Abstract
This study empirically examined the impact of external debt on economic growth. Also, the interactions of governance, external debt and external debt volatility were further investigated with emphasize on the interective effect of governance as proxied by Kaufmann, D., (2007) quality governance measures such as; government effectiveness, political stability, voice and accountability, regulatory quality and corruption control on economic growth. The study utilized annual time series data, focusing on thirty selected Sub-Saharan African (SSA) countries for the period 1997 to 2020. The Dynamic System Generalised Method of Moments estimation technique was adopted while controlling for conventional sources of economic growth. Empirical findings from the study reveal that external debt and external debt volatility have a negative and significant impact on economic growth in SSA. Furthermore, the interaction of governance indicators, external debt and its volatility, had a positive impact on economic growth in SSA. This study recommends that SSA government should endeavor to avoid excessive external debt to promote the regions’ capacity to invest in her financial prospects, and to circumvent the danger of repayment of loans using her small income. The SSA governments should also improve the quality of governance by ensuring political stability, minimising corruption, implementing sound policies and regulations that can permit and promote economic growth through the development of the private sector. The governments must ensure that every borrowed debt is properly supervised and utilised for its purposes to spur economic growth. More so, the Guidotti-Greenspan rule of Reserve adequacy should be applied to keep excess borrowings in check.
Highlights
External debt has been an important source of finance for most developing countries, mainly as a way of supplementing local revenue sources for development purposes
This study examined the impact of external debt on economic growth in thirty selected Sub-Saharan African countries for the period 1997 to 2020
The study accounted for the effect of external debt shocks by investigating the impact of external debt volatility on economic growth in the region
Summary
External debt has been an important source of finance for most developing countries, mainly as a way of supplementing local revenue sources for development purposes. Their findings show a significant relationship existing between debt and growth These studies do not control for the influence of governance or institutional environment on external debt considering the fact that it’s a major problem in Sub-Saharan Africa. This is important because evidence has shown that countries with transparent government or quality institutions are less corrupt (see [21]), and such countries benefit more from utilising external debt compared to countries with weak institutional quality [22] Other studies such as [23, 24] investigated the nexus between public debt, corruption and economic growth. While [23] found a positive and significant impact of corruption on external debt-growth [24], argued from the perspective of shadow economy, which was found to be positively related to corruption in public debt These studies do not take into consideration factors that may likely curb corruption such as regulatory quality, and government effectiveness, etc.
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