When can public debt go from good to bad in Africa

Abstract

Debt remains one of the most important means of financing growth across the world. There are however varied opinions about it effects and threshold. There has been a growing research interest in recent times to understand the exact relationship between public debt and economic growth and likewise the threshold limit of debt. The literature on Africa in this area is, however, limited. Given that, 33 out of the 39 HIPC countries are from Africa, understanding the effect and the threshold of public debt is imperative for fiscal policy directions in the region. Accordingly, the goal of this study is to first examines if there is a non-linear relationship between public debt and economic growth and secondly, to investigate the public debt threshold in Africa using a panel of 50 African countries between 1980-2016. To establish evidence of non-linearity, the study specified a quadratic model of debt and used both Fixed Effect (FE) and Generalized Method of Moment (GMM) estimation techniques for the analysis. The study found a strong evidence of a non-linear relationship between public debt and economic growth for the 50 African countries for the period between 1980 and 2016. The study investigated the existence of public debt threshold using the Arellano & Bover (1995) dynamic estimation technique in stata and the non-dynamic threshold estimation technique in eviews. The empirical analysis found a positive and highly statistically significant effect of public debt on GDP growth rate. After the debt ratio of 80.06%, the influence of public debt on economic growth diminishes with each additional increase in debt to GDP ratio. Thus, the study identified a threshold value of 80.06% as the limit above which public debt can go from good to bad for the panel of 50 African countries from 1980-2016. The result is robust across varied specifications. The result suggests that, the optimal benefit of public debt for the panel of 50 African countries is achieved at a debt to University of Ghana http://ugspace.ug.edu.gh v GDP ratio of 80.06%. The result could be an important guide to policy makers within the study area in their public financing decisions to realize the optimal advantage of public debt.