When it comes to developing countries the debate is mostly about foreign aid. I will not go into the merits and demerits of foreign aid, today. However, part of foreign aid to developing countries comes in form of loans from foreign countries, foreign private banks and other foreign multinational institutions, most notably IMF and the World Bank, payable after a given period of time.
In this post I look look at a simple relationship among COMESA region countries of such loans, which fall into the wider category of a country's external debt, and economic growth. External debt stock is
the amount a country owes to creditors outside of that country, payable in foreign currency or exports.
Common Markets for East and Southern Africa (COMESA) is a preferential trade area comprising 19 African countries with a combined GDP of $345 billion and estimated 416 million people as of 2007. It began as Preferential Trade Area (PTA) in 1982 with the objective of promoting trade between eastern and southern countries.
Figure 1, shows levels of external debt, expressed as Debt-GDP ratio, of each country in COMESA. Figure 2 is a simple relationship of debt-GDP ratio and economic growth.
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Fig. 1: I use data provided by IMF (2007) to reach this figure. The red line is the EU's target of a manageable debt level, ie 60 percent. |
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Fig. 2: Average growth rate between 2005 and 2007 is used |
Some simple conclusions to draw from this unsophisticated observation include i) Four countries in COMESA, Zimbabwe, Burundi, Sychelles and DRC, will, at some point, need help to relieve their debt ii) Kenya, despite all the economic woes, has a relatively manageable external debt level of about 24 percent of the GDP. iii) Economic growth and debt-GDP ratio exhibit a quadratic relationship (an inverted 'U' relationship) ie countries tend to grow with an increase in debt-GDP ratio till a certain critical level of debt-GDP is achieved after which growth starts to slow down. Of course, a more exhaustive econometric analysis that corrects for other lurking variables in this relationship is most admired.
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