Abstract
PurposeThis paper aims to apply the debt sustainability framework using various ratios to review the current state of sovereign debt of Economic Community of West African States (ECOWAS) member countries.Design/methodology/approachDebt sustainability framework using various ratios (which include the present value approach, Country Policy and Institutional Assessment debt policy assessment ranking and solvency ratio of external debt) for the period 2010 and 2017 were used for the analysis to determine external debt sustainability and solvency of ECOWAS members.FindingsThe findings indicate that most ECOWAS countries are already turning at the unsustainable debt path and may renege in their debt obligations, thus creating a vicious cycle of external borrowing that could lead to capital flight.Originality/valueThis paper offers the empirical evidence to identify which of the ECOWAS countries are already at the threshold of external debt stress, and in the likelihood to renege on their debt obligations.
Highlights
Most of the literature that dominated developing countries’ debt quagmire in the late 1990s into the early 2000s demonstrated that debt forgiveness could provide the much-needed stimulus to investment recovery and economic growth
The average yearly rates of external debt for anglophone West African countries and nonanglophone grew by 30.9% and 45.7%, respectively, from 1981 to 1985
Economic Community of West African States (ECOWAS) countries classified as having medium debt policy (3 < Country Policy and Institutional Assessment (CPIA) < 3.9) are Cote d’Ivoire, Ghana, Guinea and Liberia, whose ratios below the threshold using the two indicators
Summary
Most of the literature that dominated developing countries’ debt quagmire in the late 1990s into the early 2000s demonstrated that debt forgiveness could provide the much-needed stimulus to investment recovery and economic growth. Ghana falls into a similar category like other West African countries, with debt service accounting for about 40% of revenue (Figure 4) If this is related to the increasing domestic debt burden, estimated at 75% of GDP, the narratives worsen, placing Ghana’s debt problems and risk to be severely high. One key message from the above discussions is that developing economies deployed independent policies in managing their foreign debt accumulated over the years, having considered their macroeconomic fundamentals and their capacity to absorb shocks Coupled with these are copious empirical pieces of evidence indicating that substantial foreign debt and its associated service burden harm growth (Fosu, 1999; Were, 2001; Ali and Mustafa, 2012; Kharusi and Mbah, 2018; Omotor, 2019). The theoretical foundations (economic fundamentals and the PV of interest paid on the debt) used in assessing sovereign debt present value, and their sustainability indicators have been applied elsewhere (Debrun et al, 2019, for Japan; Mahmood and Rauf, 2012, for Pakistan; Gupta, 1992, for Asia, USA and Canada; Hamilton and Flavin, 1986)
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