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This thesis on Longitudinal Econometric Analysis of the effect of Debt Burden on Investment and Growth was carried out on fifteen indebted countries in sub-Saharan Africa over a time period of sixteen years (1998 – 2013). Longitudinal data approach was used since the research involved both time series and cross sectional data. Secondary data obtained from World Bank Development Indicators, World Bank, International Debt Statistics, Central Banks of the Countries and Debt Management Bureaus in the selected countries were used in the research. STATA package version 11 was used in the data analysis and the results show that total debt has a significant and negative effect on the economic growth of sub-Saharan African countries, debt service has a significant and negative effect on economic growth of sub-Saharan African countries, Total debt has a significant and negative effect on investment of sub-Saharan African countries and debt service has a significant and negative effect on Investment in sub-Saharan African countries. A unit increase in debt service resulted in approximately 19.839 unit decrease in GDP and 3.296 unit decrease in investment in the SSA countries. Also a unit increase in total debt resulted in 7.909 unit decrease in GDP and 0.590 unit decrease in investment in the SSA countries.  The implication of these results are that the debt burden from the findings distorted human capital and infrastructural development and economic advancement in the sub-Saharan African countries due to debt overhang on investment and crowding out effect on economic growth. The main recommendation from the findings of this study is that SSA countries should not continue to procure public debts as such debts actually depress growth and investment. Loans should be applied on investment in infrastructures that promotes productivity and human capital development.  The study also recommends that economies of sub Saharan African countries should apply loans only on beneficial capital investments capable of liquidating itself rather than spend it on recurrent expenditure. Only external loans with favourable terms and conditions should be sort for by the countries to avoid excessive debt burden on the economies.






Cover Page  –         –        –        –        –        –        –        –        –         i

Fly Leaf-     –        –        –        –        –        –        –        –        –        ii

Title Page    –        –        –        –        –        –        –        –        –         iii

Declaration- –        –        –        –        –        –        –        –        –        iv

Certification          –        –        –        –        –        –        –        –        v

Dedication             –        –        –        –        –        –        –        –        vi

Acknowledgement –        –        –        –        –        –        –        –        vii

Abstract       –        –        –        –        –        –        –        –        –           viii

Table of Contents- –         –        –        –        –        –        –        –        ix


1.1       Background to the Study –      –           –           –           –           –           –           1

1.2       Statement of the Problem –     –           –           –           –           –           –           5

1.3         Research Questions- –            –           –           –           –           –           –           8

1.4       Objectives of the Study-          –           –           –           –           –           –           8

1.5       Research Hypotheses              –           –           –           –           –           –           9

1.6       Justification of the Study        –           –                                   –           –           9

1.7       Significance of Study–           –           –           –           –           –           –           10

1.8       Scope of the Study      –           –           –           –           –           –                       10

1.9        Acronyms and Abbreviations –           –           –           –           –           –           10



2.1       Conceptual Issues        –          –           –           –           –           –           –           12

2.2       Origin of Debt Crisis in LDC’s  –       –           –           –           –           –           15

2.3        Review of Theories of Debt- –           –           –           –           –           –           17


2.3.1  Debt Overhang Theory-            –           –           –           –           – 17
2.3.2  Debtcum – Growth Model-       –           –           –           –           – 19
2.3.3  Threshold School of Thought (Debt – Laffer Curve Thesis)- – 19
2.3.4  Profligacy Theory-        –           –           –           –           –           – 19
2.3.5  External Debt within the Context of the Solow Growth Model- 25
2.4       Macroeconomic consequences of Debt Burden-        –           – 26
2.4.1  Consequences of Debt Burden on Economic Growth-             – 26
2.4.2  Consequences of Debt Burden on Investment              –           – 28
2.4.3  Debt Burden and Debt Service Capacity-         –           –           – 29
2.5       Africa’s Debt Crisis and its Sustainability      –           –           – 30
2.5.1    Debt Crisis in the Selected SSA Countries     –           –           – 30
2.5.2  Debt Sustainability in Selected SSA Countries            –           – 56
2.6       Review of Empirical Studies on Debt Burden in SSA Countries 63
2.7       Synthesis of Literature Review and Relevance to the Study  – 70
2.7.1  Summary of Literature Empirical Studies on Debt Burden in SSA   – 76
2.7.2  Limitations of Previous Studies            –           –           –           –           – 80
2.8       Theoretical Framework           –           –           –           –           –           –


