FINANCIAL DEVELOPMENT AND EXTERNAL DEBT DYNAMICS IN THE ECONOMIC COMMUNITY OF WEST AFRICAN STATES

The rising debt profile of many countries in West Africa has renewed interest in probing how financial development shaped foreign borrowings in six countries in the ECOWAS region (Nigeria, Ghana, Sierra Leone, Niger, Mali, and Senegal). We measured financial development using the financial access, depth, and efficiency indexes and the overall development index of financial institutions. The mean group (MG) was also employed to analyse the panel datasets obtained from the World Bank and International Financial Statistics. The short-run results showed that financial institutions’ access and depth positively affected foreign borrowings. This finding also highlights the fact that the countries in the ECOWAS sub-region can leverage financial institution development to increase their access to foreign loans to meet their growing development needs. The long-run results showed that the financial access, depth, and efficiency indexes negatively affected foreign borrowings, but their effects were not significant at the 5% level. However, overall financial development has a positive and significant effect on foreign borrowings eventually. This finding highlights the significant role played by financial institutions in improving countries’ borrowing capacity. The error correction coefficient (-0.222) is negative and highly significant at the 1% level, indicating that approximately 22.2% of long-run distortions are corrected annually. Given the findings, we recommend that policymakers should synergise their efforts to ensure the overall development of financial institutions that allow for more access, increased depth, efficiency and stability of financial institutions to provide a good signal for cost-effective borrowings from external sources