Effect of Remittances and External Debt on Economic Growth in Sub-Saharan Africa
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Abstract
Sub-Saharan Africa (SSA) has long struggled with volatile and sluggish economic growth, worsened by macroeconomic challenges such as unpredictable foreign capital inflows. These inflows, particularly remittances and external debt are critical to financing development and contribute to economic stability. This study examines the effect of remittances and external debt on economic growth in SSA. To achieve the objectives, panel data was sourced from World Bank Development Indicators (WDI) for 26 SSA countries from 1998 to 2023. The system Generalized Method of Moments (GMM) was used to estimate the relationship and address potential endogeneity and unobserved heterogeneity in the data. The findings from the System GMM model revealed that both remittances and external debt positively and significantly contribute to economic growth in SSA. The study concludes that remittances enhance household consumption and investment, while external debt, when effectively managed, is used to finance productive projects that stimulate economic activity. It is recommended that SSA countries strengthen their financial management and policy frameworks to maximize the benefits of foreign capital inflows while mitigating potential risks associated with volatility and debt sustainability.
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