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Causes and Macroeconomic Effects Of The Souring Public Debt In Most Sub Saharan African Economies


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1.0 Introduction

The public debt has caused stagnant economies in most Sub Sahara Africa countries and remained under developed economies over decades and this is the major problem facing most Sub Sahara African countries and that is how to handle with the external debts which are also a fundamental cause of the fiscal crisis in the Sub -Sahara countries. The Africa’s inability to control the economy  and sustain development because of the fiscal stress and low per capita growth  in Sub Sahara countries generated by the recession and high external debt which is finally translated into the backwardness of Sub Sahara African (SSA) countries since the external debt was relatively high than the domestic debt and the domestic debt is indigenous circulating the money within the country while the external debt is exogenous but the situation of overall debt has deteriorated since the late 1990's.  

 

According to African Forum and Network on Debt and Development report (AFRODAD, 2011)  highlighted that domestic debt levels have risen significantly over the recent years and worryingly, this is mostly in the very same countries that experienced problems with external debt and this deterioration has an adverse implications for both stabilization and macroeconomic management policies. The increased high rate of external debt in Sub-Sahara African countries (SSA) resulted in a high interest burden, because of the delayed debt service earns additional interest payments that increases the burden of the original debt which led Africa’s inability to allocate resources or expenditures for critical poverty alleviating and remained one of the poorest countries in the world.  (Milton, 1999) presented a good and empirical evidence for the backwardness of sub-Saharan Africa (SSA) countries since per capita income (measured by gross national product per person) declined at an average annual rate of 2.2%). Per capita private consumption fell by 14.8%; export volume was stagnant while import volume plummeted at an average annual rate of 4.3%; and the terms of trade fell by 9.1% however, the average annual growth rate of real GDP per capita between 1981 and 1990 was -0.9%.

The central question remains unanswered over decades is how Sub-Sahara Africa countries bridge this problem and where the sources of this vicious circle come from?

 

According to African economic outlook (2012), described that Sub-Saharan Africa (SSA) had the lowest aggregate level of human development in 2011, albeit posting the second fastest annual increase over the period 2000-11. Improved policies will not suffice to sustain high rates of growth of human development; therefore, this paper focuses the macroeconomic effects of public debt on Sub-Sahara Countries, so  after introduced the nature of the public debt in the introduction, the paper discussed in section 2 causes and sources of public debt while the paper will present macroeconomic effects of public debt in section 3, remedial steps will be highlighted in section 4 and section 5 concluding remarks will be given.

 

2. Causes and Sources of Public Debt in SSA

High public debt is an issue become prominent in Sub- Sahara African countries which hinders the level of living standard of 600 million people inhabiting it, there are several causes contributing to the increase of public debt, thus to be fully understood the debt crisis of sub-Saharan African countries, I highlight some of them, therefore in order to tackle the public debt and solve the problems created by increased public debt, the causes of public debt must be first understood.

The following are the causes:

1.      Increased government spending

2.      Increased Budget Deficits

3.      Over borrowing by the developing countries

 

Any country that fails to manage and stabilize its debt at the optimum level  by minimizing the causes and  sources of public debt  such as if government expenditure exceeds its revenue the government incurs a deficit then if deficits accumulates it becomes debt  then that country will experience debt overhang problems. These come in the forms of disincentive effect, crowding out effect and import compression effect.

As mentioned by Milton ( 1999) the external debt of sub-Saharan African countries witnessed a rapid build-up during the period immediately following the global debt crisis with external debt obligations skyrocketing from US$84 billion in 1980 to US$223.3 billion in 1995. (See Table1 for details). Thus, SSA’s external debt stock increased by 265.8% in 15 years, i.e., it grew at an average rate of 6.7% per annum.

 

Table 1: Total external debt, 1970&95 (US$ million)

 

Year                                 Total external debt                                     growth in external debt %

 1970                                 8,296 -

1971                                   9,772                                                                              17.79

1972                                  11,235                                                                             14.97

1973                                  15,168                                                                             35.01

1974                                  19,340                                                                             27.51

1975                                  22,721                                                                             17.48

1976                                  26,996                                                                             18.82

1977                                  33,705                                                                             24.85

1978                                  43,655                                                                             29.52

1979                                  55,485                                                                             27.10

1980                                  84,049                                                                             51.48

1981                                  75,668                                                                             -9.97

1982                                  81,946                                                                              8.30

1983                                  88,233                                                                              7.67

1984                                  83,866                                                                              0.72

1985                                  96,396                                                                              8.47

1986                                  127,145                                                                            31.90

1987                                  162,629                                                                            27.91

1988                                  164,981                                                                            1.45

1989                                  171,236                                                                            3.79

1990                                  190,260                                                                            11.11

1991                                  194,779                                                                            2.38

1992                                  192,781                                                                           -1.03

1993                                  197,886                                                                            2.65

1994                                  212.416                                                                            7.34

1995                                  223,298                                                                            5.12

 Source:  AERC Research Paper 90 African Economic Research Consortium, Nairobi

March 1999 and World Bank report (1996).

