Domestic Investment in Africa: Why the Emerging Public Debt Spiral Matters?

Fisayo Fagbemi and Olufemi Solomon Olatunde



Given the prevailing view that public borrowing could be a springboard for boosting domestic investment levels in any economy, leveraging on multiple sources of finance to meet development financing needs is critical. In sub-Saharan Africa, however, the bleak investment landscape in the face of the emerging public debt spiral is worrying. Therefore, the study examines the effect of public debt on domestic investment in 33 SSA countries using Corrected Standard Error Estimation (PCSE) and one step System GMM dynamic panel estimations over the period of 2000-2017. Empirical findings reveal that both debt (% of GDP) and external debt stocks (% of GNI) have a negative effect on domestic investment, implying that rising public debt tends to have adverse influence on investment levels across countries in SSA. Thus, the study posits that ensuring sustainable funding of developmental projects through the adoption of recent financial instruments that embed more resilience into the structure of public debt is central. Also, policy actors should introduce measures that could stimulate public investment efficiency, with borrowed funds effectively channeled towards investment-inducing projects such as infrastructure development for improved economic performance.




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