Public Debt Management and Economic Growth in Sierra Leone (1973-2022)

Abstract

Sierra Leone is a small developing country that continues to encounter enormous public debt challenges, principally as a result of inadequate Gross Domestic Product (GDP) and imprudent debt management. The country’s current debt-to-GDP ratio stands at 78.70%. The study investigates and analyses the impact of public debt on economic growth in Sierra Leone for the period 1973-2022. The study employs time series secondary data which were collected from various sources including the Central Bank of Sierra Leone and the Ministry of Finance. Key macroeconomic variables such as external debt stock-to-GDP ratio and domestic debt stock-to-GDP ratio were specified in the models employed in this study. The variables were tested for stationarity using unit root tests before applying the Autoregressive Distributed Lag (ARDL) approach in running the regression with a view to ascertaining both short run and long run effects of public debt on economic growth in Sierra Leone. Various diagnostic tests were carried out to appraise the robustness of the estimated growth equations using appropriate econometric criteria. The study empirically reveals a negative impact of public debt (both domestic and external) on economic growth in Sierra Leone both in the short run and in the long run. Furthermore, the study reveals that in order to ensure effective public debt management in Sierra Leone, there must be effective management of capital projects financed by public debt and to ensure stable exchange rates to reduce cost of financing debt. The study, therefore, proffers strategic recommendations in line with the findings, including a review of Sierra Leone’s debt management strategy to ensure that public debt is directed towards productive capital projects.