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What debt threshold hampers economic growth in Africa?

Lord Mensah (Department of Finance, University of Ghana, Accra, Ghana)
Divine Allotey (Department of Finance, University of Ghana, Accra, Ghana)
Emmanuel Sarpong-Kumankoma (Department of Finance, University of Ghana, Accra, Ghana)
William Coffie (Department of Finance, University of Ghana, Accra, Ghana)

International Journal of Development Issues

ISSN: 1446-8956

Article publication date: 30 September 2019

Issue publication date: 31 March 2020

550

Abstract

Purpose

This paper aims to test whether a debt threshold of public debt has any effect on economic growth in Africa.

Design/methodology/approach

The authors applied the panel autoregressive distributed models on 38 African countries with annual data from 1970 to 2015. It was established that the threshold and the trajectory of debt has an impact on economic growth.

Findings

Specifically, the authors found that public debt hampers economic growth when the depth is in the region of 20 to 80 per cent of GDP. Based on debt trajectory, this study established that increasing public debt beyond 50 to 80 per cent of GDP adversely affects economic growth in Africa. The study also finds that the persistent rise in debt also has adverse effect on economic growth in the African countries in the sample. It must be known to policymakers that the threshold of debt in developing countries, and for that matter African countries, are less than that of developed countries.

Practical implications

This study suggests threshold effects between 20 and 50 per cent; this should be a guide for policymakers in the accumulation of debt stock. Interestingly, the findings suggest some debt trajectory effect, which policymakers might consider by increasing efforts to reduce debt levels when they fall between 50 to 80 per cent of GDP. This implies that reducing such debt levels can help African countries increase their economic growth.

Originality/value

The study is unique because it seeks to add new evidence on the relationship between public debt and growth in the African region, by considering the impact of the persistent growth of public debt on economic growth.

Keywords

Citation

Mensah, L., Allotey, D., Sarpong-Kumankoma, E. and Coffie, W. (2020), "What debt threshold hampers economic growth in Africa?", International Journal of Development Issues, Vol. 19 No. 1, pp. 25-42. https://doi.org/10.1108/IJDI-03-2019-0056

Publisher

:

Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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