The Impact of Public External Debt on Capital Formation in Sub-Saharan Africa: A Panel GMM Analysis

Abstract

This study investigates the impact of public external debt on capital formation in five selected Sub-Saharan African (SSA) countries using panel data from 1990 to 2025. Employing the Generalized Method of Moments (GMM) technique, the analysis reveals a statistically significant and positive relationship between external debt and capital formation. The results indicate that external debt (EXTD), savings rate (SAVR), exchange rate (EXCR), and corruption control (CORR) positively influence capital formation, while trade openness (TROP) and population growth (POPG) have a negative impact. The findings suggest that rising public external debt in SSA countries can drive capital formation and economic growth when channeled towards productive investments. To leverage this opportunity, SSA countries should prioritize effective debt management and direct borrowed funds towards investments that foster economic growth and development. Effective management of public debt and governance reforms are crucial to addressing these challenges and promoting economic growth in SSA.