ABSTRACT The study sought to examine the impact of external debt stock on investment and economic growth in ECOWAS Countries. The specific objectives of the study were to: (i) determine the effect of external debt stock on public investment in ECOWAS countries, (ii) examine the effect of external debt stock on economic growth in ECOWAS countries, (iii) evaluate the effect of external debt service on public investment in ECOWAS countries,(iv) assess the effect of external debt service on economic growth in ECOWAS countries,(v) appraise the effect of multilateral debt stock on public investment in ECOWAS countries, (vi) ascertain the effect of bilateral debt stock on economic growth in ECOWAS countries. The study adopted the ex post facto research design and annual time series data for a thirty three year period 1982- 2015 were collected from the World Bank National Account data and Organisation for Economic Cooperation and Development (OECD) National Accounts data files. Six hypotheses were proposed and tested. The Ordinary Least Squares Regression, Hausman test, Co-integration (Philip-Peron, ADF, Pedroni Residual test) as well as Error Correction model were used to test the hypothesis. Annual public investment (PINV) measured by gross capital formation and economic growth measured by real gross domestic product (RGDP) were adopted as the dependent variable. External debt stock, external debt service, exchange rate, inflation rate, Multilateral debt stock and Bilateral debt stock were the independent variables respectively. The reviewed literature suggests wide divergence of conclusions on the impact of external debt stock on investment and economic growth. Evidence from some countries e.g. Philippines, Pakistan, and Latin America suggests, it is positive while evidence from others suggest it is negative. The study found that external debt had negative and significant impact on investment in EOWAS Countries. External debt stock had negative and significant impact. External debt service had significant impact on investment. External debt service had positive and significant impact on economic growth in ECOWAS Countries. Multilateral debt stock had significant positive impact on investment in ECOWAS Countries. Bilateral debt stock also had positive and significant impact. The study recommended that ECOWAS Countries should review her external debt policies in line with the desire to increase the productive base of the economy and enjoy a leverage advantage. If the application of the loan stock is done wisely, it will contribute to value creation. ECOWAS Countries should sustain the multilateral and bilateral creditor’s relationships and ensure that both relationships are established among nations especially by making export of goods a top priority of the governments.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
A fundamental question relevant to regional economic development relates to whether regional economic growth is converging. That is, whether per capital output growth in one region converges to levels reached by neighbouring regions. This question is of great interest to regional scientists and policy -makers who believe that large differences in economic growth among regions are undesirable. Since the beginning of the 1990s, there has been massive empirical literature on the issue of regional growth convergence-prominent among them include Burro and Martin (1991); Carlino and Mills (1993, 1996); Vohra (1998); Rey and Montouri (1999); Drennan and Lobo (1999); Bernart (2001); Lall and Yilmaz (2001).
Although such empirical studies started emerging over a decade ago, majority of them only focused on the traditional spatial method which deals with spatial entities in isolation (Qnah, 1996b). The traditional empirical approaches have not explicitly considered the geographic space in which economic relationships take place. Martin and Sunley (1998:206– 207) argue that traditional growth convergence approach “fails to take into account how different countries or regions relate and interact with one another, citing that the growth trends of a country or region may actually depend crucially on the growth trajectories of others. Despite the fact that technological spillovers has been acknowledged as a key contributor to economic growth and convergence, this process has explicit spatial components. However, the role of spatial dependence effects on regional growth and income convergence process have been largely ignored (Baumol, 1994; Temple, 1999).
From a policy perspective, new insights into spatial dependence in regional growth and income convergence may have an important effect that allows regional economic policy that considers the specific geographies of growth and income convergence, and hence provide hints on spatial interaction and regional policy co-ordination to start a virtuous circle of regional economic growth. However, it was not until recently that the possibility of spatial dependence effect was explicitly considered in the regional growth and income convergence studies. The results of Rey and Montouri (1999) represent the first detailed evidence on role of spatial effects in a regional income study. Although their study reconsiders the question of income convergence from a spatial economic perspective, it should be noted that they used states as observational units in the analysis of regional convergence.
In this context, this dissertation assesses how the external debt stock affects economic growth and investment in twelve ECOWAS countries in sub-Saharan Africa in particular, it investigates the effects of spatial dependence and spatial interaction among these countries during the debt crisis covering the 1982 – 2014.