3.1       Nature and Sources of Data –              –           –           –           –           – 83
3.2       Research Design-        –           –           –           –           –           –           – 83
3.3       Model Specification –             –           –           –           –           –           – 83
3.4       Justification for Estimation Technique –         –           –           –           – 85
3.5       The Fixed and Random effects model            –           –           –           – 86
3.6        Estimation Procedure –           –           –           –           –           –           – 87
3.6.1  The Hausman Test        –           –           –           –           –           –           – 88
3.7       Economic Criterion     –           –           –           –           –           –           – 89



4.1       Profile of Debt Burden in the SSA countries  –          –           –           –           90

4.1.1  Debt burden of the Angolan Economy             –           –           –           –           90

4.1.2  Debt Burden of the Burundi Economy             –           –           –           –           92

4.1.3  Debt Burden of the Cameroonian Economy –               –           –           –           94

4.1.4  Debt Burden of the DR Congo Economy         –           –           –           –           96

4.1.5  Debt Burden of the Ethiopian Economy           –           –           –           –           98

4.1.6  Debt Burden of the Ghanaian Economy           –           –           –           –              100

4.1.7  Debt Burden of the Kenyan Economy              –           –           –           –              102

4.1.8     Debt Burden of the Malawian Economy       –           –           –           –              104

4.1.9  Debt Burden of the Malian Economy –             –           –           –           –              106

4.1.10  Debt Burden of the Mozambican Economy –             –           –           –              108

4.1.11  Debt Burden of the Nigerian Economy          –           –           –           –              110

4.1.12  Debt Burden of the Rwandan Economy         –           –           –           –              112

4.1.13  Debt Burden of the Tanzanian Economy        –           –           –           –              114

4.1.14  Debt Burden of the Ugandan Economy          –           –           –           –              116

4.1.15  Debt Burden of the Zimbabwean Economy –             –           –           –              118

4.2       Summary of the Debt Burden across the Fifteen SSA Countries       –              121

4.2.1  Profile of total Debt across the fifteen SSA countries              –           –              122

4.2.2  Profile of Debt Service across the fifteen countries –               –           –              123

4.2.3 Descriptive Statistics of the Data used in the Analysis –           –           –              124

4.2.4 Correlation Matrix of Variables used for the Study-     –           –           –              125

4.3        Presentation of the Panel Unit Root Results- –           –           –           –              126

4.4       Panel Cointegration Test         –           –           –           –           –           –              127

4.5        Results of the Fixed Effects Models-             –           –           –           –              128

4.6       Results of the Random Effects Models-         –           –           –           –              130

4.7       The Hausman Tests     –           –           –           –           –           –           –              133

4.8       Discussion of Results in Relation to the Hypothesis- –           –           –              135

4.9        Evaluation of the Hypotheses for the Study –            –           –           –              141



5.1       Summary of the Study-           –           –           –           –           –           –              143

5.2        Concluding Remarks- –           –           –           –           –           –           –              144

5.3        Policy Implication/Recommendations-          –           –           –           –              144

5.4        Contribution to Knowledge- –            –           –           –           –           –              145

5.5       Suggested Areas for Further Studies- –           –           –           –           –              145

5.6       Limitations of Study- –           –           –           –           –           –           –           147 References- –        –             –           –           –           –           –           –           148

Appendices- –            –           –           –           –           –           –           –              161






1.1         Background to the Study

The act of borrowing creates debt and such debt could be internal or external. It is external when it is borrowed from outside the country and internal when it is borrowed from within the country. Debt can further be classified as private or public. It is private debt when it is owed by individuals and private sector businesses to their lenders within and outside the country. Public debts are debts owed by the government of a nation borrowed within or outside the territorial boundary of the nation.

The need for public debt is necessitated because of the role of capital in the development process of any economy as capital accumulation improves productivity, which improves economic growth. There is abundant evidence in the existing body of literature to indicate that external debt enhances the growth and development of a nation.

