External Debt Research Articles

Effect of Public Wages on External Debt in Kenya

Most developing Africa countries have a high need for capital projects that requires a lot of government spending and attention. However, it is unfortunate that in Kenya, borrowed cash intended for capital projects is diverted to recurrent requirements putting a damper on national investment in viable projects. This poses a significant threat to the economy's growth. The following goal served as a guideline for the study; to determine the influence of public wages on external borrowing debt in Kenya using both cointegration and error correction model. Causal research design was adopted to explain the influence of public wages on external borrowing in Kenya. The study period was from 1970 and 2019 from which a 50-year time series data was employed for analysis. The research relied on secondary data which was collected with the aid of a structured data collection checklist from Central Bank of Kenya, and Kenya National Bureau of Statistics, and World Bank websites. Data analysis was done with an aid of stata, E-views and Ox-Metrics statistical software. Stationarity of variables was tested using PP unit root test where public wages was reported to be stationary at level form. The study employed the use of Ordinary Least Square (OLS) technique in the analysis. There was a significant negative association between public wages and external debt whereby a rise in public wage by 100% indicated decrease in external debt by 101.92%. The overall model was found to be significant since the F-statistic value generated in the analysis was 124.664 with a p-value of 0.000 < 0.05. Model was a good predictor of external borrowing, with an adjusted R<sup>2</sup> of 0.946 for public wages explaining foreign debt. This research recommends the study recommends that SRC should free up resources using the austerity measures which include wage reductions for government employees. Secondly, the government through the ministry of treasury should raise tax base to increase revenues. Finally, the results of this study may be valuable to government stakeholders who are charged with the responsibility of ensuring economic development through public sector financing, also it is expected to provide important information to policymakers in order to maintain external debt at manageable levels.

The Role of Reserves in Mitigating Sanctions’ Impact on Economic Growth

ABSTRACT As global risks mount, national reserves act as a nation’s frontline defense, guarding economic stability. This study investigates the role of national reserves in mitigating the impact of international sanctions on economic growth, analyzing 131 countries from 2000 to 2022. Using econometric methods, including two-step Generalized Method of Moments (GMM) and fixed effects models, we examine how reserves relative to external debt help buffer economies against sanctions. The findings show that economic sanctions significantly hinder growth, with trade sanctions being the most damaging. Reserves act as a key buffer, particularly in the short term, though their effectiveness decreases over time. Countries with stronger reserve adequacy are better equipped to manage the challenges of sanctions. The study highlights the importance of maintaining robust reserves and implementing broader strategies like economic diversification and structural reforms for long-term resilience. These insights are valuable for policymakers navigating sanctions-related economic challenges.

Comparison study in inflation and economic development between Egypt and Saudi Arabia: Using data analysis

An increase in total demand over the natural supply causes inflation in Egypt. Currently, the government is not intervening to reduce prices, unlike Saudi Arabia, which does interfere. The government's direct aim is to limit the price rise, known as suppressed inflation. This study discusses the relationship between the inflation indicator and various dimensions of economic development (such as production, agriculture, industry, dependency, health, and education) in Egypt and Saudi Arabia from 1990 to 2022. The study found that inflation in Egypt was at a high rate during the study period, with an average of 9.9 %. This high average negatively affects four dimensions of development in Egypt: agriculture, dependency, health, and education. It positively impacts industry and production, but the positive impact is minimal compared to the adverse effects. The negative impact is powerful on the dimensions of education and health, which are related to the human element and have a primary influence on all other dimensions of economic development. This indicates the failure of the policy to combat inflation in Egypt and reduce its adverse effects on economic development dimensions. On the other hand, Saudi Arabia had a lower average inflation rate of 1.9 % during the study period, which negatively affected the health dimension of economic development but positively affected the dimensions of education and industry. The dependency dimension, measured by the external debt growth rate index, was excluded since there were no external debts with recursion.

