AbstractsEconomics

THE IMPACT OF EXTERNAL DEBT ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICA

by john Gachunga Muhia




Institution: Capital University of economic abd business
Department: School Of Economics
Degree: Master's Degree
Year: 2018
Keywords: External debt, economic growth, generalized method of moment, Sub-Saharan Africa, labor force, export growth rate and capital investment
Posted: 07/30/2019
Record ID: 2222191
Full text PDF: https://ideas.repec.org/a/khe/scajes/v4y2018i4p57-63.html


Abstract

Over the past three or so decades, many countries in Sub-Saharan Africa region had been experiencing escalating debt stock hence deepening the problem of debt burden, while economic growth has remained moderate over the years. It is not clear whether external debt stimulates or depletes economic growth. In the first instance, poverty and underdevelopment were the primary reasons why developing countries resorted to external borrowing in order to fill the financing gap. Analytically, countries borrow abroad for two broad reasons: Macro-economic reasons such as high investments, high consumption in terms of financing education and health. The second key reason for foreign borrowing is to finance transitory balance of payment deficit with an aim of lowering nominal interest rate, lack of domestic long term credit, or to circumvent hard budget constrain. In theory the underlying logic entails that, a country should borrow as long as the capital thus acquired produces a rate of return that is higher than the cost of the foreign borrowing. In that event, the economy of the borrowing country will result in increased capacity coupled with expanding output via the aid of foreign savings. With countries in Sub-Saharan Africa adopting an economic development strategy that significantly relies on external financing, the study sets out with the aim to uncover the existent relationship between external debt burden and economic growth for the period 1990 to 2015 in 38 selected Sub-Saharan countries. To do this, panel data econometric techniques of Generalized Method of Moments was employed to evaluate the relationship. The results from the generalized method of moment indicated that, economies of Sub-Saharan Africa are negatively affected by external debt. Also, external debt was found to be more deleterious to middle income economies compared to their counterparts low income economies. The last objective of this study was to analyze the non-linear effect of external debt to growth, from the findings this proposition was rejected. Control variables such as labor force, export growth rate and capital investment all had a positive and significant impact to economic growth. From the findings, a central policy recommendation to economies of Sub-Saharan Africa is to increasingly put focus on regional integration as a strategy for realizing long term growth momentum as done by other counterpart economies. Trade openness will increase the regions local market competition coupled with transformation of fragmented small economies while expanding their market and widen regional space.