Impact of Public Debt and Governance on Economic Growth in Selected Sub-Saharan African Countries

Abstract

The impact of government debt on economic growth has continued to generate series of debates among scholars around the world. Some scholars conclude that an increase in public debt caused by an expansion of government expenditure promotes growth, while some scholars had a different view and instead assert that higher public debt may slow down overall performance of any economy. In recent years, there has been an increased concern on whether countries can imperil their growth prospects by having too much debt. An example is the debt crisis of Greece in 2015, which started in 2008 and has raised concerns for many economists and policymakers. Greece has been bailed out twice since 2010 by the International Monetary Fund (IMF), European Central Bank and the European Commission with a total of €240 billion. Despite the bail out, the country still has a huge outstanding debt unwilling to be expanded by its creditors, with unemployment above 25%. This is because the bailout fund goes towards paying off debt rather than being pumped into the economy to engender growth. The focus of this chapter is the impact of public borrowings with attention to governance on economic performance.

Appendix: Summary of Empirical Result of the Impact of Debt on Economic Growth

S/n	Study	Countries covered	Year covered	Estimation method	Dependent variable	Explanatory variables	Summary of findings
1.	Azam, Emirullah, Prabhakar and Khan (2013)	Indonesia	1980–2012	OLS	GDP per capita	Total external debt stock as a ratio of GDP, exports of goods and services as a ratio of GDP, inflation rate, gross savings as a ratio of GDP, telephone lines (per 100 people) as a proxy for infrastructure	External debt and inflation rate decrease economic growth, while exports, infrastructure and gross savings have a positive impact on economic growth. It is advised that government should embark on active debt management strategy and more of domestic debt stock should be considered
2.	Bayraktar and Fofack (2013)	Ethiopia (an HIPC)	Using 2008 as base year, projection is made from 2009 to 2030	Growth Model	The models consist of production function, components of aggregate demand, government budget constraint, balance of payments, equilibrium condition of the market for domestic goods and savings-investment balance function		There is an evidence of real income stagnation and also persistent high fiscal deficit and external debt. By 2030, the share of external debt in GDP could rise to 66% as against the 18% in the immediate post-HIPC completion point
3.	Boopen, Kesseven and Ramesh (2007)	Mauritius	1960–2004	VECM	GDP per capita at constant prices	Private capital stock, public capital stock, total export and imports as a ratio of GDP, secondary enrolment ratio, external public debt ratio, NPV of external debt stock as a share of GDP and debt servicing as a share of recurrent revenue	There is a negative relationship between external debt and output level both in the short run and long run. Also, public debt has a negative effect on private and public capital stock of the country, thereby strengthening the debt overhang and crowding-out effect hypotheses
4.	Chowdhury (2001)	2 Country groups: 35 HIPC and 25 non-HIPC	1982–1999	3-year averaged pooled cross-section time series	Per capita GDP	Lagged value of the log of per capita GDP, investment/GDP ratio, population growth rate, export/GDP ratio, government expenditure/GDP ratio, terms of trade growth, M2/GDP ratio, total debt service/GDP, total debt service/exports ratio, debt/GDP ratio and debt/export ratio	Economic depression due to external debt is not limited to the HIPC group. Other low- and middle-income countries also experience negative effect on long-term economic growth. There is a statistically significant negative causal impact of the four debt ratio variables to economic growth in both the HIPC and non-HIPC groups. Therefore, debt reduction initiatives should not be limited to the 41 HIPC groups as non-HIPC countries also suffer from high debt, low growth and poverty
5.	Nguyen, Clements and Bhattacharya (2003)	55 Low income countries	1970–1999	Three-year average panel regression	Growth of real per capita income (GDP)	Lagged real per capita income, % change in terms of trade, population growth, gross secondary school enrolment rate, gross domestic investment in % of GDP, fiscal balance in % of GDP, export plus imports as a share of GDP, total debt service in % of exports, stock of external debt	High debt affect growth through its effect on efficiency use of resources rather than decreasing effect on private investment. But this can only be detrimental only after a certain threshold which is estimated at around 50% of GDP at the face value of external debt and 20–25% of GDP at its estimated NPV
