External Debt, Public Investment and Economic Growth in Cameroon

Forbe Hodu Ngangnchi,Roland Joefendeh

doi:10.47747/ijfr.v2i4.461

Forbe Hodu Ngangnchi, Roland Joefendeh

Open Access

https://doi.org/10.47747/ijfr.v2i4.461

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Abstract

This study investigates the extent to which external debt and public investment contributes to economic growth in Cameroon - emphasising on how public investment modulates the effect of external debt on economic growth. Time series data spanning the period 1980-2018 obtained from the World Bank’s world development indicators are used, together with the Dynamic Ordinary Least Squares (OLS) approach to ascertain the nature of the long-run relationship between external debt, public investment and economic growth. Consistent with the debt-overhang and crowding-out literature, the study reveals a negative significant influence of external debt on economic growth in Cameroon. Results also reveal that there is a positive and significant direct effect of public investment on economic growth in the long run. Further results indicate that public investment and external debt positively and significantly engender economic growth. This is evidence that public investment is modulating the effect of external debt on economic growth in Cameroon. These findings suggest the need for developing country governments to create an enabling environment for private sector development, while accompanying external debt resources with domestic revenue mobilization by broadening the tax base - taxes on landed property being potential candidates

Highlights

Economic growth and development remains a major concern of most developing countries; to solve this problem, resources are mobilized from various sources including external borrowing for investment into productive projects for growth acceleration
An increase of government or public investment by one percent will lead to an increase in gross domestic product (GDP) per capita by about 0.21% everything being equal in the long run
Investment is a vital ingredient of economic growth to less developed countries; the coefficient of public investment is positive and has a statistically significant effect on economic growth in the long run

Summary

Introduction

Economic growth and development remains a major concern of most developing countries; to solve this problem, resources are mobilized from various sources including external borrowing for investment into productive projects for growth acceleration. Sustainable economic growth is the prime concern for all countries, especially developing economies that frequently face burgeoning fiscal deficits mainly driven by higher levels of debt service, external debt servicing and widening current account deficits (Bernardin et al, 2018). The principal reason for governments borrowing is to finance public goods that increase welfare and promote economic growth. The spending has to be financed either through taxation, through seignorage, or with debt. It is expected that developing countries would benefit from external borrowing if the marginal product of capital is higher than the world interest rate (Ogunmuyiwa, 2011)

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