Debt Sustainability of Emerging Economies in Sub-Saharan Africa

Abstract

Every developing economy aims to ensure long term economic growth. To achieve this, they embark on long term development projects which mostly create huge fiscal deficit. Financing the deficit leads to borrowing from both domestic and international markets to supplement the inadequate revenues generated. The excessiveness of borrowing and interest strings due payable mostly result in debt crisis with the possible adverse effect of unsustainability. This thesis examines debt sustainability of twenty-six (26) emerging Sub-Saharan Africa (SSA) economies using data from the year 2000 to 2018. In so doing, it investigates the effect of debt-to-GDP ratio on overall primary balances; analyses the effect of the output gap on the overall fiscal balances; and estimates a threshold value for measuring risk of unsustainable. To achieve these goals, a fiscal reaction function and threshold models were estimated using the System GMM and Hansen (1999) threshold estimator respectively. The results show a statistically significant positive relationship between primary balance and; the debt ratio and the output gap. It was unravelled that although debt ratio increases government revenues, the net effect is deterioration in the primary balances. The threshold estimator showed the existence of a non-linear relationship between sovereign risk of default and the debt ratio. It provided an average threshold value of 17.95 percent of GDP showing that, if the average debt-to-GDP ratio exceeds 17.95% there is a greater possibility of debt default. The study recommends that emerging economies in SSA must demonstrate fiscal discipline in public spending to reduce primary deficits. They must improve upon their domestic revenue mobilization to limit the rate of borrowing. Above all, they should resort to acquiring more concessional loans which are highly secured.