ЧИННИКИ ТА ІНСТРУМЕНТИ ЗБЕРЕЖЕННЯ І ПІДТРИМКИ БІЗНЕСУ В УМОВАХ ВІЙНИ: ФІНАНСОВІ ТА СТРАХОВІ АСПЕКТИ

The article considers the aspects of ensuring the viability of economic entities in the critically difficult conditions of a full-scale war. As stated, in world practice, the fact of the functioning of the national economy of a country under military aggression, and even more so the preservation of the viability of economic agents, is considered paradoxical a priori. However, this has been a common practice for Ukraine for three years. The purpose of the study is to identify the factors and justify the tools of the state and corporate policy of preserving and supporting Ukrainian business in the conditions of war with the use of financial and insurance means for such purposes. Threats to the financial security of domestic economic entities in war conditions were determined by such components of security as credit, insurance, monetary, budgetary and tax, investment and fund security. Based on the same components, a policy toolkit for supporting domestic business in wartime conditions was developed, in particular in the sense of financial and insurance aspects of regulation. It was established that in the conditions of a full-scale war, the following became the dominant threats to the financial security of domestic business entities: freezing of investment projects, loss of foreign investment, destruction of facilities (investment component of financial security of enterprises); complication of attracting financial and credit resources, growth of external and internal debt, difficulty of attracting credit funds (credit component); devaluation of the national monetary unit, slowdown in the circulation of funds, difficulties in settlements with counterparties (monetary component); increase in the level of tax liabilities, decrease in the level of budget investment, delays in calculations (budget and tax component); problems of securities issuance, a decrease in the level of dividend distribution, the decline of the country’s stock system (stock component); aggravation of the problems of insurance of military risks, increase in the cost of insurance services, actualization of the problems of internal and self-insurance (insurance component). Policy instruments for strengthening the financial security of business in wartime conditions have been defined. This is the diversification of sources of investment formation, consideration of investment options abroad, however, for the production of products in the domestic market; activation of cooperation programs between enterprises to replace credit resources, optimization of internal and external debt, replacement of part of operations in foreign currency, formation of insurance and reserve funds, "decomposition" of business into separate components, detinization and legalization of business, proactive state policy in this area, use of public investment instruments, improvement of conditions for purchasing OVDP bonds, diversification of state securities, active investment policy of enterprises, improvement of war risk insurance instruments, active involvement of foreign companies to the domestic insurance market.

Between moral and commercial debt: Israel, Holocaust compensation, and the Conference on German External Debt, 1951–52

ABSTRACT In early March 1951, the Chancellor of West Germany, Konrad Adenauer, announced to the three Western powers occupying his country – the United States, Great Britain, and France – that his government was ready to acquiesce to their demands and settle the external debts Germany had accumulated before and after World War II. This announcement was made at roughly the same time that Israel presented its claim for reparations, which was added onto two other kinds of compensation claims the Jewish world had been already promoting in the aftermath of the Holocaust: claims for restitution of property and personal indemnification. The Israeli Ministry of Foreign Affairs (IMFA) was gravely worried about the possibility that West Germany would not be able to settle its moral debt to the Jewish people and the Jewish state due to the need to repay its commercial debts in the international arena. The present article examines the policy implemented by Israel with the aim of avoiding such a scenario.

Distributive Conflict, High Inflation, and Stabilization Programs in a Small Open Economy Framework: The Case of Argentina in the 1980s

ABSTRACT The debates between demand-pull and cost-push theories of inflation have shaped stabilization programs since the 1923 German hyperinflation. This article combines elements from the modern revival of the Classical tradition of value and distribution and the Latin American Structuralist Approach to analyse the political economy behind Argentina's high-inflation regime and stabilization policies from 1983 to 1989. Our main hypothesis is that exchange rate dynamics play a crucial role in stabilizing distributive configurations and price dynamics in a small open economy with conflicting claims. High external debt, persistent devaluation expectations, and exchange rate policies imposed by international creditors to safeguard the economy's repayment capacity are identified as the primary causes behind the failure of stabilization attempts in Argentina during the late 1980s.

