Does External Debt Promote Growth? Empirical Evidence from ECOWAS

Abstract

This study examined the relationship between external debt and economic growth in the Economic Community of West African States (ECOWAS) using annual panel data for fifteen member countries from 1990 to 2023. The study focused on how debt service ratio, external debt as a percentage of gross domestic product, gross fixed capital formation, and inflation influence economic growth in the region over time. Data were obtained from the World Bank Development Indicators and analysed using panel econometric procedures. Panel unit root tests were first employed to determine the order of integration of the variables, while Kao's residual co-integration test was used to assess the existence of a long-run equilibrium relationship. The Panel Fully Modified Ordinary Least Squares estimator was then applied, and Panel Dynamic Ordinary Least Squares was used as a robustness check. The results show that the debt service ratio and gross fixed capital formation have positive and statistically significant effects on economic growth. Inflation has a negative and statistically significant effect, indicating that price instability may weaken growth performance in ECOWAS economies. External debt as a percentage of GDP has a negative but statistically insignificant effect in the Panel FMOLS estimates, although the robustness check indicates a positive and significant coefficient. Overall, the findings suggest that debt sustainability, productive capital formation, and macroeconomic stability are important for long-run growth in ECOWAS countries. The study concludes that external borrowing should be managed prudently and directed towards productive investments capable of supporting sustainable economic expansion without increasing vulnerability to debt-related macroeconomic risks.