Foreign Currency Debt Sustainability Risk and Exchange Rate Depreciation under Market Uncertainty: Evidence from Sub-Saharan Africa

This paper examines the dynamic interaction between exchange rate depreciation, market uncertainty, and external debt in Sub-Saharan Africa, and how these linkages generate macro-financial asymmetries in external vulnerability and debt sustainability. We ask whether a sovereign-level financial accelerator operates through mutually reinforcing channels that place structurally weaker debtor economies at a disadvantage in the global financial system. A panel VAR framework is estimated using annual data for 24 Sub-Saharan African economies, with robustness ensured through FD-GMM estimation, Granger causality tests, and orthogonalized impulse response functions. The results indicate strong bidirectional causality among all variable pairs and evidence of triangular causality across the system, whereby any two variables jointly Granger-cause the third. This suggests a tightly connected macro-financial structure in which depreciation, uncertainty, and external debt interact in self-amplifying cycles, consistent with a sovereign financial accelerator. Uncertainty emerges as a central transmission mechanism shaping debt dynamics and macro-financial fragility. The findings are particularly relevant for low- and middle-income debtor countries, where currency mismatches, exposure to volatile global conditions, and limited policy space often combine to generate heightened crisis-propagation risks. We argue that empirical assessments of external vulnerability and debt sustainability must integrate information or proxy variable on uncertainty explicitly, and we draw policy implications for strengthening macroeconomic credibility, broadening export and financial diversification, and enhancing institutional resilience to mitigate uncertainty-driven debt spirals.