Countries generally borrow for two major reasons. The first is to increased investment and human capital development and the second to lessen budget constraint by financing fiscal deficits and balance of payment deficits (Soludo 2003).  It has been noted that countries, especially the developing countries borrow to increase capital formation and investment that have been hampered by low level of domestic savings (Obadan and Uga, 2007). Ultimately the reasons why countries borrow narrow down to two major reasons which are to bridge the “savings-investment” gap and the “foreign exchange gap”. Chenery (1966) added that countries borrow to supplement the lack of savings and investment in that country. The dual-gap theory explains the use of external debt to bridge the savings-investment gap in a nation. For development to take place it requires a level of investment which is a function of domestic savings and the level of domestic savings is not adequate enough to guarantee development (Oloyede, 2002).

Countries borrow from overseas (external debt) as well to bridge the foreign exchange (imports-exports) gap. For many developing countries like Nigeria the persistent balance of payments deficits have not allowed for capital inflow which will bring about growth and development. Since the income from exports required to execute this investment is insufficient, foreign debt may be the last resort to gaining access to the resources required to attain rapid economic growth.

Foreign borrowing is a major source of public supply and financing capital formation in any economy (Adepoju et al, 2007). It is a means by which countries fill the deficits and execute economic projects that increase the living standard of the people and promote sustainable growth and development. Hameed, Ashraf and Chaudary (2008) opined that foreign borrowing should enhance economic growth especially when internal financing is inadequate. External debt also increases the overall factor productivity through increment in output that enhances Gross Domestic product (GDP) of a nation. Foreign debt increases the capital formation of a nation which is used in infrastructural development, human capital and provision of basic amenities that facilitates the well being of the citizen. The need for foreign borrowing cannot be overemphasized as it is a keen stimulant of growth and hence improves standards of living and poverty alleviation.

The continuous need for countries to borrow to finance fiscal deficits led to the accumulation of external debt (Osinubi and Olaleru, 2006). It is broadly accepted in the international development community that too much external debt in most developing nations is a great barrier to their economic growth and stability (Audu, 2004; Blavy, 2006). Developing countries in sub-Saharan Africa (SSA) have often accumulated big sum of foreign debts that resulted in trade debt arrears at high interest rates. Gohar and Butt (2012) stated that excessive debt service payments create tremendous problems for nations particularly the developing nations which serviced debts for more than the amount it was contracted and this weighs down the growth process in such nations. The inability of the SSA’s to meet their debt service payments obligations has resulted in debt overhang or debt service burden that has militated against her growth and development (Audu, 2004).

The debt burden has, for many years, remained a recurring and dissonant note in the discussion of the crisis and contradictions of Africa’s development. This is, however, not entirely surprising given its magnitude and the consequences for Africa.

The collective debt burden of the continent represents a massive underutilization of Africa’s huge resource base, both human and material, and the failure of policy measures targeted at the management of those resources. Expectations were high in the decade of the 1960s, when most African countries gained political independence. Africa’s emerging leaders assumed that with the abundance resources under their control, they were bound to record steady progress in the area of sustainable democratic governance and development.

The  1980’s  debt  crisis  came  as  a  key  macroeconomic  setback  for  many  developing  nations. Following  this,  different  studies  were carried  out  to  find  out the  cause,  consequence and as a possible solution to the way  out from the crisis.  According to  Krumma  (1985)  the  debt crisis  traced  back  to  the  economic  and  political situations of  many  poor  countries  in  1970’s. During that period, many developing countries got an extended access to foreign loans and spend more  on public expenditure.  Beside  this  many  of  the  countries  were  not prepared for the second oil shock which  happened in the late 1970’s. During the early 1980’s (1980 – 1983) the  world  economic recession  following  the  oil  shock  and  a reaction  from  lender  countries resulting in high interest  rate,  a  decline  in  official  lending  and  a  delayed   adjustment  programme  made  the situation very  difficult  for  many  developing  countries.  The outcome was that the economic growth of many sub-Saharan African countries declines adversely.

