What debt threshold hampers economic growth in Africa?

Abstract

PurposeThis paper aims to test whether a debt threshold of public debt has any effect on economic growth in Africa.Design/methodology/approachThe 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.FindingsSpecifically, 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 implicationsThis 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/valueThe 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.