IDEAS home Printed from https://ideas.repec.org/a/agr/journl/v2(627)y2021i2(627)p175-206.html
   My bibliography  Save this article

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

Author

Listed:
  • Manamba EPAPHRA

    (Institute of Accountancy Arusha, Tanzania)

  • William MESIET

    (Institute of Accountancy Arusha)

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.

Suggested Citation

  • Manamba EPAPHRA & William MESIET, 2021. "The external debt burden and economic growth in Africa: a panel data analysis," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(627), S), pages 175-206, Summer.
    • Handle: RePEc:agr:journl:v:2(627):y:2021:i:2(627):p:175-206
    as

    Download full text from publisher

    File URL: http://store.ectap.ro/articole/1546.pdf
    Download Restriction: no
    File URL: http://www.ectap.ro/articol.php?id=1546&rid=143
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Catherine Pattillo & Hélène Poirson & Luca Antonio Ricci, 2011. "External Debt and Growth," Review of Economics and Institutions, Università di Perugia, vol. 2(3).
    2. Andrew M. Warner, 1992. "Did the Debt Crisis Cause the Investment Crisis?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(4), pages 1161-1186.
    3. Cuong Le Van & Phu Nguyen‐Van & Amélie Barbier‐Gauchard & Duc‐Anh Le, 2019. "Government expenditure, external and domestic public debt, and economic growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 21(1), pages 116-134, February.
    4. Bernardin Senadza & Agbemavor Korsi Fiagbe & Peter Quartey, 2017. "The Effect of External Debt on Economic Growth in Sub-Saharan Africa," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 11(1), pages 61-69, December.
    5. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 407-443.
    6. Robert Solomon, 1977. "A Perspective on the Debt of Deveoloping Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 479-510.
    7. Mr. Tito Cordella & Mr. Luca A Ricci & Marta Ruiz-Arranz, 2005. "Debt Overhang or Debt Irrelevance? Revisiting the Debt-Growth Link," IMF Working Papers 2005/223, International Monetary Fund.
    8. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
    9. Peter Hjertholm, 1999. "Analytical History of Heavily Indebted Poor Country (HIPC) Debt Sustainability Targets," Discussion Papers 00-03, University of Copenhagen. Department of Economics.
    10. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-578, May.
    11. Jayaraman, Tiru K. & Choong, Chee-Keong, 2008. "“External Debt and Growth in Pacific Island Countries," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 61(4), pages 711-728.
    12. K. M. Guei, 2019. "External Debt and Growth in Emerging Economies," International Economic Journal, Taylor & Francis Journals, vol. 33(2), pages 236-251, April.
    13. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    14. Abdur Chowdhury, 2001. "External Debt and Growth in Developing Countries: A Sensitivity and Causal Analysis," WIDER Working Paper Series DP2001-95, World Institute for Development Economic Research (UNU-WIDER).
    15. Maureen Were, 2001. "The Impact of External Debt on Economic Growth in Kenya: An Empirical Assessment," WIDER Working Paper Series DP2001-116, World Institute for Development Economic Research (UNU-WIDER).
    16. Mbire, B. & Atingi, M., 1997. "Growth and Foreign Debt: The Ugandan Experience," Papers 66, African Economic Research Consortium.
    17. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, vol. 18(2), pages 191-214, April.
    18. Joshua Greene & Delano Villanueva, 1991. "Private Investment in Developing Countries: An Empirical Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 33-58, March.
    19. Eaton, Jonathan, 1993. "Sovereign Debt: A Primer," The World Bank Economic Review, World Bank, vol. 7(2), pages 137-172, May.
    20. S.Ibi Ajayi, 1991. "Macroeconomic approach to external debt The case of Nigeria," Working Papers 8, African Economic Research Consortium, Research Department.
    21. Carmen M. Reinhart & Vincent R. Reinhart & Kenneth S. Rogoff, 2012. "Public Debt Overhangs: Advanced-Economy Episodes since 1800," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 69-86, Summer.
