Academic journal article Journal of Economic Cooperation & Development

Effect of External Debt on Economic Growth of Sudan: Empirical Analysis (1969-2015)

Academic journal article Journal of Economic Cooperation & Development

Effect of External Debt on Economic Growth of Sudan: Empirical Analysis (1969-2015)

Article excerpt

1.Introduction

Most of developing countries need external financial resources to support their internal and external balances and supplement low levels of domestic savings in order to promote economic growth. Sudan is not an expectation and has been receiving international capital flows both in terms of foreign loans and aids for more than five decades and more recently increasing inflows of foreign direct investment. The major source of international capital flow to Sudan is foreign borrowing accumulating into external debt. The dual-gap analysis provides the framework which shows that the development of a nation may largely be dependent on investment financed through foreign aid and loans where domestic savings are lacking behind (Thirlwall, 1991, 2003). Hameed, Ashraf, and Chaudhary (2008) stated that external borrowing is ought to accelerate economic growth especially when domestic financial resources are inadequate. Within the orthodox macroeconomic framework in such cases foreign loans and external debt are expected to play a positive role on the growth process of the receiving economy. Soludo (2003) states that countries borrow for two broad reasons; macroeconomic reasons, either finance higher investment or higher consumption, and to circumvent hard budget constraint. This implies that an economy borrows to boost economic growth and alleviate poverty meanwhile. However, when debt reaches a certain level, it becomes to have adverse effect as debt servicing becomes a huge burden and countries find themselves on the wrong side of the debt-laffer curve, with debt crowding out investment and growth.

In special set of literature, external debt is understood to retard economic growth in the context of the debt overhang hypothesis and the crowding out of public investment resulting from debt services (Krugman, 1989). Alesina and Tabellini (1989) demonstrated that governments in Low Income Countries (LICs) with varying distributional goals and objectives often create fiscal uncertainty that generate capital flight, low investment and over-accumulation of external debts, which retard economic growth. Cohen (1993) found that the level of the debt had no important effect on investments during the debt crisis of the early 1980s although debt repayment is found to correlate negatively with investment, suggesting a crowding out effect. Also, Clements, Bhattacharya and Nguyen (2003) estimated a quadratic relation between debt and growth in some LICs finding that high levels of debt tended to crowd-out public investment.

However, one fact is that for many low income and middle income countries foreign loans are major sources of public receipts, which would reduce public deficit. If foreign loans are well utilized and managed, the accumulation of external debt should not lead to slow economic growth. In particular payment and management of debt services play the crucial role in this interplay of external debt and economic growth. At what rate a country achieves economic growth and capital accumulation as compared with how fast it accumulates debt and debt services are the two main processes which determine the net effect of external debt on economic growth. However, foreign borrowing with poor external debt management causes a country to default and inability to meet its debt obligation caused for example by the lack of information on the nature, structure and magnitude of external debt (Were, 2001).

The roots of Sudan's external debt can be traced to 1961 and in 1969 total external debt amounted to US$ 244 million compared with a GDP ofUS$ 1,848 which makes Debt/GDP ratio 13.20%. In 1978, Sudan had to adopt a World Bank/International Monetary Fund (IMF) sponsored Structural Adjustment Programme (SAP), with a view to revamping the economy making the country better-able to service its external debt. In the same year external debt had already cumulated to US$ 3,159 billion of which US$ 1,895 billion were arrears with a GDP estimated at US$ 8,074 (i. …

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