The Nonlinear Relationship between External Public Debt and Economic Growth in Emerging Economies of Sub-Saharan Africa

ABSTRACT The rising burden of external debt in Sub-Saharan Africa (SSA) has sparked intense debate regarding its impact on economic growth, with concerns over debt sustainability, fiscal vulnerabilities, and the long-term consequences of excessive borrowing. While external debt is often justified as a means of financing critical infrastructure and stimulating economic expansion, the region’s persistent debt accumulation raises questions about its effectiveness in fostering sustainable growth. This study examines the impact of external debt on economic growth in SSA, investigating the threshold effects and the role of institutional quality in moderating this relationship. Utilizing a longitudinal research design, the study analyzes panel data spanning 1990 to 2022 from the African Development Bank (AfDB), World Development Indicators (WDI), and the Worldwide Governance Indicators (WGI). Employing the Generalized Method of Moments (GMM) estimator to address endogeneity concerns, the study models real GDP per capita as the dependent variable, while external public debt stock (EXPD) serves as the key explanatory variable, with gross fixed capital formation and labor force participation rate included as control variables. The findings reveal a non-linear relationship, where external debt contributes positively to economic growth at moderate levels but exhibits diminishing returns beyond a critical threshold, supporting the debt overhang hypothesis. Furthermore, institutional quality plays a crucial role in mitigating the adverse effects of external debt, with countries exhibiting stronger governance frameworks experiencing more favorable growth outcomes. The study concludes that while external borrowing remains a vital tool for economic development, excessive accumulation without effective debt management strategies can undermine long-term growth prospects. Policymakers are advised to adopt prudent borrowing practices, enhance institutional governance, and prioritize productive investments to maximize the benefits of external debt. Future research should explore the sectoral effects of external debt and assess how debt composition influences economic performance in SSA economies.