Empirical evidence in 1980’s from World Bank Report indicated an average annual rate of growth of real  gross domestic product (GDP)  in  sub-Saharan  Africa (SSA)  countries was  1.7%,  The  annual  per  capita  income declined at an average  rate  of 2.2%  and  terms  of trade knock down by  9.1%.  In line with the above,  the population growth rate  in  the  region  amounted  to  0.9  %  annual  average growth rate  of  real  GDP  per   capita.   Due  to  this,  the  decade  of  1980’s  is  taged  as  “lost decade”  for  Africa in terms of opportunities for development.

The  World  Bank  Report  in  2004  generalized  the  possible  factors  for  the  poor  economic performance in  SSA to  domestic  factors  and  external  factors.  As per the report: high population growth  rate(which  leads  to  a  reduction  in  per  capita  welfare) ,insignificant  human  capital development,  poor infrastructure;  which  in  turn  affects  development in the private  sector  and  inappropriate government policies   beside with  ethnic  conflicts  and political instability.  In  the  other  side,  the  successive  oil  price  shock  (1973  -1974  and  1978-1979),  an  alarming  decrease  in  terms  of  trade  and  a  recession  in  the  industrialized  countries which  increased  the  interest  rate  categorized  as  external  factors  by  the  report.(World  Bank Report, 2004).

According to Cordella  and  Ruiz-Arranz (2005),  the  original  cause  for  the  debt  crisis  was  the  excessive borrowing by government to  service their accumulated debt. This happened due to the inverse correlation between the real interest rate in  the  international  market  and the  total  real Gross Domestic Product GDP growth rate in the heavily indebted poor African countries (HIPCs).  During most of the years  in  the  decade  of  1970’s,  the real  long  –term  rate  of  interest in  the developed  world  fell well  short  of  the  real  growth  rate  of  GDP  by  HIPCs.  This opened a viable decision for the country to service their accumulated debt by making new borrowing, instead of generating resources to service the debt. This has resulted to large fiscal deficits experienced by many countries in SSA.

Krumma, (1985) was of the opinion that, if the existing foreign loan improves the productive capacity of the borrowing country.  It is needless to take additional foreign loan to service the original debt.  According  to  Blavy,(2006):  if  marginal  productivity  of  each  available  external  debt  is  greater than  or  equal  with  the  principal  and  the  interest  payment  ,  external  debt  will  have  a  positive impact on the economy of the borrowing country. This will accordingly  require  the  external  debt  to   be  invested  in  productive  sectors  and  infrastructures that will enhance  the  productivity  of  other  sectors. On this scenario external debt servicing doesn’t affect economic growth adversely.  But, if the indebted country is unable to meet its debt service obligations, it will likely lose  its’ credit worthiness; and this might affect the economic performance  of  the  borrowing  country  by  reducing  the  availability  of  foreign  credit.(Freytag and Pehnelt,  2009).

In general this study will try to analyse the effect of debt burden on investment and economic growth on selected fifteen indebted sub Saharan African countries.


1.2         Statement of the Problem

Governments in many countries particularly the SSA have run persistent annual fiscal deficits. Fiscal deficit occurs when expected revenues are insufficient to fund government spending, meaning that the state must borrow money either internally or externally.

Many countries in SSA run large and often semi-permanent fiscal deficits which have increased their foreign indebtedness. In Nigeria for example which has run fiscal budget deficits for several years now has incurred huge foreign debt. Nigeria’s foreign debt balance was US$28.35 million in 2001 which was about 59.4% of GDP from US$8.5 million in 1980 which was about 14.6% of GDP (WDI 2013). The debt increased in 2003 when US$2.3 billion was used to service the external debt. In the year 2005 the Paris Club group of creditor nations forgave 60% (US$18 billion) of US$30.85 billion debt accrued by Nigeria. Despite the debt relief of US$18 billion received by Nigeria from the Paris club in 2005 the situation remains the same (Boboye and Ojo, 2012). This experience is same for many other SSA countries as the impact of World Bank HIPC initiatives in 2012 is yet to reflect in the economies of the beneficiary countries.

A number of reasons can be put forward, some of them short-term and others linked to deeper fiscal issues, for this state of affairs. According to Boboye et al, (2012), some of the reasons that have led to persistent fiscal deficits in Africa particularly the SSA include:

  1. High levels of tax avoidance and tax evasion ii. High levels of income and wealth inequality iii. Demographic pressures or rapid growth in population iv. Government inefficiency and corruption
  2. High levels of government subsidies and poverty alleviation programmes vi. High spending on financing wars, tackling insurgency and terrorism, fighting outbreak of diseases such as Cholera, Ebola and others – most African countries over some decades now are beseeched with civil wars, insurgency, militancy and terrorism.