The impact of external debt stock on economic growth: ethical dilemmas and evidence from East African community bloc

The impact of external debt stock on economic growth: ethical dilemmas and evidence from East African community bloc

A Time Series Study of Financial Sector Development and Original Sin in Nigeria

This study examined financial sector development and original sin in Nigeria financial market. Time series data was sourced from Central Bank of Nigeria Statistical Bulletin from 1990-2023. Original sin measured by Nigeria external debt per exchange rate, Capital market development as market capitalization to gross domestic product, Foreign exchange market as variation in naira exchange rate per US Dollar, banking sector development as percentage total bank assets to gross domestic product, money market development as insurance total assets to gross domestic product, Money market development as value of money market instrument to gross domestic product. The study employed descriptive statistics and multiple regression models to estimate the relationship that exists between the dependent and independent variables. The null Hypotheses (H0) were tested at 0.05 level of significance, Ordinary Least Square (OLS), Augmented Dickey Fuller Test, Johansen Co-integration test, normalized co-integrating equations and parsimonious vector error correction model were used to conduct the investigations and analysis. The study found that 57.0% variation on original sin can be traced and explained by variation on the independent variables as formulated in the regression model. However, the F-Statistics and the F-probability justifies that the model is significant and adequate in explaining variation on the dependent variable. The β coefficient shows that capital market development have negative effect on original sin, foreign exchange market have positive effect on original sin, banking sector development have negative effect on original sin, insurance sector development and money market development have positive effect on original sin. From the findings, the study concludes that the independent variables determine positively and negatively original sin in Nigeria. We recommend that the need for policies to deepen the capital market as this can cushion the effect of the negative effect of external borrowing and domiciled in Nigeria currency rather than international currency. There should be institutionalized policies to enhance the value of the naira against other international currencies as this can reduce the pressure of exchange rate variation in international debt and international monetary environment. Public expenditure should be directed to the productive sector of the economy as this can enhance the productive capacity of the economy and reduce the negative effect on balance of payment and other macroeconomic variables. Policies should be advanced to reduce external borrowings; this can reduce the debt burden and reduce the incidence of original sin in the financial market.

Impulse Response of External Debt Stock and Gross Capital Formation on Economic Growth in Bangladesh: Var Model, Granger Causality and Variance Decomposition Analysis

Purpose: This study employs an annual time series data set from 1987 to 2018 gathered from the World Development Indicators (WDI), 2021 to analyze the properties of external debt stock on financial progress(proxied by economic growth) in Bangladesh. Methodology: The objectives are determined using a variety of econometric techniques, including the Phillips-Perron (PP) unit root test, Var model, Johansen co integration test, Impulse Response Function (IRF), Variance decomposition function, and Granger causality test. The get the result of the Phillips-Perron (PP) unit root test which indicates the stationarity of all the variables at the initial difference. Findings: There is an expectant impact on financial progress (proxied by Gross Domestic Product Per capita) in Bangladesh, according to the short run Var model with the two independent variables External Debt Stock (proxied by public debt) and second lag of Gross Fixed Capital. Block Exogeneity/ Wald Tests and Johansen Co-integration test show that both lnEDS and lnGCF have a strong constructive impact on Bangladesh's financial progress in the short as well as long run. Pairwise, Granger Causality also indulgence the Bi-directional causality between lnGDPPC and lnEDS and Uni-directional causality from lnGCF to lnGDPPC. The influences of lnEDS and lnGCF on lnGDPPC are rising in the long term, showing that both variables are significantly exogenous on the dependent variable. Practical Implication: Bangladesh is now a fast-growing economy with several mega projects for infrastructural, human, and technological advancements such as roads, train, power, education, health, information technology, gas, and energy. External debt service and gross capital formation are crucial for Bangladeshi economic growth. The government should establish a priority aim for long-term economic growth by implementing suitable measures to control, maintain, regulate, and stabilize inflation at a reasonable level. Originality/Value: In a developing country, Savings within the country are insufficient to support investment for financial progress, according to the dual-gap theory and the Keynesian theory of public debt. As a result, bridging this gap for the required level of investment and achieving targeted economic growth will necessitate a bigger inflow of foreign aid or external borrowings. That’s why this study is very important. Limitations: Some limitations of this study include the absence of recent data with the factors. Also numerous factors can influence Bangladesh economic growth for instances, remittances, exchange rates and foreign direct investment all have a crucial impact on GDP growth.

