The effect of public debt on structural transformation in Sub-Saharan Africa: the role of financial development

The country's indebtedness has long been one of the major issues in economics. As a result, the most recurrent question that arises is that of the debt effects on the various macroeconomic aggregates, based on the principle that it enables a country to invest capital beyond its financial capacity. From this perspective, the debt created is supposed to generate growth and foster development. The relationship between debt and economic growth perception has differed. On the one hand, debt can be considered as a future tax and attributed to the State. A budget deficit policy financed by borrowing is considered to have no effect on economic activity. By anticipating an increase in taxes to repay the loan, agents save an amount equivalent to the public debt. A high level of debt is detrimental to economic growth, as it has an impact on investment. When debt exceeds a country's internal resources, there is a risk that the country will no longer be able to repay past loans, which will discourage potential investors. On the other hand, it is considered that debt does not entail costs, either for current generations or for future generations, because of the investments generated. Public debt helps to boost aggregate demand and, through the accelerator effect, leads to an increase in investment and production. Following this position, a new framework has emerged which considers that the impact of debt differs according to the economic regime. It is established that in the short term, public debt can boost aggregate demand and therefore the economy's output. In the long term, however, public debt has a negative impact on growth through the reduction in the capital stock. So, since the outbreak of the foreign debt crisis, the problem of poor countries' debt has become a matter of concern, and international institutions are taking an interest in it as part of their efforts to combat extreme poverty and promote development. Despite the fine economic performances achieved in recent years in the Sub-Saharan Africa region, the challenges are still enormous in this part of the world. These numerous economic challenges, which include the public indebtedness of the region's States and the low level of structural transformation of the region's economies, have attracted our particular attention. The objective of this paper is to analyse the public debt effect on the structural transformation of Sub-Saharan African (SSA) countries through financial development. The data covers 42 countries and comes from the United Nations Development Program (2020), the African Development Bank (2020), and the World Bank (2020) database from 1990 to 2019. The estimation technique of Driscoll and Kraay (1998) and Feasible Generalised Least Squares are used to take into account spatial dependence among SSA countries, and heteroscedasticity, and to check the robustness of the results. The results indicate that, unlike credit to the private sector, public debt negatively affects structural transformation in SSA. Also, the results show that credit granted to the private sector crowds out the depressive effect of debt on structural transformation in SSA countries. These results are robust to both estimation techniques. As a policy implication, economic policymakers in SSA countries need to improve financial development to lessen the effect of public debt on structural transformation and accelerate the structural transformation desired by the African Union by 2063.