The Foreign Debt and Economic Growth in Sub-Saharan Africa

Abstract

The growing levels of external debt in developing countries are increasingly a worldwide problem, particularly in Sub-Saharan African countries, where the expanding portfolio of foreign debts, debt servicing rates, and debt overhang cause alarm and global concern. The likelihood of relatively good outcomes of the interaction between external debt and economic growth is based on the government's attempts to maintain a sustainable debt-to-GDP ratio, a low budget deficit, and that the external debt is utilized primarily for capital investments. Under other conditions, the government would confront a circumstance in which accumulated foreign debt levels stifle economic progress, particularly when debt levels rise over time and are poorly managed. In this context, this study aims to examine the association between foreign debt and economic growth in Sub Sahara African countries during the period from 1980 to 2019. The study employed the Dynamic Panel Threshold Regression analysis to investigate the differential impact of foreign debt on economic growth below and above a threshold. The empirical results highlight the existence of a nonlinear relationship between foreign debt on economic growth above the debt threshold during the examined period. Empirical evidence suggests significant policy prescriptions; Sub Sahara African governments should use solid methods of generating domestic income to supplement outside sources of funding, such as the inclusion of domestic informal businesses on a shared cutting-edge platform to ensure successful domestic revenue collection.