Application of Article 6-Linked Debt-for-Climate Swap for the Clean Energy Transition in Africa

This study presents an innovative financial model that integrates the debt-for-climate swap mechanism with Article 6 of the Paris Agreement, specifically designed to support Africa’s transition to clean energy. The model connects debt-for-climate swaps with the creation of internationally transferred mitigation outcomes (ITMOs), offering mutual benefits for both debtor and creditor nations. This approach aims to improve the debt sustainability of African countries while strengthening their climate resilience by combining Article 6 of the Paris Agreement with Official Development Assistance (ODA). Additionally, this model aligns with key Sustainable Development Goals (SDGs), including SDG 7 (Affordable and Clean Energy), SDG 13 (Climate Action), and SDG 17 (Partnerships for the Goals). Furthermore, the study proposes a restructuring of existing environmental safeguards by incorporating the “Do No Significant Harm” (DNSH) criteria and environmental contribution indicators to ensure alignment with the minimum safeguards mandated by Article 6 and international development standards. Through quantitative analysis, our findings indicate that the proposed debt-for-climate swap model could significantly contribute to Africa’s clean energy transition, address the region’s external debt challenges, and enhance climate resilience.

Impact of External Debt and Energy Consumption on Environmental Quality in Somalia

This study investigates the interconnections between external debt, energy consumption, industrialization, and environmental quality in Somalia over the period 1990 to 2019, utilizing the ARDL bounds testing approach. Notably, a positive correlation is found between energy consumption and CO2 emissions, emphasizing the imperative for sustainable practices. In the long run, external debt is observed to have an insignificant impact on environmental quality, suggesting a strategic opportunity for policymakers to channel external funds towards environmentally sustainable projects. Short-term strategies underscore the positive link between decreased industrialization and improved environmental quality, while a cautious approach to external debt is crucial due to its short-term negative impact. The significance of the error correction term underscores the need for adaptive policies. Overall, the study advocates for comprehensive policies integrating sustainable practices and directing external financing towards eco-friendly projects, alongside a capacity building and technology transfer partnerships for environmentally conscious development in Somalia.

Foreign Capital Inflows and Financial Development in Pakistan: A Linear and Nonlinear ARDL Analysis

Foreign capital inflows play a significant role in sustainable development of financial sector of any country. This study investigates the impact of foreign capital inflows (including remittances, foreign direct investment (FDI), foreign aid, and external debt) on the financial development of Pakistan. For empirical analysis, this study used linear and nonlinear autoregressive distribution lags (ARDL) techniques with time series data from 1972 to 2022. Findings reveal that FDI, workers’ remittances, and foreign aid support financial development, whereas external debt negatively impacts financial development. Moreover, there appear to be asymmetrical effects of FDI and external debt on the financial development in the long run which reduces to a nonlinear FDI-finance relationship in the short run. The outcomes of this study imply policies that encourage networks for FDI and remittances while discouraging external debt inflows to stabilize the financial sector.

