External Debt and Economic Growth in Sub-Saharan African Countries

Abstract

This study examines the effect of external debt on economic growth in Sub-Saharan Africa. Despite the continued rise in external debt across the Sub-Saharan African region, economic growth has not increased proportionally. This raises concerns regarding the sustainability and productivity of debt-financed development. While external borrowing is expected to supplement domestic revenue and stimulate investment, excessive debt accumulation may increase debt servicing burdens, thus constraining long-term economic growth. The existing empirical evidence presents mixed results, thus motivating this study. The study therefore employs the Autoregressive Distributed Lag modelling approach to estimate both the short-run and long-run dynamics among the variables. The study uses aggregated data for all sub-Saharan countries except Nigeria and South Africa due to their high income. The findings reveal the existence of a stable long-run relationship, as indicated by the negative and statistically significant error correction term at a one percent level of significance. The coefficient of the error correction term showed that approximately 85.6 percent of short-run disequilibrium is corrected within one year, implying rapid convergence towards long-run equilibrium after economic shocks. The long-run results indicate that the coefficient of external debt is statistically significant at a 5 percent level of significance. Specifically, the results reveal that an increase in external debt by one unit leads to a decrease in economic growth by 0.0092 units ceteris paribus. The changes in external debt are found not to be an important determinant of economic growth in Sub-Saharan Africa in the short run. However, in the long run, external debt was found to have a negative and significant effect on economic growth. Based on the study’s findings, the study recommends that the governments in the Sub-Saharan Africa region should adopt prudent external debt management strategies, as excessive accumulation of external debt may impede long-run economic growth.