External debt among HIPCs in Africa: accounting and panel VAR analysis of some determinants

Purpose The management of external debt among highly indebted poor countries (HIPCs) in Africa still remains a challenge despite numerous packages and attempts to ameliorate the consequences of such odious debt. The purpose of this paper is to establish the factors that contribute to the growth rate of external debt and how these factors respond to shocks to external debt growth rate in Africa. Design/methodology/approach Data were obtained from 24 African countries and analyzed using a panel vector autoregression estimation methodology. Findings The study found that external debt growth rates respond positively to unit shock or changes in government investment spending, consumption spending, and domestic borrowings over a long period of time. In the medium term, external debt growth rates respond negatively to shocks in tax revenue, inflation, and output growth rates. The paper also provides empirical support that external debt may be consumed rather than invested among HIPCs in Africa. Research limitations/implications The findings of this paper are limited to only HIPCs in Africa. Practical implications This study has some few debilitating implications for external debt management among HIPCs in Africa. First, the paper suggests that debt repayment may be a problem. This is largely because external debt is consumed rather than invested. External debt sustainability needs a holistic approach in less developed countries. The findings place much emphasis on improvements in gross domestic product and tax revenues as the principal routes out of the debt doldrums. However, this option must be exploited with great caution as there is ample evidence that these poor countries increase their external borrowing capacities with improvements in economic outlook. Originality/value This paper fills a research gap that identifies specific components of government deficit budgets that may be contributing to the growth rate of external debts among HIPCs.