The twenty first century ushered in an era of change in the attitude of richer nations towards their poorer counterparts in the developing world. With the adoption of the Millennium Development Goals (MDGs) in 2000, the international community has set itself a target of reducing poverty, income inequality, hunger and increasing human development by 2015. However, many observers have expressed doubts that, on the current trends, it is unlikely that this objective can be achieved in the poorer countries, especially in Africa at any time close to that date (Brown, Woltensohn, 2004).
In order to meet the target of poverty reduction in ECOWAS countries by 2015, the current GDP growth rate in the region would have to be increased and sustained to levels of least 7 to 8 percent per annum, implying doubling the current aid inflow and maintaining it at that level for at least a decade (UNTAD, 2000). Pursuing such an action, with the right mix of international support and appropriate domestic policies, would generate enough saving for investment that would put Africa on a sustainable growth track and graduate it from debt burden and aid dependency.
Africa’s external debt problems and its resource requirements are directly related to its capacity to accumulate capital and to grow. However, since the inception of the crisis in the early 1980s, the debtor countries have been transferring billions of dollars every year to the richer nation in debt – service at the cost of providing domestic services in the affected poor countries. Debt service is accounting for a larger percentage of Africa’s GDP annually.
Three decades after independence, a good number of ECOWAS countries experienced major episode of financial crisis that were characterized by unsustainable fiscal deficits. During the period, however, current account deficits were considered normal. Therefore countries were encouraged to borrow from abroad to finance their deficits and to create a conducive environment that attracts foreign investment to boost economic growth. In this process, little attention was paid to the individual countries absorptive capacities and ability to repay the borrowed founds. The deficits raised the level of external public and publicly guaranteed debt through more external public borrowing for financing purposes (Mahdavi, 2004). It was not until August
1982 when Mexico, despite being an oil exporter, declared that it could no longer service her debts. Since then, the problem of external indebtedness became a great concern to the international financial community.
Meanwhile, the debt crisis facing ECOWAS Countries has consistently occupied the international media. Since its inception in the 1980s the international financial community has been providing help to debtor countries in an attempt to reduce their external debt burdens, foster growth, reduce poverty, and attain external viability (IMF, 1999: 2). This assistance has taken the form of providing concessional financing from the international financial institutions, debt relief from official creditors mainly in the context of the Paris Club rescheduling and restructuring, and in some cases, through bilateral action by creditors. These measures have resulted in considerable success in alleviating the external debt burdens of many middle-income countries. However, many poor countries especially the ECOWAS, continue to suffer from unacceptable levels of poverty, civil and regional conflicts, high external debt burdens and low economic growth.
Today, the international community is constantly engaged in discussions and analysis of the problem of the continent. The World Bank produced several reports during the
1980s diagnosing in detail the problems of ECOWAS Countries and recommended several policy measures for restoring economic growth and long-term development. Member countries in the region also carried out series of studies and adopted numerous comprehensive programmes for achieving specific regional goals and objectives (Igbal and Kabur, 1997). There was a continuous flow of information about the region’s problems but opinions were, however, different as to the causes and what should be done to restore growth and promote sustainable development. The World Bank, for instance, blamed domestic mismanagement and other factors for the region’s poor economic performance, while many countries considered external factors as largely responsible for their economic woes.
Heavy external indebtedness and rampant corruption in ECOWAS Countries have not only had a negative effect on economic growth and development, but also derailed efforts at economic recovery and market enhancing initiatives (Richards, et. al, 2003:
304). The continent is the world’s most relatively indebted and aid-dependent of the world. Much of the resources that could have been ploughed back into investment are used to service debt or embezzled by corrupt Africa leaders. Out of the 44 countries classified by the World Bank as “heavily indebted poor countries” 33 are in SSA. These countries are so burdened and overwhelmed by debt service obligations that their economies and financial systems have practically crippled as they struggle to evolve a way of servicing their foreign debts. In this process, their economic and social welfare systems have deteriorated beyond expected levels (Richards, Nwanna and Nwankwo, 2003: 304). Although the international creditors seen to be flexible in debt rescheduling and restructuring; nonetheless, no signs of marked improvement have been noticed in the debtor Countries. The continued deterioration of economic conditions rallied sympathetic calls by a net work of activities, civil society and NGOs for debt relief and cancellation.