A major part of their budget is used to finance the fight against these trends and diseases.

External debt burden is one of the major problems faced by the developing countries in sub-Saharan Africa. Gohar, Bhutto and Butt, (2012) mentioned that the repayment or “debt service” creates problems for many countries especially for developing countries because a debt to be serviced is greater than the real sum it was contracted for. Therefore, large payments for debt service create constraints on a country’s growth scenario. Either, it drains out scarce resources or limit resource inflows required for the development of these countries.

Benedict and Nguyen, (2003) suggested that foreign borrowing has a positive impact on investment and growth of a country up to a threshold level but debt service has the potential to affect economic growth since resources are used in the repayment of the debt rather on the investments. Furthermore, Fosu (2009) noticed that debt service moves spending away from the social, health and educational sectors. This has shown that the aim of borrowing is for development but debt service has created a great hindrance in the economic growth of a country due to high interest payments on the external debt using foreign exchange earnings to repay that debt.

According to World Development Indicators (WDI-2011) developing nations suffered greater debt burden more than the developed countries. For instance over the period of 1990-2010 countries like the United State of America (USA), United

Kingdom (UK), and Japan paid nothing in terms of debt service obligations.

In general Debt burden presents the following features in an economy:

  1. In some cases the size of the debt might be huge in relation with the economy size of the borrower  and  this  leads  to  a  possible  capital  flight and  moreover  it discourages private investment.
  2. Servicing a  debt  by  export  earnings  may  affect  economic  growth  by  depleting  available income  for social  service activities.
  • Inefficient debt management also has a direct macro economic effect on the borrowing countries.

In particular, debt burden may affect investment and economic growth in two ways:-

  1. Through the debt overhang  effect:-  a  situation  when an accumulated  debt,  discourages and  overhang  investment,  particularly  private  investment;  as  investors  expect  an increase in tax by government to repay the accumulated debt.
  2. Through debt crowding out effect, this happens when earnings from export is used to repay the accumulated debt. This affects investment adversely.

It is no exaggeration that this is the major challenge faced by most countries in SSA including Nigeria. The inability of these SSA countries to effectively meet its debt servicing requirements has exposed the nations to a high debt service burden. The resultant effect of this debt service burden creates additional problems for their economies particularly the increasing fiscal deficit which is driven by higher levels of debt servicing. This poses a severe threat to the nations as huge sum of their hard earned revenue is being eaten up. The question then becomes why has external borrowing not accelerated the pace of growth in the economy of SSA countries?

Various empirical studies have been conducted to investigate the impact of debt burden on economic growth in SSA countries and have arrived at different results using the same scope of study (see Benedict & Nguyen, 2003; Fosu, 2009; Hunt, 2007; Ayadi, 2008). These results were hampered by limited scopes and methodologies adopted by the researchers.

This study focuses on determining the long run relationship between debt burden on investment and economic growth by expanding the scope of study beyond what has been done in times past. This will be in the area of number of countries to be used in the cross sectional data, increased period of time and improved methodology in data analysis.

This study covered a period of sixteen years from 1998 to 2013. Fifteen countries in sub-Saharan Africa were selected for the study. They include;  i. Angola  ii. Burundi  iii. Cameroon

  1. DR Congo
  2. Ethiopia vi. Ghana vii. Kenya viii. Malawi Mali
  3. Mozambique xi. Nigeria xii. Rwanda  xiii. Tanzania  xiv. Uganda   xv. Zimbabwe

The countries listed above were chosen based on the availability of consistent data series over the study period.

1.3        Research Questions

The following research questions will be examined in this study;

  1. Is there any relationship between total debt and economic growth of sub-Saharan

African countries?

  1. Is there any significant relationship between debt service and economic growth of sub-Saharan African countries? iii. Is there any significant relationship between total debt and investment in sub-

Saharan African countries? iv. Is there any significant relationship between debt service and investment in sub-

Saharan African countries?


