External debt and economic growth in Sub-Saharan Africa: does heterogeneity in the quality of public sector management make a difference?

This study empirically examines the effect of external debt on economic growth, taking into account heterogeneity in public sector management (PSM) across 31 selected sub-Sahara African (SSA) countries spanning 2005 to 2017. In this study, we contributed to existing studies by examining how differences in PSM quality complement external debt to influence economic growth. We employ the system-generalized method of moment (system-GMM) and the panel smooth transition regression (PSTR) methods for the analysis. The results without differences in PSM quality show that external debt has a significant negative effect on economic growth in SSA. However, the effect of external debt on economic growth tends to be positive for SSA countries with strong PSM quality when external debt interacts with PSM quality. Furthermore, the results show that countries with strong PSM quality experienced higher economic growth than those with weak PSM quality. The PSTR also showed strong evidence of a nonlinear relationship between external debt and economic growth and estimated the indebtedness threshold value at 45% for the selected SSA countries. The implication of the findings calls for governments in SSA to strengthen the quality of public sector management via structural reforms aimed at public sector reform, tax reforms and strengthening debt management capacity to ensure positive growth effects of external debt.