The impact of external debt on economic growth in Sub Saharan Africa: A panel data analysis

Abstract

The effects of external debt on economic growth have been a subject of debate in the academic and policy circles. The debates arouse from poor economic performance in many developing countries amidst accumulation of external debt. However, there are competing hypotheses about the effect of external debt on economic growth as it can boost or reduce growth. This study examined the impact of external debt on economic growth in SSA over the period 1990-2005. A theoretical framework was built based on a neoclassical growth model. The main data source used is the World Development Indicator 2008 CD ROM published by the World Bank. Panel data estimation techniques were applied and results shows that external debt stock to GDP ratio had statistically significant negative effect on economic growth meanwhile the external debt service to GDP ratio was statistically insignificant. It is concluded that debt overhang was the main channel through which external debt negatively affected economic growth in SSA between 1990 and 2005. This is contrary to common view that external debt servicing led to decline in economic growth in Sub Saharan Africa. In terms of policy implications, it is recommended that SSA countries should reduce on taking huge loans in order to avoid debt overhang effect. The negative and statistically significant coefficient of INSTITUTION-a variable measuring political and civil liberties indicates that the governments in Sub Saharan Africa should improve on civil and political freedom in order to boost investor’s confidence on the enforcement of private property rights.