Private Debt and Economic Growth: Evidence from SSA

Abstract

This paper assesses the impact of private debt on economic growth in Sub-Saharan Africa, controlling for variables such as inflation, government debt, U.S. GDP, interest rate, and exchange rate. Using the local projection (LP) method, the study highlights the complex and nonlinear relationship between private debt and economic growth. Private debt accumulation typically occurs during economic expansions, but its impact on growth is short-lived. A positive shock in private debt increases economic growth on impact, however this effect declines fading one period after impact, with no significant medium- and long-term effects. Furthermore, the effects of private debt on economic growth are nonlinear, depending on debt levels, timing of shocks, and economic conditions. In low-debt regimes, private debt declines after one period growth but shows brief recoveries in periods 3 and 6, which are not sustained. These temporary boosts suggest that debt servicing burdens and limited borrowing capacity prevent lasting growth. In high-debt regimes, private debt has no significant impact on growth, indicating that in high debt states, the negative effects of financial distress outweigh any potential benefits. These findings highlight the vulnerability of underdeveloped credit markets in SSA and emphasize the need for effective debt management policies to balance short-term borrowing benefits with the risks of financial instability.