The Effect of External Debt on the Economic Growth in East Africa: ARDL Bound Testing Methodology

Abdikarim Bashir Jama¹

¹School of Economics, Banking and Finance, University Utara Malaysia, Sintok, Kedah, Malaysia

Cite this paper:
Abdikarim Bashir Jama. The Effect of External Debt on the Economic Growth in East Africa: ARDL Bound Testing Methodology. Journal of Finance and Economics. 2021; 9(6):221-230. doi: 10.12691/jfe-9-6-3

Abstract

To attain the maximum goal of sustainable economic development, the government needs a substantial quantity of capital finance via investment expenses on infrastructural and productive capability progress. Lack of sufficient capital due to low savings, majority of developing countries seek to borrow from an outside source to bridge the resource gap. East African country's external debt outline has augmented over the decade to attain economic growth but this has terminated to low economic performance as demonstrated by high unemployment, high inflation, and elevation of the poverty rate. This has informed the requirement to conduct the present study to examine the effect of external debt on economic growth in East Africa. Utilizing ARDL bound testing approach and fixed-effect model for the period 2011-2019. Empirical results from ARDL bound testing approach fail to detect a long-term relationship between variables. However, the fixed-effect model indicates a negative and insignificant impact of exterior obligation on economic progress. An export variable was insignificant. While labor force and gross capital formation have a positive and statistically significant effect on economic growth. Therefore, the negative influence is insufficient of proper management for the funds borrowed from an external source that utilized unproductive projects. Subsequently, the administration ought accurately to apportion its outside debt for industrious investment and sustain an effective and well-organized obligation management policy.

Keywords:
public external debt export labor force gross capital formation economic growth ARDL fixed effect model

