2024, vol. 8, issue 12, 4024-4036

Abstract: This study examines the nexus between external debt and capital formation in sub-Saharan African countries, with a focus on the role of institutional quality as a moderator. The analysis covered from 1998 to 2023, using two-step system GMM, panel quantile regression, dynamic threshold estimator and cross-sectional dependence test. The results showed that external debt has a negative impact on capital formation, but this effect is moderated by institutional quality. The study also found that the benefits of debt can be realized in sub-Saharan Africa when the average institutional quality is above a certain threshold. Specifically, countries with strong institutional quality can use debt effectively to promote efficient resource allocation and attract further investment. Therefore, policymakers are encouraged to implement debt management strategies and institutional reforms, such as reducing corruption, improving effective governance, and strengthening the rule of law, to ensure transparency in debt utilization and maintain a sustainable debt level. This will create a more favorable environment for both domestic and foreign investment.

Date: 2024
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