Africa’s External Debt, Its Debt Sustainability and Effect on Growth of African Countries (1960 To 2014)
Date
2017-06
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University of Ghana
Abstract
This research is to investigate if external debt and debt sustainability have any impact on the economic growth and the level of investment in African countries. The study considered 54 African countries over the period 1960 to 2014, and employed a quantitative approach due to the nature of the data that was used in the study. Two regression models were estimated which included a growth model and an investment model. The estimation technique used was the fixed and random effect model estimation technique. The data was then averaged over a five year period to cater for long term business cycles. Thus the Generalised Method of Moments (GMM) was employed to do the analysis. The debt variable was analysed to see possible endogeneity problem as it proved to be endogenous in studies where the debt variable was used. This variable came out to be endogenous and in order to cater for this, the system GMM was used. The growth model results indicate that external indebtedness, population growth and exchange rate volatility have a negative effect on the economic growth of African economies. On the other hand, the increase in public investment, trade openness and debt sustainability have a positive effect on the economic growth of African economies. The investment model result shows that the increase in external debt and exchange rate volatility have a negative impact on public investment in most African economies. On the other hand, as African countries become more open, it results in a positive impact on public capital investment. The debt service ratio indicates that the liquidity or the capacity to service external debt in the long term does not pose a threat to the economic growth of most African economies. However, the debt overhang effect is present in most African countries.
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Debt Sustainability, Africa, Growth, External Debt