6.	Checherita C. and Rother P. (2010)	12 Euro Area Countries	1970–2011	Panel-fixed effects corrected for heteroskedasticity and autocorrelation	GDP per capita growth rate	Initial level of income per capita, investment/savings-to-GDP rate, population growth rate and a quadratic equation of debt, other control variables (fiscal, openness, interest rate)	There is a negative non-linear impact of public debt on per-capita GDP growth rate. A higher debt-to-GDP ratio gives a lower long-term growth rates at debt levels above the range of 90–100% of GDP
7.	Ejigayehu and Persson (2013)	8 HIPCs (Benin, Ethiopia, Madagascar, Mali, Mozambique, Senegal, Tanzania, Uganda)	1991–2010	Panel data random effect estimation	Economic growth for country i between year t and t+1	Log of initial per capita GDP, investment growth rate, population growth rate, trade balance, debt service export ratio, total external debt to GNI, net total debt service	The effect of external debt on economic growth is of crowding-out effect rather than debt overhang, indebted countries transfer resources, including foreign aid and foreign exchange resources to service their debt. Debt overhang effect is statistically insignificant in the study. Also, the total amount of debt relief is negligible and did not contribute to a better economic growth
8.	Elbadawi et al. (1997)	99 Developing countries in SSA, Latin America, Asia and Middle East		Cross section	GDP per capita growth	Ratio of current debt stock to GDP, past debt accumulation to GDP reflecting debt overhang, debt service as a ratio of export earnings, fiscal deficit ratio and lagged of it, ratio of public investment to GDP, inflation rate, real exchange rate, population growth, human capital development, initial level of GDP, trade variability and external shocks proxy	There exists a debt overhang effect on economic growth. They recognized three direct channels in which indebtedness affects growth: current debt inflows proxy who should increase growth and development, past debt accumulation and debt-service ratio. Debt accumulation was deleterious to growth while debt stock stimulates growth and development
9.	Wamboye E. (2012)	40 Less Developing Countries	1975–2010	Arellano-Bond SGMM method (on unbalanced panel data)	Real per capita GDP growth	Real per capita GDP, external public and publicly guarantee debt, net inflow of Foreign Direct Investment, Net overseas development assistance, secondary school enrolment, population growth rate and fiscal volatility.	High external debt reduces economic growth of LDCs, regardless of the type of the debt (public and publicly guaranteed debt, total or concessional debt)
10.	Fosu (2010)	35 sub-Saharan African Countries	1975–1994	Five-year panel data	Sectors’ share of public expenditure on capital, health, education, social sectors, economic services, agriculture, public investment expressed in percentages	External debt service rate, foreign aid (ODA) as a proportion of GDP, GNP per capita, share of population engaged in agriculture, political structure measured by global trends	Constraint on debt servicing has intersectoral implications. This would shift public expenditure away from the social sectors and likely from public investment
11.	Iyoha M.A. (1999)	50 Sub-Saharan African Countries	1970–1994	Two-stage Least squares regression method	GDP, per capita gross domestic investment	Interest rate (commercial lending rate), labour force, marginal product of capital, price of investment goods, growth rate of real output, ratio of external debt stock to GNP, ratio of total debt service payments to export of goods and services	There was a significant debt overhang effect as well as crowding-out effect during the period observed in SSA. The stocks of external debt and heavy debt service payments have had a depressing effect on investment in SSA
12.	Frimpong J.M. and Oteng-Abayie E.F. (2006)	Ghana	1970–1999	VECM	GDP growth	Gross domestic investment to GDP ratio, ratio of total external debt to GDP, ratio of total debt service to exports ratio, annual growth rate of export capacity to import, foreign direct inv. as a ratio of GDP	There is an evidence of crowding-out effect as increase in external debt servicing gives a lower GDP growth. The VECM also supports an evidence of debt overhang effect of high accumulated debt as the investment variable has a negative significant effect on GDP growth
13.	Jalles (2011)	72 Developing countries	1970–2005	System-GMM	Per capita GDP growth	Lagged income per capita, investment rate, secondary school enrolment rate, population growth rate, openness, terms of trade growth and fiscal balance, NPV of debt as a share of GDP, debt service as a % of exports of goods and services	Countries with lower corruption seem to be able to use and manage their debt better. However, the panel Granger-causality tests only feebly support that debt or institutional quality affects growth. Therefore, in countries with low level of corruption, the HIPC Initiative should be implemented and more disbursement should be encouraged while in countries with high levels of corruption, emphasis should be on spending on improvements in governance which would increase efficiency in the medium and long terms