1.2 Statement of the problem
The external debt crisis of the third world and indeed ECOWAS countries has imposed enormous costs on the debtor countries, most notably, low economic growth and crowding out of public investment. Although a substantial proportion of Sub- Saharan Africa debts are development related, the ability to service them does not only depend on growth and development in the debtor countries, but also on a healthy and expanding world economy. Neither of these conditions was obtained during the
1980s (Abbott, 1993). The presumed growth and development did not take place, and instead of promoting the growth and development process, the development loans
retarded it by pre-empting an increasing share of their limited foreign exchange resources for debt-service payments. This problem was further aggravated by the large number of bogus projects and over ambitious development plans which negatively affects the development effort in the region.
The ECOWAS countries economies have had a history of debt-servicing difficulties due to insufficient domestic resources to bridge their budget gaps necessitates the region’s continued reliance on external sector financing which is usually characterized by very stringent lending conditions, unfavourable foreign exchange variations and repudiation tendencies that cause debt overhang. This as revealed by previous studies (Udoka, et, al., 2010; Savvids, 2011; Edo, 2002; Bullow, 1990) has been a disincentive to domestic capital formation and consequently lead to deprivation of adequate basic necessities to the region citizens (Fosu, 2007; Karagol, 2002). This was evidenced by the fact that on several occasions the countries were in debt-service arrears. Notwithstanding previous debt relief, rescheduling and restructuring initiatives, Africa’s debt problems and economic situation remained fragile.
The region’s mounting debt stocks have discouraged the inflow of foreign resources in the form of foreign direct investment for fear of high taxation rates and macroeconomic policy distortions. Instead of attracting resources from abroad, domestic resources flees to the developed nations either for safe keeping or to be invested. According to Levy and Chowhurry (1993); Malik (2010); Sawada (1994) and Audu (2004), high debt stock is associated with rising debt burden and could also cause pervasive poverty rate, endemic corruption and decayed infrastructural facilities (Okonjo- Iweala, Soludo and Muhtar, 2003) both of which could result to slow pace of economic growth.
Public sector investment, which provides employment for majority of the population, has fallen considerably as a result of the external debt burden. Similarly, human capital and technology as a key factor in promoting growth and development is no longer affordable for similar reasons (Richards, et al., 2003). Even though structural Adjustment Programmes have been implemented since many years ago, Sub-Saharan Africa economies are still weak, vulnerable and not sufficiently transformed to sustain accelerated growth and development. For example, in many countries of the region, the total debt stock in 1999 was almost equal in size to their GDP and the cost of debt- service reactive to export earning was more than 25 percent of the countries’ export earnings. In 2000 for example, an estimated cost of external debt-service by the Ghanaian ministry of finance was found to be equivalent to 55 percent of government’s total tax revenues, which implies that the government could no longer meet its domestic expenditures from domestic revenue without additional borrowing from foreign sources.
The inability of the governments to generate enough revenue to service foreign debts due to the deteriorating term of trade and the narrow tax base, debt service obligation could only be met by reducing expenditures in priority areas such as education, health care systems, welfare and social services or by additional foreign borrowing. This has resulted to high fiscal deficits and inflation rate. Moreover, low public investment has resulted to lower overall investment since public investment is a significant proportion of total domestic investment in Sub-Saharan Africa and may also be complementary to private investment. Finally, governments are expected to borrow for projects that could repay the amount borrowed and create jobs rather than borrowing to finance budget gaps that are largely recurrent (Uzamera, 2011).
This study is poised to largely find resolution options to the problem.
1.3 Objectives of the study
The main objective of this study is to assess the impact of external debt stock on growth and investment in ECOWAS Countries. The specific objectives of the study are to:
1. To determine the effect of external debt stock on investment in ECOWAS Countries.
2. To examine the effect of external debt stock on economic growth in ECOWAS Countries.
3. To evaluate the effect of external debt service on investment in ECOWAS Countries.
4. To assess the effect of external debt service on economic growth in ECOWAS Countries.
5. To appraise the effect of multilateral debt stock on investment in ECOWAS Countries.
6. To evaluate the effect of bilateral debt stock on economic growth in ECOWAS Countries.
1.4 Research questions
The following research questions were formulated for the study:
1. To what extent has external debt stock affected public investment in
ECOWAS Countries?
