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Abstract

Abstract

Economic growth in Highly Indebted Poor Countries (HIPCs) in Sub-Saharan Africa remains heavily influenced by external financing conditions, making the role of external public debt a critical empirical and policy issue. Governments in the region depend on external borrowing to supplement limited domestic resources, yet the extent to which such debt supports or constrains economic growth is still contested. This study therefore examines the linear and nonlinear impact of external public debt on economic growth using a panel of 20 HIPCs covering the period 2000-2024. Employing the Pooled Mean Group (PMG) estimator within a dynamic ARDL framework, the analysis identifies both short-run adjustment dynamics and long-run equilibrium relationships.

The results show that external debt has a positive and statistically significant long-run effect on economic growth, with a 1 percent rise in external debt associated with a 0.82 percent increase in output. However, the inclusion of a squared debt term confirms a nonlinear, inverted U-shaped relationship, indicating diminishing returns to debt. The estimated threshold of approximately 23-24 percent of GDP marks the point beyond which additional borrowing ceases to support growth and instead triggers debt overhang effects. Furthermore, the study finds that the growth impact of debt depends critically on its use: increases in external debt unaccompanied by higher capital formation significantly reduce growth, underscoring the importance of investment efficiency. Structural factors also matter, with urbanization exerting a strong positive effect, while FDI remains positive but statistically insignificant. Short-run impacts of debt are negligible, although the significant error-correction term confirms a stable long-run relationship.

The findings suggest that external debt supports long-run growth only when maintained within sustainable thresholds and effectively allocated to productivity-enhancing investment. Strengthening debt sustainability frameworks, prioritizing concessional borrowing, improving public investment management, and aligning debt-financed projects with structural transformation and urban development strategies are critical to maximizing growth outcomes.

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