Effect of External Debt in the relationship between fiscal policy and growth in subsaharan Africa: An analysis of nonlinearity

Abstract

The objective of this article is to analyze the non-linear effect of fiscal policy on economic growth conditional on external debt in sub-Saharan Africa during the period from 2011 to 2021. By applying a Panel Smooth Transition Regression model (PSTR) developed by Gonzàlez et al. (2005), the results show that fiscal policy has non-linear and significant effect on the growth rate conditioned by external debt and indicate the existence of a threshold of approximately 37% of the external debt ratio per relative to GDP, beyond which any increase in budgetary expenditure negatively affects the growth rate in sub-Saharan Africa. More precisely, the results obtained suggest that the sensitivity of the growth rate to fiscal policy becomes lower when external debt becomes increasingly higher. Our results remain robust using the interaction model estimated by the GMM method. We suggest governments substitute debt with resources such as non-oil revenues and others.

Keywords : Public debt, economic growth and PSTR model.

JEL Classification : F21, F36, F43.

Paper type : Empirical research.