External Debt and Economic Growth in Sub-Saharan African Countries: An Econometric Study

Milton A. Iyoha

No RP_090, Research Papers from African Economic Research Consortium

Abstract: This econometric study takes a simulation approach to investigate the impact small macroeconometric model estimated for 1970-1994. nting external debt depresses of external debt on economic growth in sub-Saharan African countries using a investment through both a "disincentive" effect and a "crowding out" effect. Policy simulation was undertaken to investigate the impact of alternative debt stock reduction scenarios (debt reduction packages of 5%, 10%, 20% and 50%), effective in 1986, on investment and economic growth in the subsequent years. It was found that debt stock reduction would have significantly increased investment and growth performance. A 20% debt stock reduction would, on average, have increased investment by 18% and increased GDP growth by 1% during the 1987-1994 period. Thus, the results demonstrate that debt forgiveness could provide a much needed stimulus to investment recovery and economic growth in sub-Saharan Africa. Thus, heavily indebted countries in sub-Saharan Africa need to articulate creative strategies for bringing about debt reduction so that the high debt stock and associated crushing debt service burden would not have such a negative impact on economic growth. Traditional debt relief mechanisms currently being used by SSA countries include debt restructuring, debt rescheduling, reduced debt servicing, debt buy-backs, interest rate options, and various debt conversion schemes like the debt-equity swap. Overall, the effectiveness of these techniques in significantly reducing the debt stock has been rather limited.

Date: 1999-03
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