Exploring the interplay of institutional quality, external debt and economic growth in Sub-Saharan Africa

Abstract

This study asks whether the institutional conditions surrounding external borrowing help explain its association with economic performance in Sub-Saharan Africa. Sustainable borrowing is understood as the use of external finance to generate durable economic returns without eroding repayment capacity, fiscal space, or future development investment. We analyse 520 country year observations from 40 countries covering 2012 to 2024 using a two step system generalised method of moments estimator. External debt is negatively associated with real GDP per capita in the baseline model, with statistical significance at the 10% level (β =  − 0.4014, p  = 0.066). In the model without interaction terms, control of corruption (β = 0.6787, p  < 0.001), government effectiveness (β = 0.4552, p  < 0.001), and regulatory quality (β = 0.5834, p  = 0.018) are positively associated with real GDP per capita. The interaction estimates show that the negative association with debt weakens as government effectiveness (β = 0.1455, p  = 0.002) and regulatory quality (β = 0.4085, p  < 0.001) improve. The interaction with control of corruption is positive but supported by weaker evidence (β = 0.9963, p  = 0.053). These estimates do not measure debt sustainability itself. They show that institutional dimensions are not interchangeable and identify administrative capacity and regulatory credibility as the clear institutional conditions associated with a less adverse debt coefficient.