1.4        Objectives of the Study

The main objective which this study aimed at is to undertake an empirical investigation into the effect of debt burden on investment and economic growth of selected fifteen indebted sub-Saharan African countries. The Specific objectives are to determine:

I,          The profile of public debt in the selected sub-Saharan African countries over the period of sixteen years.

  1. If total debt has any effect on the economic growth of sub-Saharan African countries. iii. If debt service has any effect on economic growth of sub-Saharan African


  1. If total debt has any effect on investment of sub-Saharan African countries.
  2. If debt service has any effect on investment of sub-Saharan African countries.
  3. Based on the findings make recommendations for appropriate debt management framework for the SSA countries.


1.5        Hypotheses of the Study

The following hypotheses were tested in this study.

  1. H0: Total debt has no effect on economic growth of sub-Saharan African


  1. H0: Debt service has no effect on economic growth of sub-Saharan African


  • H0: Total debt has no effect on investment of sub-Saharan African countries. iv. H0: Debt service has no effect on investment of sub-Saharan African countries.


  • Justification of the Study

Sub-Saharan Africa is made up of developing countries faced with the challenges of infrastructural bottlenecks and capital inadequacy and therefore often ends up borrowing repeatedly from foreign countries and international financial institutions. This has resulted to huge total debt and high debt service obligations. This study is relevant as it provided, based on its findings far-reaching suggestions on how the debt burden in sub-Saharan Africa countries can be reduced. The international community is becoming relatively closer in terms of financial resources that can be used in the developmental process of any nation. This study will therefore make recommendations for appropriate debt management framework for the SSA countries.



  • Significance of the Study

This study is significant as it provided alternative measures to tackling the challenges of debt burden in fifteen sub-Saharan African countries including Nigeria. The study provides an empirical framework to guide loan procurement and debt service in these countries. This work also provides the basis for further research and documentation on Africa’s external debt crisis. Thus the study is beneficial to researchers as well as local and international lending agencies as proper utilization of debt will go a long way in improving the level of investment and hence economic growth in the selected sub-Saharan African countries.


  • Scope of the Study

The study covered a period 1998 and 2013. Fifteen indebted sub-Saharan African countries were selected for the study. Therefore, the period of study and countries were chosen on the basis of available consistent data series for the macroeconomic variables used. Data from World Bank Development Indicators (WDI), World Bank International Debt Statistics, Central Banks of the selected countries and

Debt Management Bureaus of these countries were used for the study.


  • Acronyms and Abbreviations

Debt Service (DS): Debt service is the sum of principal repayments and interest paid in currency, goods, or services on long-term and short-term debts to the IMF and other creditors.

Debt Service Coverage Ratio (DSCR). This measures the ratio of earnings available for debt servicing to interest and principal payments.

External Debt (EXD): External debt is debt owed to foreigners repayable in currency, goods, or services. It is the sum of public, publicly guaranteed and private nonguaranteed long-term debt, use of IMF credit, and short-term debt from other


Gross Domestic Product (GDP): This is the value of total final goods and services produced within a country in a given year. The GDP used in this study is measured at purchasing power parity (PPP).

Highly Indebted Poor Countries (HIPC): The heavily indebted poor countries are a group of 38 developing countries with high levels of poverty and debt overhang which are eligible for special assistance from the International Monetary Fund (IMF) and the World Bank.

Internal Debt/Domestic Debt/Public Debt (IND): This is the cumulative total of all government borrowings less repayments within the country denominated in a country’s home currency.

Investment/Gross fixed capital formation (INV): Formerly gross domestic fixed investment includes:  Land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and roads, railways, and the like, including schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings.

Net Present Value (NPV): The net present value is defined as the difference between the present values  of incoming cash flows and cash outlays over a period of time.

Official Exchange Rate (OER): Official exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is the value of a country’s currency in terms of another currency.

Purchasing Power Parity (PPP): Purchasing power parity is the estimate of what the exchange rate between two currencies would have to be in order for the exchange to be at par with the purchasing power of the two countries’ currencies.

Sub Saharan Africa (SSA): Sub-Saharan Africa is the area of the continent of Africa that lies south of the Sahara desert excluding Sudan.


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