The effect of external debt on domestic investment in sub-Saharan African sub-regions

This paper investigates the effect of external debt on domestic investment in sub-Saharan Africa (SSA) during the period 1980-2017. It focuses on four zones in SSA (EAC, ECOWAS, CEMAC and SADC) and the methodology adopted is the Generalized Method of Moments (GMM). The Results show that external debt has a positive effect on domestic investment in SADC and EAC, with bearable debt threshold, which account for 74.33% of Gross Domestic Product (GDP) in the EAC zone. For CEMAC and ECOWAS, the effect of external debt on domestic investment is rather negative, but for a debt threshold below 94.73% of GDP in CEMAC, the effect on investment is positive. Our results imply that public policies for improving domestic investment and assuring sustainable debt should be promoted: to concentrate investments in sectors with ripple effects that can boost other sectors; to observe multilateral surveillance across countries over the long term; and strengthening investment thanks to the improvement of the business climate.