The Relationship between Sovereign Debt and Politics

ABSTRACT: With the rise of bonded private debt over the past 15 years, there is an increased dependency on private creditors for sovereign nations that borrow to finance their government activities. The power of private creditors gained through increased sovereign debt burdens is affecting the internal political dynamics of these borrower countries, especially in the Global South, including Latin America. A larger external debt burden creates internal political conflict around the distribution of benefits, so debt is intimately linked with politics. Standard economics literature ignores this problem by hypothesizing markets based on perfect competition. We outline a set of hypotheses regarding the relationship between creditors' political preferences in sovereign debt markets that feature "power rents," when relatively powerful foreign investors can obtain significantly higher returns by lending to smaller, weaker nations. Bringing power asymmetries into the debt discussion, we also present a research agenda for economics and political science.

Structural changes in the foreign sector and its consequences for the economy of Ukraine

The paper defines the essence and role of the external sector in the development of the national economy. It has been studied that the main endogenous and exogenous factors affecting the state and structure of the external sector of the national economy are globalization, technological progress, foreign economic policy and economic integration. The impact of the war on the development of the external sector of Ukraine's economy is substantiated. In particular, the main consequences of the impact of the war on the external sector of Ukraine's economy are the disruption of trade, the insecurity of investments, and the instability of the national currency. It was analyzed that during the period 2020-2022, the deficit of foreign trade in goods and services of Ukraine increased significantly, by more than two times. This negative trend was due to a significant reduction in the export of Ukrainian goods caused by military actions, which led to a decrease in production and complications with logistics. On the other hand, the import of goods to Ukraine decreased slightly. An important aspect is that the share of raw materials in the export structure is constantly growing. Only in the period of 2021-2022, the share of raw products in the export structure increased by as much as 13.3%, which is of a threatening nature in general for the national security of Ukraine. The structure of imports almost did not change, but the volume of imports also decreased, although significantly less than exports. Such a reduction in imports, especially in 2022, is dictated by the contraction of Ukraine's economy, primarily the level of consumption. Since at least 3 million people left Ukraine during the war, inflation and devaluation of the national currency increased, and the economy was partially transferred to military lines. It has been established that a chronic deficit in the balance of goods and services can lead to the accumulation of external imbalances and negatively affect the stability of the country's economy. The analysis of the external debt structure of the Ukrainian economy reveals both challenges and opportunities. While the high level of external debt poses risks to economic stability, it also highlights the need for prudent fiscal management, structural reforms and investment in key sectors. By solving these challenges and using its strengths, Ukraine will be able to manage the dynamics of external debt and build a sustainable and growing economy.

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

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.

Chronological approach to the characteristics of Ecuador’s debt with the IMF and the WB.

Where did Ecuador’s foreign debt originate and grow to alarming levels? The purpose of this article is to describe, from an analytical perspective based on the contributions of various authors, the origin of Ecuador’s external debt with international institutions such as the World Bank and the International Monetary Fund, as well as the support that these organizations provide for the development of the countries of the South, case Ecuador. To achieve this purpose, a documentary methodology was implemented that included an exhaustive review of studies focused on the specific variables subject to analysis, the PRISMA tool and Atlas.ti 23 were used. The results show that the creation of these financing agencies in their attempt to support the financial stability of developing countries has not been sufficiently effective in improving the welfare conditions of a good percentage of the population and has generated an imbalance in the sustained development of the poorest countries. It is concluded that the capitalist system gives predominant priority to the economic growth of nations, thus relegating in its model the consideration of human development. This orientation does not contribute effectively to the improvement of crucial aspects such: education, health and the standard of living of the population.

Foreign or Domestic Public Debt for Cameroon’s Development? An Externality Approach

Public debt plays a major role in financing projects that support economic growth and sustainable development. As governments may choose between domestic and external borrowing, a comprehensive assessment of their effects would support this choice. Our study provides an integrative view of economic and social outcomes and compares, through externalities, the impacts of external and domestic public debt as methods of financing development, with a focus on the Cameroonian economy. Utilizing a dynamic computable general equilibrium (CGE) model and a microsimulation analysis, we find that domestic debt has more advantages for Cameroon compared to external debt, as it increases the large-scale economic impact by improving household welfare, boosting GDP growth, and progressively reducing poverty and inequality. It is therefore recommended that the Cameroonian government focus on increasing the use of domestic debt as a method of financing development by implementing policies that support domestic saving and promote the development of domestic debt markets.

