External Debt, Investment and Economic Performance in Sub-Saharan Africa

Mutiu Abimbola Oyinlola, Abdulfatai A. Adedeji and Rasheed Oluwaseun Oladipupo

Background and Objective: External debt has been identified as a key source of finance for many countries in sub-Saharan Africa (SSA) due to inadequate funds from other sources. Many countries relied on external debt to finance their investment with the expectation of spurring economic growth. Therefore, this study investigates the effect of external debt and investment on economic performance. Materials and Methods: The study utilized a panel of 26 sub-Saharan Africa (SSA) countries between 1999 and 2014 using system General Method of Moments (GMM). Results: The estimated results showed that the growth effect of external debt is negative while positive for investment. Also, the result of the interaction between external debt and investment is negative. The growth effect of inflation is negative while that of trade openness is positive. In addition, the growth effects of the interactions are positive and statistically significant for inflation and external debt, trade openness and external debt and crisis and external debt. More so, the non-linear effect of external debt is positive. Conclusion: This study, therefore, concludes that inflation, financial crisis and the interaction between external debt and financial crisis negatively influenced growth while the impact of trade openness is equivocal. The impact of the interaction between external debt and inflation on economic growth is positive. It is recommended that countries should monitor their debt level when raising funds for investment to prevent debt crisis in the future. In addition, the efficient use of the resources from external debt is very important for the countries in SSA to prevent crowding out effect. Given the unstable nature of global economy, there is need for countries to create economic resilience for the external debt to foster investment and economic performance in the sub-Saharan African countries. The SSA countries is encouraged to work towards these recommendations to promote investment expansion and better economic performance.

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