Public debt and economic growth in the West African monetary zone (WAMZ)

Abstract

In this paper, we revisit the relationship between public debt and economic growth with a spotlight on the West African Monetary Zone (WAMZ). In the re-examination, we pursue three undertakings using both panel data and time series modelling techniques. First, we examine the linear relationship using the Autoregressive Distributed Lag (ARDL) model for time-series data and the fixed (or random) effect model for the panel data counterpart. Second, we assess the nonlinear relationship by incorporating the squared term of the debt variable as an additional explanatory variable in the models. Third, we identify the level of public debt/GDP ratio beyond which public debt becomes unsustainable using threshold regression techniques. The findings show a negative relationship across the linear models. We also establish that the debt-economic growth relationship is non-linear, and we obtain the points of inflection for the WAMZ countries. These levels are 71.9 % for Gambia, 55.8 % for Ghana, 91.5 % for Guinea, 83.7 % for Liberia, 38.45 % for Nigeria and 38.6 % for Sierra Leone. We make suggestions for the WAMZ countries to expand their economic bases by channelling funds to infrastructure development and the development of human capital in order to optimize the benefits of debt accumulation in the long run.