Pre-COVID-19 evaluation of external debt, corruption and economic growth in South Africa

Ebenezer Gbenga Olamide,Andrew Maredza

doi:10.1108/reps-03-2021-0019

Ebenezer Gbenga Olamide, Andrew Maredza

Open Access

https://doi.org/10.1108/reps-03-2021-0019

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Abstract

PurposeThis study is a pre-COVID-19 exposition of the existing situation about external debt-GDP relationship, incorporating corruption into the hypothesis, making South Africa the object of the study. The aim is to examine the causal relationship between corruption, economic growth and external debt, and in the end proffer solutions to the problems arising therefrom.Design/methodology/approachThe study employed ARDL technique on time series data running from 1990 to 2019 with real gross domestic product as the dependent variable and external debt, external debt servicing, corruption, inflation and capital formation as regressors. Necessary tests that include unit root, cointegration, CUSUM and CUSUMSq, normality, serial correlation and heteroscedasticity were performed on the model.FindingsThe study shows that corruption, inflation and external debt servicing exert negative influences on economic growth while the effect of investment on growth was positive. External debt's effect in the short run was positive while its long-run effect on growth was negative. Among other things, the need to improve and strengthen public institutions in addition to targeting tax evaders and avoiders for increased government revenue were emphasized.Originality/valueThe study incorporates corruption into the country specific debt-GDP debate as against earlier studies that excluded corruption in their time series analysis or that were cross-country based. The authors also exposit the existing knowledge of the debt-GDP hypothesis before the outbreak of COVID 19 pandemic. This is expected to serve as a precursor to subsequent studies on the rising debt of South Africa during and after the pandemic.

Highlights

Just like any other developing country, the rising external debt of South Africa in the face of its dwindling economic growth has become a source of worry to both researchers and policy makers
The study revealed that external debt exerts positively on economic growth in the short run while its negative impact in the long run was statistically insignificant
This shows that external debt brings succor to the economy by contributing positively to the nation’s GDP

Summary

Introduction

Just like any other developing country, the rising external debt of South Africa in the face of its dwindling economic growth has become a source of worry to both researchers and policy makers. B€okemeier and Greiner (2015) investigated seven developed economies within the OECD and observed that there was no evidence of nonlinearity in the relationship between public debt and economic growth in those countries. The current COVID-19 pandemic has left many countries with no options than to resort to fiscal borrowing as a way out of their economic problems This has raised concerns about the increasing public debt in South Africa whose leverage is already approaching an alarming level. Phiri and Mhlaba (2019) employed the same ARDL for time series data spanning 2002–2016 in testing for the long and short run harmful effects of debt on GDP for South Africa and reported a negative relationship.

Conclusion

Findings