Does institutional quality moderate the impact of public debt on economic growth? Evidence from SSA

Abstract

The recent slowdown in economic growth in SSA amidst increased borrowing both domestically and externally raises questions regarding the effectiveness of debt in the region. This study specifically examines the impact of debt on economic growth and the moderating role of institutions in the relationship between debt and economic growth in SSA, using six indicators of institutional quality (control of corruption, rule of law, government effectiveness, political stability, voice and accountability, and regulatory quality) as defined by World Bank. It applies Difference GMM estimator which addresses endogeneity concerns and dynamic behavior of economic growth process. The results indicate that public debt has a marginal positive impact on economic growth in SSA. Moreover, the positive impact is overturned when the level of debt to GDP reaches 97 percent. On the other hand, improvement in institutional quality significantly promotes GDP growth, particularly improvement in government effectiveness, political stability, voice and accountability, and rule of law. The results further show that better institutional quality enhances the effectiveness of public debt in SSA. Based on the findings of the study, the study recommends improvement in institutional quality in SSA if countries are to optimize the benefits of public debt. Specifically, countries need to enhance control of corruption, government effectiveness, political stability, voice and accountability, and rule of law. SSA countries also need to enhance their debt management strategies to ensure the debt to GDP ratio is kept within manageable limits.