Abstract
Literature on the debt-growth nexus postulates that external debt is viewed as capital that closes the financing gap, boost investment and promote growth. Against this background, and given the low revenue mobilization drive, the ECOWAS Member States resort to external borrowing with a view to complement domestic revenue and enhance their ability to finance large infrastructural projects and boost economic growth. However, external debt accumulation has not translated into high growth in the ECOWAS Member States. Thus, the paper investigates the impact of external debt on economic growth in the ECOWAS countries, and determines the optimal threshold level of external debt that promotes growth. The study utilizes panel data for 15 countries spanning from 2000 to 2019, and employs four estimation techniques including the Pooled Ordinary Least Squares (POLS), Fixed Effect Model (FEM), Random Effect Model (REM) and Panel Corrected Standard Errors (PCSE) techniques. The empirical results suggest that external debt (ED), Openness to trade (Opn) and Control of Corruption (CoC) are the main determinants of economic growth in the ECOWAS countries. Specifically, openness has a positive effect on growth, while both external debt and control of corruption have negative impact on growth. Furthermore, the study reveals evidence of a nonlinear relationship between external debt and real GDP, and confirms that the optimal threshold level of external debt in the ECOWAS countries is 111%. Intuitively, the result indicates that any increase in external debt above 111% will reduce growth in the ECOWAS countries by 0.0001% while below the threshold level, economic growth will improve by 0.0222%. The policy implication is that, governments of the ECOWAS countries should ensure that, external debt are utilized in growth enhancing sectors, with a view to boost growth. Also, governments should develop debt management strategic policies, with a view to keep debt levels within sustainable limits.
Highlights
The issue of external debt and its impact on economic growth and development remains a major concern for most developing countries, which are typified with low level of domestic resource mobilization, low savings, low per capital income, large fiscal deficit, rising current account imbalances and high savingsinvestment gap
The results show that any increase in external debt above 111% will reduce growth in the Economic Community of West African States (ECOWAS) region by 0.0001% while below the threshold level economic growth will improve by 0.0222%
Results from the linear model revealed that the major determinants of economic growth in the ECOWAS countries during the study period, were external debt (ED), Openness to trade (Opn) and Control of Corruption (CoC)
Summary
The issue of external debt and its impact on economic growth and development remains a major concern for most developing countries, which are typified with low level of domestic resource mobilization, low savings, low per capital income, large fiscal deficit, rising current account imbalances and high savingsinvestment gap. Such situations constraint developing economies to raise adequate resources required to promote investment and boost economic growth. In order to fill the resource gap, most developing countries resort to external borrowing with a view to complement domestic savings and enhance their ability to undertake productive activities.
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More From: International Journal of Business and Economics Research
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