This work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]	Were, M. (2001). The impact of external debt on economic growth in Kenya: An empirical assessment (No. 2001/116). WIDER discussion paper.
[2]	Soludo, C. C. (2003). Debt, poverty, and inequality. Okonjo-Iweala, Soludo, and Muhtar (Eds.), The Debt Trap in Nigeria, Africa World Press NJ, 23-74.
[3]	UNCTAD (2016). Economic development in Africa Report 2016. Debt dynamics and development finance in Africa. www.unctad.org/en/PublicationsLibrary/aldcafrica2016_en.pdf (Accessed 20 May 2016).
[4]	Babu, J. O., Kiprop, S., Kalio, A. M., & Gisore, M. (2014). External debt and economic growth in the East Africa community. African journal of business management, 8(21), 1011-1018.
[5]	Momodu, A. A. (2012). Effect of debt servicing on economic growth in Nigeria. Reiko Journals of Business and Finance, 4(3), 116-124.
[6]	Eduardo, B. (1989). The Effect of External debt on Investment. Finance and Development 26(3) 17-19.
[7]	Eton, J, (1995). Sovernity Debt: A Primer. The World Bank Economic Review, 7(2). http://documents. World Bank. Org/curated/425051468741322444/sovereign-debt-a primer (accessed 7 July 2021).
[8]	Krugman, P. (1988). Financing vs. forgiving a debt overhang. Journal of Development Economics, 29(3), 253-268.
[9]	Serieux, J., & Yiagadeesen, S. (2001). The debt service burden and growth: Evidence from low income countries. The North-South Institute, Ottawa.
[10]	Fosu, A. K. (1996). The impact of external debt on economic growth in Sub-Saharan Africa. Journal of economic development, 21(1), 93-118.
[11]	Alwi, S. F., Lee, H. A., Azman, N. S., & Lee, H. H. (2020). External Debts and Economic Growth in Malaysia.
[12]	Marobhe, M. (2019). External debts and economic growth in Tanzania. Review of Integrative Business and Economics Research, 8(1), 64-79.
[13]	Matuka, A., & Asafo, S. S. (2018). External debt and economic growth in Ghana: A co-integration and a vector error correction analysis.
[14]	Ndubuisi, P. (2017). Analysis of the impact of external debt on economic growth in an emerging economy: Evidence from Nigeria. African Research Review, 11(4), 156-173.
[15]	UDEH, S. N., UGWU, J. I., & Onwuka, I. O. (2016). External debt and economic growth: The Nigeria experience. European Journal of Accounting Auditing and Finance Research, 4(2), 33-48.
[16]	Kasidi, F., & Said, A. M. (2013). Impact of external debt on economic growth: A case study of Tanzania. Advances in Management and Applied Economics, 3(4), 59.
[17]	Sulaiman, L. A., & Azeez, B. A. (2012). Effect of external debt on the economic growth of Nigeria. Journal of Economics and sustainable development, 3(8), 71-79.
[18]	Munasinghe, S. D. (2020). Analysis of Public Debt on Economic Growth in South Asian Countries.
[19]	Kharusi, S. A., & Ada, M. S. (2018). External debt and economic growth: The case of emerging economy. Journal of economic integration, 33(1), 1141-1157.
[20]	Akinwunmi, A. A., & Adekoya, R. B. (2018). Assessment of the impact of external borrowing on the economic growth of the developing countries-Nigerian Experience. Asian Business Research, 3(1), 29.
[21]	Senadza, B., Fiagbe, K., & Quartey, P. (2017). The effect of external debt on economic growth in Sub-Saharan Africa. International Journal of Business and Economic Sciences Applied Research (IJBESAR), 11(1).
[22]	Olasode, O. S., & Babtunde, T. S. (2016). External debts and economic growth in Nigeria: An empirical study using Autoregressive Distributed Lag Model. Available at SSRN 2801636.
[23]	MOWLAEI, M., & GOLKHANDAN, A. (2014). The Impact of External Debts on Economic Growth in Iran.
[24]	Malik, S., Hayat, M. K., & Hayat, M. U. (2010). External debt and economic growth: Empirical evidence from Pakistan. International Research Journal of Finance and Economics, 44(44), 1450-2887.
[25]	Ayadi, F. S., & Ayadi, F. O. (2008). The impact of external debt on economic growth: A comparative study of Nigeria and South Africa. Journal of sustainable development in Africa, 10(3), 234-264.
[26]	Mohamed, M. A. A. (2005). The impact of external debts on economic growth: an empirical assessment of the Sudan: 1978-2001. Eastern Africa Social Science Research Review, 21(2), 53-66.
[27]	Gövdeli̇, T. (2019). External debt and economic growth in Turkey: An empirical analysis. Sosyoekonomi, 27(40), 119-130.
[28]	Hüseyin, A. Ğ. I. R. (2016). TÜRKİYE’DE DIŞ BORÇLANMA VE EKONOMİK BÜYÜME İLİŞKİSİNİN NEDENSELLİK ANALİZLERİ. Sosyal Ekonomik Araştırmalar Dergisi, 16(32), 214-231.
[29]	Umutlu, G., Alizadeh, N., & Erkılıç, A. Y. (2011). Maliye politikası araçlarından borçlanma ve vergilerin ekonomik büyümeye etkileri.
[30]	Çiçek, H., Gözegir, S., & Çevik, E. (2010). Bir maliye politikası aracı olarak borçlanma ve ekonomik büyüme ilişkisi: Türkiye örneği (1990–2009).
[31]	Abdullahi, N. I., Domeher, H. D., Blay Jnr, A. V. K., Yakubu, A. M., & Musah, G. (2016). External Debt-Gdp Nexus In Ghana: An Application Of The Autoregressive Distributed Lag (ARDL) Model. European Journal of Business, Economics and Accountancy, 4(6), 106-121.
[32]	Mwaba, A. N. D. R. E. W. (2001, September). External debt and debt reduction measures in Uganda. In WIDER, www. Wider. unu. Edu/conference/conference. 2001.
[33]	Chongo, M. B. (2013). An econometric analysis of the impact of public debt on economic growth: the case of Zambia (Doctoral dissertation, University of Zambia).
[34]	Getinet, B., & Ersumo, F. (2020). The Impact of Public External Debt on Economic Growth in Ethiopia: The ARDL Approach to Co-integration. Journal of Economics and Sustainable Development, 11(11).
[35]	Pesaran, H., & Shin, Y. (1999). An autoregressive distributed lag modeling approach to cointegration “chapter 11. In Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium.
[36]	Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of applied econometrics, 16(3), 289-326.
[37]	Pesaran, M. H., & Shin, Y. (1995). An autoregressive distributed lag modeling approach to cointegration analysis.
[38]	Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica: Journal of the Econometric Society, 1057-1072.
[39]	MacKinnon, J. G. (1996). Numerical distribution functions for unit root and cointegration tests. Journal of applied econometrics, 11(6), 601-618.
[40]	Gujarati, D. N., & Porter, D. C. (2004). Basic econometrics (ed.) McGraw-Hill. Irwin, a business.
[41]	Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the econometric society, 1251-1271.
[42]	Shabbir, S. (2013). Does external debt affect economic growth: evidence from developing countries (No. 63)? State Bank of Pakistan, Research Department.
[43]	Dey, S. (2018). Relationship between Export Revenue and Gross Domestic Product in Bangladesh: An Econometric Analysis. Asian Business Review, 8(1), 1-12.
[44]	Saaed, A. A. J., & Hussain, M. A. (2015). Impact of exports and imports on economic growth: Evidence from Tunisia. Journal of Emerging Trends in Educational Research and Policy Studies, 6(1), 13-21.
[45]	Duval, R., Eris, M., & Furceri, D. (2010). Labour Force Participation Hysteresis in Industrial Countries: Evidence and Causesℵ.
[46]	Adhikary, B. K. (2011). FDI, trade openness, capital formation, and economic growth in Bangladesh: a linkage analysis. International Journal of Business and Management, 6(1), 16.
[47]	Pesaran, M. H., Shin, Y., & Smith, R. J. (1996). Testing for the existence of a Long-run Relationship' (No. 9622). Faculty of Economics, University of Cambridge.
[48]	Narayan, P. K. (2005). The saving and investment nexus for China: evidence from cointegration tests. Applied Economics, 37(17), 1979-1990.
[49]	Afxentiou, P. C., & Serletis, A. (1996). Growth and foreign indebtedness in developing countries: an empirical study using long-term cross-country data. The Journal of developing areas, 31(1), 25-40.
[50]	Cohen, D. (1993). Low Investment and Large LDC Debt in the 1980s. The American Economic Review, 437-449.
[51]	Frimpong, J. M., & Oteng-Abayie, E. F. (2006). The impact of external debt on economic growth in Ghana: a cointegration analysis. Journal of Science and Technology (Ghana), 26(3), 122-131.
[52]	Farrar, D. E., & Glauber, R. R. (1967). Multicollinearity in regression analysis: the problem revisited. The Review of Economic and Statistics, 92-107.
[53]	Fajana, F. O. (1993). Nigeria's debt crisis. United Nations Economic Commission for Africa, Socio-Economic Research and Planning Division.
[54]	Ejaz, M. (2007). Determinants of female labor force participation in Pakistan: An empirical analysis of PSLM (2004-05) micro data. The Lahore Journal of Economics, 12(1), 203-235.
[55]	Mujahid, N., & uz Zafar, N. (2012). Economic growth-female labor force participation nexus: a piece of empirical evidence for Pakistan. The Pakistan Development Review, 565-585.