    22. Claessens, Stijn & Detragiache, Enrica & Kanbur, Ravi & Wickham, Peter, 1996. "Analytical aspects of the debt problems of heavily indebted poor countries," Policy Research Working Paper Series 1618, The World Bank.
    23. Faraji Kasidi & A. Makame Said, 2013. "Impact of External Debt on Economic Growth: A Case Study of Tanzania," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 3(4), pages 1-6.
    24. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    25. M. Emranul Haque & Richard Kneller, 2008. "Public Investment and Growth: The Role of Corruption," Centre for Growth and Business Cycle Research Discussion Paper Series 98, Economics, The University of Manchester.
    26. Yeva Nersisyan & L. Randall Wray, 2010. "Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff," Economics Working Paper Archive wp_603, Levy Economics Institute.
    27. Festus, Gift Emmanuel & Saibu, Muibi Olufemi, 2019. "Effect of external debt on Nigerian Economy: Further evidences," MPRA Paper 92704, University Library of Munich, Germany.
    28. repec:dgr:rugccs:200107 is not listed on IDEAS
    29. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
    30. Ibrahim Mohammed Adamu & Rajah Rasiah, 2016. "External Debt and Growth Dynamics in Nigeria," African Development Review, African Development Bank, vol. 28(3), pages 291-303, September.
    31. Kharusi, Sami Al & Ada, Mbah Stella, 2018. "External Debt and Economic Growth : The Case of Emerging Economy," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 33(1), pages 1141-1157.
    32. Sturm, Jan-Egbert, 2001. "Determinants of public capital spending in less-developed countries," CCSO Working Papers 200107, University of Groningen, CCSO Centre for Economic Research.
    33. Toan Quoc Nguyen & Mr. Benedict J. Clements & Ms. Rina Bhattacharya, 2003. "External Debt, Public Investment, and Growth in Low-Income Countries," IMF Working Papers 2003/249, International Monetary Fund.
    34. Mr. Vito Tanzi & Mr. Hamid R Davoodi, 1997. "Corruption, Public Investment, and Growth," IMF Working Papers 1997/139, International Monetary Fund.
    35. Naeem Akram, 2011. "Impact of Public Debt on the Economic Growth of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 50(4), pages 599-615.
    36. Deshpande, Ashwini, 1997. "The debt overhang and the disincentive to invest," Journal of Development Economics, Elsevier, vol. 52(1), pages 169-187, February.
    37. Mbire Barbara & Michael Atingi, 1997. "Growth and foreign debt:The Ugandan experience," Working Papers 66, African Economic Research Consortium, Research Department.
    38. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(3), pages 681-712.
    39. Gill, Indermit & Pinto, Brian, 2005. "Public debt in developing countries : has the market-based model worked?," Policy Research Working Paper Series 3674, The World Bank.
    40. Claessens, Stijn, 1990. "The debt laffer curve: Some estimates," World Development, Elsevier, vol. 18(12), pages 1671-1677, December.
    41. J. E. Meade, 1958. "Is The National Debt A Burden?," Oxford Economic Papers, Oxford University Press, vol. 10(2), pages 163-183.
    42. Iyoha, M.A., 1999. "External Debt and Economic Growth in Sub-SAharan African Countries: an Econometric Study," Papers 90, African Economic Research Consortium.
    43. Safia Shabbir, 2013. "Does External Debt Affect Economic Growth: Evidence from Developing Countries," SBP Working Paper Series 63, State Bank of Pakistan, Research Department.
    44. repec:eco:journ1:2014-02-19 is not listed on IDEAS
    45. Jayaraman, T.K. & Lau, Evan, 2009. "Does external debt lead to economic growth in Pacific island countries," Journal of Policy Modeling, Elsevier, vol. 31(2), pages 272-288.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Taner Turan & Halit Yanıkkaya, 2021. "External debt, growth and investment for developing countries: some evidence for the debt overhang hypothesis," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 20(3), pages 319-341, September.
    2. Bernardin Senadza & Agbemavor Korsi Fiagbe & Peter Quartey, 2017. "The Effect of External Debt on Economic Growth in Sub-Saharan Africa," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 11(1), pages 61-69, December.
