Abstract

The study examines the effect of external debt on the economic growth of Cameroon. The model specifies economic growth measured by gross domestic product as dependent on external debt proxy by bilateral debt and multilateral debt.

Annual time series data from World Bank 1990-2022 was sourced using secondary data and analyzed using ordinary least squared estimation technique. Results show that external debt has a significant positive impact on economic growth. Both bilateral debt and multilateral debt have a significant effect on the economic growth of the country.

The study demonstrates that increasing external debt reaps the static and dynamic benefits, stimulating rapid national economic growth. The study therefore recommends that the government should encourage investment and discourage external debt to avoid accumulation of external debt stock overtime and prevent an obscuring of the motive behind external debt for economic growth.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

External debt occurs all over the world. Thus, even though the United States is known to be the biggest economy in the world, or precisely for that reason, they have not been prevented from uncontrolled growth of debt, public and private.

According to CADTM (2015), the USA public debt has been evaluated at 15 239 billion of dollars in 2012 (around 104% of GDP). It was 14 089 and 1766 billion US dollars in 2012 in EU and Low developed countries respectively.

For EU countries it represents around 93.5% of GDP. The debt of African countries represents 200 billion of US dollars (around 40% of GDP). So, debt is a world issue since every country is indebted though the level of indebtedness is different depending on the country.

External debt refers to money borrowed from a source outside the country in order to better a country’s economic situation. External debt has to be paid in the currency in which it is borrowed and can be obtained from foreign commercial banks, international financial institution like IMF, World Bank and from the government of foreign nations. We find mostly in the world today African and Asian countries borrowing from American and European countries.

Today due to some natural disasters that destroy some countries we find countries like Haiti, Japan and others borrowing from foreign countries to restructure their nation or better their economic condition (IMF, 2012).

Given the increasing interest in globalization, countries have introduced policies aimed at opening up to the rest of the world. Such economic integration through globalization is embarked upon in the hope of reaping some associated benefits which include the transfer of technologies and foreign direct investment.

Thus, foreign trade has become an essential part of countries’ economic growth and development. On one hand, trade openness creates or generates employment opportunities and foreign exchange reserves (Duodu and Baidoo 2020). On the other hand, it leads to higher external debt when imports exceed exports, as reported by Al-Fawwaz (2016).

External debt can be from bilateral, multilateral or commercial sources. Bilateral sources include government to government while multilateral sources include government to a conglomeration of countries or agencies that have created a pool of resources from which they lend.

The debt of a state or provincial government or local government can also constitute public debt. Multilateral debt could be sourced from financial institutions such as the IMF, African Development Bank and the World Bank among other Institutions (Polly, 2009).

A group of low income countries classified as highly indebted poor countries have continued to experience difficulties in managing and servicing for huge stocks of external debt. Over the last four decades, the external debt of many developing countries has risen dramatically due to the chronic current account (import-export gaps), lack of capital (saving–investment gap), and fiscal imbalances (revenue-expenditure gap) (Beyene and Kotosz, 2020,).

This growing strain of foreign debt and large debt payments is a persistent problem for the whole world, but an even greater challenge for developing countries (Duodu and Baidoo, 2020; Baidoo et al., 2021; Ofori, Abebrese, Baidoo, and Olesu, 2021). Developing countries have borrowed a huge amount of external funds as a result of budget deficits, trade deficits, and saving–investment gaps.

Given this, researchers and policymakers have investigated the determinants of external debt since the debt crises of the early 1970s. After the 1970s and 1980s, global developments, such as oil price shocks, high-interest rates, low commodity prices, and recessions in developed countries, affected the domestic macroeconomic factors of developing countries (Waheed, 2017).

Over the last decade, statistics show a dramatic increase in external debt in most developing countries, where external debt remains high as a proportion of gross domestic product (GDP). Rapid economic development experienced by developing countries has resulted in an increase in demand for external debt to finance various investment expenditures, including infrastructure and other investments.  However, this requires sustainable external debt to avoid negative impacts on the economy, such as falling foreign investment and currency devaluation, which hampers economic growth.

Previous studies reported direct proportional relationship between external debt and economic growth (Balago, 2014; Zaman & Arslan, 2014).  The high level of external debt has a detrimental impact on economic growth, as explicated by the overhang hypothesis and liquidity constraints (Arnone, Bandiera, and Presbitero, 2005).

For instance, during the European debt crisis, 2008/2009, countries such as Greece, Portugal, Ireland, Italy and Spain overestimated their capability to pay back debt interest payments after accumulating large amounts of external debt, which suggests the failure of countries’ governance and debt management. These countries are nearly facing bankruptcy due to failure to pay back their debt.

On the other side of the coin, there is also concern amongst creditors on the future of the debt system. Creditors have worked to find solutions to repayment on loans to be easier. The first step is placing debt relief within an overall framework. Poverty reduction came with the endorsement of the heavily indebted poor country initiative (HIPC) in 1996 by the international monetary fund and the World Bank. It aimed at reducing debts on poorest countries. (Journal of economic cooperation, 2003)

Countries with less developed domestic debt markets often rely on external borrowing to meet their financing needs. This is because the domestic debt market is shallow and cannot match the government financing requirements. As a result, their debt portfolio is mainly composed of external debt. Although most countries in East Africa have over time deepened their domestic markets, a large proportion of their foreign borrowing is denominated in foreign currency. While the external financing is mainly from concessional sources, the challenge of managing external debt remains prevalent.