2. To what extent has external debt stock affected economic growth in ECOWAS Countries?
3. How far has external debt service affected public investment in ECOWAS Countries?
4. To what extent has external debt service affected the economic growth in
ECOWAS Countries?
5. How far did multilateral debt stock affect investment in ECOWAS Countries?
6. How far did bilateral debt stock affect the economic growth in ECOWAS Countries?
1.5 Research hypotheses
The following hypotheses were formulated for the study:
Ho1. External debt stock does not have significant positive impact on public investment in ECOWAS countries.
Ho2. External debt stock does not have significant positive impact on economic growth in ECOWAS countries.
Ho3. External debt service do not have significant positive impact on public investment in ECOWAS countries.
HO4. External debt service do not have significant positive effect on economic growth in ECOWAS countries.
HO5. Multilateral debt stock does not have significant positive effect on public investment in ECOWAS countries.
HO6. Bilateral debt stock does not have significant positive effect on economic growth in RCOWAS countries.
1.6 Scope of the research
The period covered by study was between 1982 and 2015. This period is significant because as Abubakar (1990); Boote and Thugge (1997) observe, the external debt burden which the ECOWAS countries carries started taking its toll on their economies in the period from 1982 onwards, from which, most of the ECOWAS countries joined the league of Highly Indebted Poor Countries (HIPCs).
Scope as per content of the study examined a segment of the debt crisis in Sub- Saharan Africa in general, but the empirical analysis focuse only on ECOWAS Member Countries in West Africa. Due to the unavailability of data, Guinea, Liberia, Sierra-Leone and Mauritania were excluded from the analysis. The countries in the study include Ghana, Cote d” Ivoire, Togo, Burkina Faso, Benin, Nigeria, Cape Verde, The Gambia, Senegal, Guinea Bissau, Niger, and Mali.
1.7 Significance of the study
This study will be of immense benefit to the following:
Government and its Agencies
The study will make government leaders of ECOWAS countries to understand the causes and effects of heavy external debt stock on economy and adopt appropriate policies geared towards minimizing macroeconomic distortions caused by heavy debt obligations, while trade and investment policies and regulatory frame works will be streamlined. It will contribute to the development of policies and strategies that seek to promote growth in ECOWAS countries. A growth in annual output is what translates to an increase in income per capita. A higher per capita income in turn, increases the market basket of goods a citizen can afford. Large external debt burden has, however, encouraged a continuous outflow of resources from Sub-Saharan Africa in debt-service payment, and thus, retarding the region’s economic growth and development. Other government Agencies like the fiscal Responsibility Council will benefit from the study as it will act as an impetus for them to draw and implement debt related policies. Such policies revolving around placement of debt ceilings, establishment of debt sustainability indices as well as the need to prosecute defaulters if properly implemented will help to build strong institutions. The study will also be useful to the government (s) and its Agencies to reappraise her bilateral and
multilateral relationship with her creditors more so as the study is also designed to identify the extent of contribution to economic growth and investment by each of the sources of external debt in ECOWAS Countries.
Academics
As an academic exercise, the study will contribute to the scholarly discussion on the implications of heavy external indebtedness especially in the context of ECOWAS Countries in Africa. It is expected that students and researchers especially in finance and other related discipline will gain literature awareness and empirical consciousness on the impact of external debt stock on growth and investment in Sub-Saharan Africa. Such awareness will create a basis for embracing further studies in this context.
Private Business Units
These are private businesses, agencies, organisations and institutions which activities are designed to add value to the economy. They require external financing to facilitate their programmes and such funds are usually provided by creditors who also operate within the context of both external and domestic economy. The findings and recommendations of the study will serve as courage for prudent management of the resources including the borrowed funds and the knowledge gained will be of immense benefit to them.
Publics
The findings and recommendations of the study are expected to avail the reading public information on debt related issues that will enable them carry out self assessment exercise on the performance of project that require the external fund, especially as it affects their communities and living standard. Reactions emanating from such exercise are expected to burn the interest of the various pressure groups on the need for prudent management of the borrowed funds and prudent application of the nation’s resources to the critical areas.
This material content is developed to serve as a GUIDE for students to conduct academic research
IMPACT OF EXTERNAL DEBT STOCK ON INVESTMENT AND ECONOMIC GROWTH IN ECOWAS COUNTRIES 1982-2015
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