Public Debt, Economic Growth and Inflation in African Economies

• Author: Tiago Neves Sequeira,Alexandra Ferreira‐Lopes,José Augusto Lopes da Veiga
• Published date: 01 June 2016
• DOI: http://doi.org/10.1111/saje.12104
• Date: 01 June 2016

PUBLIC DEBT, ECONOMIC GROWTH AND INFLATION

IN AFRICAN ECONOMIES

JOSÉ AUGUSTO LOPES DA VEIGA

†,

ALEXANDRA FERREIRA-LOPES

*

AND TIAGO NEVES SEQUEIRA

‡

Abstract

We analyse the relationship between public debt, economic growth and inflation in a group of 52

African economies between 1950 and 2012. The results indicate that the limits of public debt are

negatively related to economic growth and exhibit, from a given level of debt, an inverted U

behaviour regarding the relationship between economic growth and public debt. Briefly, the high

levels of public debt are coincident with reduced rates of economic growth and rising levels of

inflation. Our results for three specific geographical areas resemble those of the overall analysis,

despite some differences. In North African countries, the growth rates of the gross domestic

product (GDP) and inflation also show an inverted U behaviour as the ratio of public debt/GDP

increases. The highest rate of economic growth is recorded when the ratio of public debt/GDP is

below 30% of GDP and corresponds to an average inflation rate of 5.33%. An identical behaviour

of the GDP growth rates and inflation also appears in Sub-Saharan countries until the third

interval (60–90%). However,the highest growth rate of the GDP and GDP per capita is registered

when the public debt/GDP ratio is in the second interval (30–60%). For the countries of the

Southern Africa Development Community, the highest average rate of economic growth (6.8%)

is similar to North African countries, when the ratio public debt/GDP is below 30% of GDP, with

an average inflation rate of 11%. A number of robustness analyses were performed and the great

majority of them confirm the general analysis.

JEL Classification: E31, E62, H63, O40

Keywords: Public debt, economic growth, inflation, African countries

1. INTRODUCTION

Public debt in African countries is an issue of global concern. The burden of public debt

and widespread indebtedness of these economies has been the subject of spirited debate

among economists, academics, policy makers and the general public.

The public debt issue and its burden started in the late 1970s when the international

trade and financial environment manifested very favourably for developing countries,

* Corresponding author: Assistant Professor, Instituto Universitário de Lisboa, ISCTE – IUL,

ISCTE Business School Economics Department, BRU-IUL (Business Research Unit), Lisboa,

Portugal; and CEFAGE-UBI, Av. Forças Armadas 1649-026, Lisboa, Portugal. E-mail:

alexandra.ferreira.lopes@iscte.pt.

†Universidade do Mindelo, Management and Economics Department and Universidadeda Beira

Interior.

‡Universidade da Beira Interior and CEFAGE– UBI. Management and Economics Department.

We gratefully acknowledge financial support from FCT, and Tiago Neves Sequeira also

acknowledges financial support through Grant FEDER/COMPETE, PEst-C/EGE/UI4007/

2013. We also thank the comments and suggestions of two referees and the associate editor. The

usual disclaimer applies.

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with particular emphasis for the African countries. The increasein expor ts, the negative real

interest rates in international capital markets and the high price levels of export markets,

which favoured the terms of trade of these countries, were crucial to an explosion of public

consumption and investment, with considerable impact on the increase of public debt of

these countries. In this context, the debt of African countries has rapidly grown and

culminated in the debt crisis of the 1980s and 1990s with negative impact on their growth.

In fact, as very well stated by Tarp (1993), for many decades the performance of

African economies has been disappointing. The average annual gross domestic product

(GDP) growth rate, which reached a level of 5% from 1965 to 1973, declined to only

3.2% during the later part of the 1970s. This growth rate further dropped to 2.1% in

1980. With a rapidly growing population, the real GDP per capita fell by 1.1% during

the 1980s.

The UNCTAD (2004) states that “Africa’s external debt burden increased significantly

between 1970 and 1999. From just over $11 billion in 1970, Africa had accumulated over

$120 billion of external debt in the midst of the external shocks of the early 1980s. Total

external debt then worsened significantly during the period of structural adjustment in the

1980s and early 1990s, reaching a peak of about $340 billion in 1995. Overall, Africa’s

external debt averaged $39 billion during the 1970s, before ballooning to just over $317

billion in the late 1990s. Over the same period, total debt service paid by the continent

increased from about $3.5 billion to a peak of $26 billion.” The situation became

unsustainable, and it was clear that these countries would not be able to repay their debt and

that a solution was needed.The negotiation of a debt reduction programme started with the

Paris Club in the early 1990s and assumed a more solid structure in 1996 with the Highly

Indebted Poor Countries (HIPC) Initiative, launched by the World Bank and the

International Monetary Fund (IMF). The purpose of this initiative is to reduce the debt

burden of poor countries to sustainable levels in order to ensure that no country faces a debt

burden that it cannot manage. It is designed to help those countries that cannot reach a

sustainable debt burden through traditional mechanisms of rescheduling and debt

reduction. These countries must follow the IMF- and World Bank-supported adjustment

programmes and must implement a poverty reduction strategy.

The public debt crisis and the inherent fiscal deficit constitute a big issue in African

economies, particularly in Sub-Saharan Africa where fiscal deficit is a common

phenomenon due to high level of public expenditures. As stated by Collier (1996), the ratio

of Sub-Saharan Africa fiscal deficits to GDP reached an average rate of 4.33% between

1985 and 1994, which indicates that the ratio of public investment in Sub-Saharan Africa

has not only been consistently higher compared with other regions but also the low returns

on the public investment were responsible for the decline in growthperformance. However,

in a recent paper, Marcelino and Hakobyan (2014) discuss the effects of the HIPC

Initiative on growth and conclude that this programme was beneficial to growth.

Generally, the fiscal policy measures adopted seeking to increase the state revenues and

reverse the course of growing national debt have not produced the desired results, and the

socio-economic conditions of the citizens have not improved. The uncontrolled

proliferation of small informal economic activities as a source of livelihood and survival

of many families affects the mechanism of effective taxation and defeats the purpose of the

fiscal policy measures.

In this situation, countries are obliged to borrow more money to fill in the gap between

the expenditures and the revenues during fiscal periods.The internal and external loans are,

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