The impact of external debt on economic growth in Liberia (1970-2006)

Abstract

The developing economies of Sub-Saharan Africa, for which Liberia is a part, have had serious problems of managing and servicing their ever increasing stock of external debt, which have inhibited their economic development and debt sustainability strategies. Despite Liberia’s continued external borrowing and commitment to achieving higher and sustainable economic growth, her GDP growth has experienced a declining trend over the period 1970-2006. This study examines the relationship between external debt and economic growth in Liberia for the period 1970 -2006 by means of time series analysis. The study used an augmented neoclassical growth model that was adopted by Cunningham (1993). The study applied the Augmented Dickey Fuller test to establish the order of integration of the variables, the Johansen Likelihood ratio test to establish the co-integrating relationships among variables and the shortrun dynamic test. The findings of the study indicated that Liberia has suffered from severe debt overhang problem but as of late in 2004, it has been able to honor part of its debt and interest payments. The debt service ratio, which indicates the crowding out effect, suggests that Liberia has not experienced severe external debt servicing. Labour force was found to be statistically significant and rightly signed, suggesting that Liberia has experienced low unemployment. Credit to the private sector was rightly signed and statistically significant at the 5 percent level, suggesting that the financial sector can improve the real sector, provided appropriate policies are put into place.