EXTERNAL DEBT AND ECONOMIC GROWTH: A THRESHOLD ANALYSIS FOR SUB-SAHARAN AFRICAN COUNTRIES

Abstract

This study investigates the nonlinear relationship between external debt and economic growth in Sub-Saharan Africa (SSA) using a balanced panel of 48 countries from 1990 to 2024. The study builds a regime dummy on the basis of the SSA median external debt-to-GNI ratio of 53.1 per cent to determine whether the growth impact of debt varies between low- and high-debt regimes. The analysis uses a variety of estimators, which include pooled ordinary least squares, fixed and random effects, feasible generalised least squares, panel-corrected standard errors, and dynamic generalised method of moments, and controls the inflation, trade openness, oil rents, current account balance, and the terms of trade. The findings are always that external debt is having a strong negative impact on economic growth. More to the point, as the interaction between the external debt and the high-debt regime shows, there is a strong nonlinear interaction: the countries above the 53.1% threshold experience an average decrease in the GDP growth by 1.31 percentage points stronger than the similarly nonlinear interaction between the external debt and the high-debt regime. It is then confirmed that these findings are stable by robustness checks, such as Arellano-Bond GMM estimation, omission of outliers, and alternative trade proxies. This research contributes to an important gap in the literature by providing a regime-sensitive, large-sample panel threshold model that is specific to SSA over an extended and a recent period. As opposed to the previous literature where researchers use linear models or a small sample size, this study considers an interaction-based threshold based on SSA-specific data and implements comprehensive diagnostic corrections of cross-sectional dependence, heteroskedasticity, and serial correlation. Policy implications of the findings are evident. To reduce the negative impact of growth, SSA countries need to keep the level of external debt below the measured threshold. Further, international financial institutions ought to take into account nonlinear debt-growth processes in their design of lending structures and debt sustainability strategies of the region.