    3. Haytham Y.M. Ewaida, 2017. "The Impact of Sovereign Debt on Growth: An Empirical Study on GIIPS versus JUUSD Countries," European Research Studies Journal, European Research Studies Journal, vol. 0(2A), pages 607-633.
    4. Naeem AKRAM*, 2017. "Role of Public Debt in Economic Growth of Sri Lanka: An ARDL Approach," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 27(2), pages 189-212.
    5. repec:dau:papers:123456789/4089 is not listed on IDEAS
    6. repec:eco:journ1:2014-02-19 is not listed on IDEAS
    7. Taha Zaghdoudi, 2020. "Threshold Effect in the Relationship Between External Debt and Economic Growth: A Dynamic Panel Threshold Specification," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(2), pages 447-456, June.
    8. Doğan, İbrahim & Bilgili, Faik, 2014. "The non-linear impact of high and growing government external debt on economic growth: A Markov Regime-switching approach," Economic Modelling, Elsevier, vol. 39(C), pages 213-220.
    9. Wamboye, Evelyn, 2012. "External debt, trade and FDI on economic growth of least developed countries," MPRA Paper 39031, University Library of Munich, Germany.
    10. Brian Tavonga Mazorodze, 2020. "Re-visiting the External Debt-Economic Growth Question in Zimbabwe," Journal of Economics and Behavioral Studies, AMH International, vol. 12(2), pages 1-8.
    11. Taner Turan & Halit Yanikkaya, 2019. "External Debt, Growth and Investment for Developing Countries: The Role of Government Effectiveness," Working Papers 2019-03, Gebze Technical University, Department of Economics.
    12. Naeem Akram, 2013. "Empirical examination of debt and growth nexus in South Asian countries," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 20(2), pages 29-52, December.
    13. Saungweme, Talknice & Odhiambo, Nicholas M., 2020. "The Impact of Domestic and Foreign Public Debt on Economic Growth: Empirical Evidence from Zimbabwe," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 73(1), pages 77-106.
    14. Saungweme, Talknice & Odhiambo, Nicholas M, 2019. "The impact of debt service on economic growth:Empirical evidence from Zambia," Working Papers 25652, University of South Africa, Department of Economics.
    15. Swastika, Purti & Dewandaru, Ginanjar & Masih, Mansur, 2013. "The Impact of Debt on Economic Growth: A Case Study of Indonesia," MPRA Paper 58837, University Library of Munich, Germany.
    16. Slimani, Slah & Othmani, Abdelhafidh & Bakari, Sayef, 2015. "Analyse de la Soutenabilité de la Dette Extérieure de la Tunisie pour la Période 1970-2012 [Analysis of the Sustainability of Tunisia's External Debt for the Period 1970-2012]," MPRA Paper 80824, University Library of Munich, Germany.
    17. Mattia Osvaldo Picarelli & Willem Vanlaer & Wim Marneffe, 2019. "Does Public Debt Produce a Crowding Out Effect for Public Investment in the EU?," Working Papers 36, European Stability Mechanism.
    18. José Augusto Lopes da Veiga & Alexandra Ferreira-Lopes & Tiago Neves Sequeira, 2016. "Public Debt, Economic Growth and Inflation in African Economies," South African Journal of Economics, Economic Society of South Africa, vol. 84(2), pages 294-322, June.
    19. Siti Daud & Jan Podivinsky, 2011. "Debt–Growth Nexus: A Spatial Econometrics Approach for Developing Countries," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 18(1), pages 1-15, September.
    20. Ikonen, Pasi, 2017. "Financial depth, debt, and growth," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number e51.
    21. Slimani, Slah & Bakari, Sayef & Othmani, Abdelhafidh, 2015. "Croissance et Soutenabilité de la Dette Extérieure Tunisienne pour la Période 1970-2012 : Une Analyse Dynamique [Growth and Sustainability of Tunisian External Debt for the Period 1970-2012: A Dyna," MPRA Paper 80954, University Library of Munich, Germany.
    22. Minhaj ud-Din & Muhammad Azam Khan & Muhammad Tariq, 2020. "External Debt - Blessing or Curse: Empirical Evidence from Pakistan," International Journal of Economics and Financial Issues, Econjournals, vol. 10(4), pages 235-246.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:agr:journl:v:2(627):y:2021:i:2(627):p:175-206. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marin Dinu (email available below). General contact details of provider: https://edirc.repec.org/data/agerrea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.