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

Milton A. Lyoha

Working Papers from African Economic Research Consortium

Abstract: This econometric study takes a sumulation approach to investigate the impact of external debt on economic growth in sub-Saharan African countries using a small macroeconometric model estimated for 1970-1994. An important finding was the significance of debt overhang variables in the investment equation, suggesting that mounting external debt depresses 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%, l0%, 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.

Date: 1999-03
Note: African Economic Research Consortium
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Persistent link: https://EconPapers.repec.org/RePEc:aer:wpaper:1c3cc745-728b-4d5f-96f6-5374b5d85b10

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