Twin deficits and the sustainability of public debt in sub-Saharan Africa

Gichuki, James Kiiru
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Sub-Saharan African (SSA) debt has attracted attention since the 1980s. Countries in the region moved from healthy debt levels in their formative years,tobecomeoneofthemostheavilyindebtedregionsintheworldrelative to their size of gross domestic product. Policy response to the debt has been unfolding the same way as the debt. First, countries adopted a wait and see attitude in the late 1980s and early 90’s, then swung to debt forgiveness in the 2000s involving 30 out of 48 nations. This research adopts a three-tier approach to an investigation of debt in the region. First, it examines whether internal debt has a relationship with the external debt by evaluating a twin deficit hypothesis by use of a trend analysis and a panel generalized method of moments. Secondly, it controlsforthehighdebtregimeandexamineswhetherdebtreliefmanagedto bringdebtsustainabilitybacktotheregionusingcross-countryautoregressive distributive lag models. Lastly, it evaluates the performance of debt relief in the region with respect to its fiscal space effects. Here, the study investigated whetherdebt forgivenesscrowdedout aid andgrants, increasedconsumption expenditure, or affected poverty alleviation through education and health expenditure. This thesis reports that there exists a positive relationship between the current account and the primary balance and that the relationship is twined so that an increase in one deficit leads to an increase in the other. Specifically, a percentage point increase in the primary deficit leads to a 0.3 percentage pointincreaseinthecurrentaccountdeficit. Italsofindsthatbyreducingdebt from the high debt regime of the 1990s, debt relief had managed to bring back sustainability to the region. Debts had fallen to levels below the formative years of independence, and the two low debt regimes had sustainable debt with the exception of Zambia whose debt remained unsustainable and relatively high as a fraction of GDP. On the impacts of debt relief, this study findsthatdebtreliefpartlyimprovedthefiscalspacebyincreasinggovernment expenditure, domestic revenue, and education expenditure, but found no effects on recurrent and health expenditure.
A thesis submitted to the Faculty of Commerce, Law and Management, University of the Witwatersrand, Johannesburg, in fulfillment of the requirements for the degree of Doctor of Philosophy July 2018
Gichuki, James Kiiru, (2018) Twin deficits and the sustainability of public debt in Sub-Saharan Africa, University of the Witwatersrand, Johannesburg,