External debt in developing countries since HIPC and MDRI: What are the driving factors?

Abstract

AbstractThis article analyses the trend of external debt and its drivers in the heavily indebted poor countries (HIPCs) in the post‐debt relief initiatives. Focusing on the largest component of external debt in HIPCs, that is, public and publicly guaranteed external debt, the data reveal that these countries have started accumulating external debt again few years after debt relief under HIPC and MDRI. Specifically, though the average external debt‐to‐GDP ratio has declined by 22% points between 2005 and 2016, since 2012, however, external debt has steadily increased in HIPCs. Using panel data over the period 2005–2016, the article finds that economic growth rate, nominal exchange rate and remittance inflows negatively and significantly affect the ratio of external debt‐to‐GDP. The article also finds the persistence of external debt. However, more preference has been given to countries with better policies and institutions for the access to external debt.