For instance, the exchange rate fluctuations drive the debt service higher than projected leaving fewer resources to finance development projects. Chawdhury (2001) admits that external debt may have huge effects on the overall performance of these countries. Mukui (2013) observes that high levels of external debt in Kenya poses a great challenge to the economy given that a large proportion of the export income goes to servicing debts instead of being put into domestic investment.

External debt from all sources has over the years remained sine-qua-non for filling the resource gap in Cameroon. This resource gap is three fold: the domestic savings gap, the foreign exchange gap and the fiscal gap resulting from budget deficits. Cameroon’s debt situation is as a result of embezzlement, corruption and mismanagement of resources.

Empirical evidence suggests that external debt impact the status of economic growth in a nation if the level of external debt is too high, the economy ceases to grow. High external debt retards economic growth by hindering physical capital accumulation and net factor productivity. Chongo (2013) concluded that there is a long run negative relationship between public debt and economic growth which calls for policies that will promote conservative borrowing in order to reduce the negative growth effects of public debt on the country.

Consequently, low growth enlarges the indebtedness reducing net economic revenues paving the way for a vicious cycle. This results in enlarged debt ratios. The debt can be of two forms that is bilateral debt which is discharging a part of debt owed by a nation’s government to another. We also have multilateral debt, dismissing a portion or whole of the outstanding amount owed to the international financial institutions.

Cameroon recorded debt to gross domestic product of 19.90 percent of the country’s gross domestic product in 2014.External debt to Cameroon’s GDP averaged 46.75percent from 1990 until 2014 reaching an all-time high of 131.44 percent in1994 and a record of 9.30 percent in 2008 due to debt cancellation but the country’s debt increased from 3.9 percent in 2011 to 7.6 percent in 2013.

This represents an increase of 900 billion as debt. This money was borrowed to increase the welfare, boost investment in order to increase productivity and for infrastructural development and to alleviate poverty, globally to boost economic growth. (World Bank, 2017).

On the other hand, the literature presents external debt as an opportunity. Among authors who developed such idea one can quote Keynes who states that public deficit honestly financed by debt stimulates production, makes wide the fiscal basis and allows the repayment of public debt in the future (Bofoya, 2011). Different experts are of the view that external debt has favorable effect on economic growth.

Among them one may quote: Jayaraman and Lau (2001) cited by Siddique and Selvanathan (2015), Elouar (2009), etc.  However, according to Mulugeta (2014), external debt burden requires due attention of policy makers. An increase in external debt servicing decreases GDP growth and there is evidence for existence of crowding out effect in developing countries. Ezeabasili, et al., (2011) ended with the same result as regards the case of Nigeria. Therefore, given the existing mixed results in this field of study, it is important to give a contributing idea by examining the effect of external debt on the economic growth of Cameroon.

1.2 Statement of the Problem

Developing countries are characterized by economic imbalances among which we can quote budget deficit (Ngabo, 2009). In front of budget deficit, Government can either resort to banknote plate or public debt. Banknote plate is in some cases source of inflation. Thus, despite consequences of debt on the economy, a State finds necessary resorting to it as a means addressing public deficit.

The contribution of external debt to economic growth is controversial since it may have a positive or negative effect. Debt is presented by some authors as a burden. Among them some present external debt as a burden for future generations since it requires more taxes in the future. Perkins (2011), states that debt creates crisis while Todaro (2011) argues that external debt has a cost.

The World Bank and the international monetary fund have raised concern over Cameroons debt. Cameroon spends more than it earns. The Bretton wood institution is raising a situation where Cameroon might slip back to a heavily indebted poor country. It is worth that it was only in 2006 that multilateral donors cancelled Cameroons debt when it went through scrutiny of highly indebted poor country initiatives.

According to the IMF institution, the situation is due to limitations in the public treasury and lack of priority spending in the management of public finances. The result has been the nonpayment of bills within 60days time frame provided by the 2012 finance law. In 2012, the first year that the government instituted the 60day deadline for the repayment of bills, nonpayment of bills imposed public debt of 200billion fefa according to the IMF report number 13/279. That is what made the economic growth in Cameroon to be weak in 2013 that is 5.5 percent (Mario De Zamaroczy). He revealed that this was because in 2013, Cameroon borrowed 400billion from the IMF to finance fuel subsidies but this was not successful. (IMF, 2012).

However, in the midst of the researcher’s findings and other works that were done by other researchers, their findings have not been clear on the exact relationship that exists between external debt and economic growth because their studies have revealed different results, and this is due to the differences in geographical and economic conditions among the countries.

This further clearly confirms that conclusions from studies on different countries or regions could not be effectively generalized for the rest of the world. Given this, and considering that, this important phenomenon has been given little attention in the developing countries, there is, therefore, the need for a study to consider that to fill the gap created, and the present study seeks to fill this lacuna in the literature by giving solutions to the research questions below.

1.3 Research Questions

1.3.1 Main Research Question

What is the effect of external debt on the economic growth of Cameroon?

1.3.2 Specific Research Questions

1. What is the effect of bilateral debt on economic growth in Cameroon?
2. To what extent does multilateral debt affect economic growth in Cameroon?

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