The Impact of External Debt on Economic Growth in Selected Sub-Saharan Countries

Abstract

Purpose: The overarching goal of this research is to look at in Sub-Saharan Africa, what is the impact of external debt on economic growth in selected Sub-Saharan African countries from 2000 to 2020? These included Kenya, Uganda, Ethiopia, Tanzania and Nigeria. It was motivated by two specific objectives: to ascertain the external debt's effect on economic growth in a Sub-Saharan African sample between 2000 and 2010. (2000-2020). additionally, to determine whether external debt and economic growth in a sub-Saharan African country have a long-term relationship(2000-2020).From 2000 through 2020, The study analyzed World Bank and International Monetary Fund panel data.. The study investigated its stationary qualities of time series data using a unit root testing approach (ADF).

Methodology: The data were evaluated using fixed effect and random effects model estimation approaches. Both cointegration and ECM analysis were employed to examine and explain the relationship between external debt and economic growth in Sub-Saharan Africa, with external debt serving as the independent variable and economic growth serving as the dependent variable. A panel cointegration test was performed on the variables, which allowed for the assessment of the long run through cointegration. This implies that there are four cointegrating equations, which indicates the presence of a long-run relationship between external debt and economic growth as demonstrated by the Johansen cointegration coefficient. A second method utilized in this study was the variable test through ECM, which was used to estimate the short-run relationship between external debt and economic growth.

Findings: A negative correlation of -0.002076 between external debt and GDP is implied by holding inflation and investment constant. This indicates that a 1% increase in external debt results in a -0.002076 or 0.2 % decline in gross domestic product. Additionally, a significant link was found with an R-square of 0.730929 and an adjusted R-square of 0.50167.

Recommendation: The study recommends that the Sub-Saharan Africa and policymakers must try speedily to enact structural reforms aimed at reforming the public sector and sustainability of the external debt. Since reliance on external resources is both dangerous and unstable, the SSA must mobilize its own resources and adopt policies to reduce its external debt exposure, in order to reduce its undesirable economic effects. In other words, to prevent further debt accumulation, the SSA should expand the economy to generate more income and to increase domestic financing.