14.	Uzun, Karakoy, Kabadayi and Emsen (2012)	19 Transition Economies	1991–2009	Panel autoregressive distributed lag model (ARDL)	GDP per capita growth rate	External debt to export ratio, OPENESS	The transition economies started market-based economy after 1991 which requires external resources. There is a positive relationship between debt and growth rate in the long run. However, countries should consider the cost of external debt in expanding the economies as the growth rate might not be for long term if fiscal and monetary policies discipline is not performed
15.	Diallo M.B. (2010)	20 sub-Saharan African countries (2 groups of 10 countries divided into resource-rich and resource-poor)	1960–2008	unit root tests, cointegration tests, and error correction models	GDP per capita	Foreign aid per capita, population growth, government expenditure on education and health, public expenditure on infrastructure investment, transfers into household consumption and public consumption for functioning of government and foreign transfer used on human and public capital from foreign aid	the share of foreign aid used in human capital development has a positive effect on debt per capita and GDP per capita. It however, has a negative effect on debt-to-GDP ratio and public capital.
16.	Sichula M. (2012)	5 Southern Africa Development Communities Heavily Indebted Countries (SADC HIPC). Zambia, Mozambique, Malawi, Tanzania and Madagascar	1970–2011	OLS and GLS	Rate of outpour (GDP) growth, private investment	External debt to GNI, Public investment to GDP, Debt Service to GDP, Terms of Trade, Exchange Rate, Corruption Index, Dummy variable for debt relief (represented as HIPC)	HIPC countries have experienced economic decline as a result of increase in debt service obligations. The need for infrastructural development in these countries has heightened debt with increase in interest payments as creditors demand higher yield on their funds. Exchange rate and corruption also play a major role not only in HIPC countries but in Africa as a whole. Therefore, reduction in external debt accumulation and attainment of completion point are key determinants for growth in these countries
17.	Ajao M.G. and Ogiemudia A.O. (2013)	Nigeria	1979–2009; Annual	OLS, ECM	GDP	External Debt Services, External Debt Stock, Aggregate Investment	External debt stock has a significant positive impact on economic development in Nigeria. However, external debt stock had a negative insignificant relationship with GDP. The study also reveals that if properly managed, increase in external debt will contribute significantly to the economy’s development
18.	Presbitero (2006)	121 developing countries	1980–2004	5-year averaged panel data analysis	GDP growth	Per capita GDP, NPV of External debt as a ratio of GDP and export, external debt as a ratio of GDP ad exports, debt service as % of GDP, investment, primary education, terms of trade (TOT), openness, inflation, Country Policy and Institutional Assessments (CPIA) made by 16 countries. All expressed in log except TOT, inflation and CPIA	There is a linear negative relationship between external debt and growth. With respect to debt and investment, there is no evidence of debt overhang but debt service crowds out investment in Low-Income Countries while there is no evidence of liquidity constraint in middle-income countries. This is attributed to weak tax system in poor countries
19.	Umaru, Hamidu and Musa (2013)	Nigeria	1970–2010	OLS	GDP	Log of external debt, log of domestic debt	There is a negative impact of external debt on economic growth, while domestic debt possessed a positive impact on growth. Therefore, if domestic debt is channelled towards real sector, Nigeria can achieve its desired level of growth
20.	Were (2001)	Kenya	1970–1995	General Instrumental Variables Estimators	Real GDP growth rate	Stock of external debt to GDP ratio, stock of external debt to GDP ratio lagged by one period, debt service as a ratio of export earnings, fiscal deficit to GDP ratio, current real private investment as a ratio of GDP, lagged private investment as a ratio of GDP, terms of trade, human capital development, inflation rate, movement in real exchange rate, real public inv. as a ratio of GDP, lagged public inv. as a ratio of GDP	External debt accumulation decreases economic growth and private investment, resulting in debt overhang. Debt servicing does not affect economic growth but has some crowding-out effects on private investment. However, current debt inflows stimulate private investments