The Simultaneity of Strategic Financial Decisions: Evidence from PSX listed Firms

This study investigates the interrelationships among financing, dividends, and the investment choices of non-financial firms listed on PSX. Unlike previous research, which primarily focused on developed nations with well-developed financial markets and investor protection laws, this study examines businesses in a developing economy characterized by fragile corporate governance, precarious investor protection laws, and political instability. The aim of this study is to shed light on the unique decision-making processes of managers operating in such contexts. This study employs a framework of simultaneous equations considering the flow of funds identity and utilizes the 3SLS estimation technique, which addresses the limitations of single-equation estimation methods. The findings reveal significant interdependencies among corporate financing, dividends, and investment decisions. Financing decisions positively influence dividend decisions and vice versa. Similarly, financing decisions positively impact investment decisions and vice versa. Moreover, dividends and corporate investments have been shown to be competing uses of funds. The results highlight the sensitivity of all three financial decisions to internal cash flows. Additionally, leverage and internally generated cash flows are identified as alternative sources of funds, while investment and dividend decisions are constrained by both internal funds and external debt. These findings align with the flow of funds approach and provide valuable insights for corporate managers and investors to understand the dynamics of financial choices in non-financial firms. This study contributes to the literature by filling a gap in knowledge regarding the interactions among financing, dividends, and investment decisions in emerging markets.

Threshold-based influence of currency devaluation on external debt sustainability: Insights from smooth transition regression and multiple thresholds nonlinear ARDL approaches

This study offers unique insights into the threshold-based influence of currency devaluation (CD) on external debt sustainability (EDS) in designated Sub-Saharan African (SSA) countries. The absence of evidence from this viewpoint, particularly in SSA, inspires this new assessment. On this premise, the study utilizes two innovative estimation procedures: smooth transition regression (STR) and multiple thresholds nonlinear ARDL (MTNARDL) to estimate the sign-based and magnitude-based asymmetric influence of CD on EDS. The outcomes indicate that first, an average CD threshold of 21.1% is consistent with EDS in the designated nations; second, a small CD significantly reduces the external debt–GDP ratio and improves sustainability, while a very high CD largely worsens the EDS problem; third, in the CD regime, devaluation has more detrimental effects on external debt burden; fourth, exceedingly large changes in exchange rate (whether positive or negative) essentially affect the countries’ EDS negatively; and fifth, the adverse effect of large depreciation on EDS is greater than that of large appreciation. The study recommends, amongst others, that heavily indebted countries with sizeable external debt denominated in foreign currency should, as a matter of urgency, avoid excessive and escalated large percentages of devaluation or exchange rate depreciation.

Low- and middle-income countries’ external debt cycle and global economic prospect

The rapid growth of peripheral countries has brought significant changes to the global economic and financial system, making it crucial to examine the relationship between their cyclical debt fluctuations and the world economy. Using the Bayesian dynamic factor model, this paper documents the presence of a set of common factors, known as global debt cycles, in the external debt accumulation of the low- and middle-income countries (LMICs). The interesting finding is that this debt cycles differ from well-known factors for global financial cycles in capital flows, such as U.S. monetary policy and global risk aversion. Even after controlling the factors for global financial cycles, our results reveal a significantly negative predictive effect of estimated debt cycles on global economic growth. Moreover, we demonstrate that this negative effect is primarily dominated by LMICs occupying prominent positions in international debt market networks, especially during the post-2008 financial crisis period. These findings emphasize the increasing importance of peripheral countries in the world system, which has been largely ignored in existing literature.