3. Macroeconomic Effects of Public Debt

(lyoha, 1999) described that macroeconomic effects of public debt are pervasive in Sub-Sahara African countries (SSA) because of that debt  they suffer low income, low savings and low investment, the current high levels of debt and debt servicing in Sub- Sahara countries would militate against rapid economic growth and development, which  led to the low standard of  living in these countries, indeed, some analysts and international policy makers appear to have reached a consensus to the effect that a satisfactory recovery of investment and output growth in indebted SSA countries will remain difficult, perhaps unattainable, as long as they are saddled with a burden of debt servicing that requires a sizeable net transfer of resources abroad. Stated simply, there is no way in which many SSA countries can service their debt and still have adequate resources left for development finance. Thus, many now believe that a necessary condition for economic growth and development in SSA is debt relief. This must go beyond debt rescheduling and even beyond the “Naples terms” (the latest initiative by executive countries). It could be a policy package that combines debt reduction (debt or debt service write-down) with a significant amount of debt forgiveness (write-off of official debt and perhaps write-down of commercial debt) for the low-income SSA countries. This seems to me that the effect of skyrocketing debt is the main hindrance for economic growth and development in sub-Sahara African countries, as mentioned by lyoha (1999) the investment and GDP were very low and also reached the level that can be called the  Gross domestic investment collapsed in sub-Saharan Africa in the 198Os, especially starting from 1983. According to World Bank data, from a level of US$44 billion in 1981, gross domestic investment rapidly fell to a low of US$23 billion in 1984. From that level, it rose slowly, reaching US$37.6 in 1991. According to the World Bank (1994b), the average annual growth rate of gross domestic investment was 5.1% between 1970 and 1980, but was -3% between 1980 and 1992. As may be expected, the investment/ GDP ratio also declined sharply. In analyzing the movement of the investment/GDP ratio, the World Bank (1992b) shows that while the annual average ratio was 21.5% in19751979, it collapsed to 15.6% in 1980-1985. Indeed, if the period 1983-1986 is considered, it is found that the average investment/GDP ratio was only 13%. In fact, from a ratio 26% of GDP in 1977, the investment ratio fell to a catastrophic 12.8% in 1984. No doubt, a fall in gross domestic saving partly accounts for this. World Bank (1992b) statistics show that the ratio of gross domestic saving to GDP, which averaged 18.9% in1975-1979, had fallen to 13.4% in198&1985.

 

All these imperial macro econometrics figures which have being done by Iyoha shows us that the macroeconomic affects of debt for these countries are very high. To support his findings this burden of debt has led backwardness to the Sub-Sahara countries (SSA) and also depresses investment and growth through both disincentive effect and crowding out effect because the high debt servicing has a negative effect on the growth process.

 

4.      Remedial Polices of the problem

1.      External Debt Sustainability

(Osinubi, 2006), suggested that the first step to remedy the  problem of external debt is to maintain the sustainability of external debt  he argued that if it can meet its current and future external debt service obligations in full, without resource to debt scheduling or the accumulation of arrears and without compromising growth so once the current burden and future obligations is reduced to sustainable levels it is possible to eliminate the disincentive effect of a heavy debt burden on investment and new capital inflows, thereby improving growth prospects.

2.      Optimal Level of Borrowin

(Osinubi, 2006), also suggested that If properly used what is borrowed from external resources may greatly benefit a developing country and contribute to its growth – they add to the total resources available to an economy over a given period. However, such borrowing is desirable when it is used to finance investment that is expected to yield an adequate rate of return or to smoothen consumption in the face of an uneven aggregate supply, since it can provide a level of economic welfare that could not otherwise be obtained. It is important to stress that if debt problems are to be avoided, the investments financed by foreign borrowing must have a real economic rate of return that is at least equal to the real rate of interest. And since the borrowing is presumably in foreign currency, the required equal rate of return must also be expressed in foreign currency (Obadan, 1999).  Also suggested that the same idea but if the conditions for optimal borrowing are violated then external debt becomes a burden and the country can no longer sustain the existing level of debt stock. The concept of external debt sustainability has occupied a center-stage in recent analyses of the debt problem of developing nations.

5. Conclusion

In summary, this paper is carried out to explain the causes of macroeconomic effects of public debt in Sub-Sahara African countries and in which ways they can remedy the burden of this debt, therefore, this paper and many other literatures reviewed, showed that it cannot be ignored the macroeconomic problems of public debt burden since it hinders the development and overall growth of the sectors of the economy, Sub-Sahara African countries should put in place to know the sources of these problems and continue improving the macroeconomic stability by minimizing  the current burden and future obligations of debt once it is reduced to a  sustainable levels it is possible to eliminate the disincentive effect of a heavy debt burden on investment and new capital inflows, thereby improving growth prospects.

 

REFRENCES

Budget deficits, external debt and economic growth in nigeria. Applied Econometrics and International Development , 6(3) 175-176.

lyoha, M. (1999). External debt and economic growth in Sub-Sahara African countries:An econometric study.  Retreived May 20, 2014, from OUM online database.

lyoha, M. (1999). External debt and economic and economic growth in Sub-Sahara African countries:An econometric study. Retreived May 20, 2014, from OUM online database.

lyoha, M. (1999). External debt and economic and economic growth in Sub-Sahara African countries:An econometric study. Retreived May 20, 2014, from OUM online database. 

Edited by Macalim

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