Many researches had done by others on analyzing the relationship between debt and economic growth. However, little attention has been paid to the econometric analysis of the dynamics of economic growth, debts and budget deficits of Sub-Saharan Africa (SSA). The main purpose of this paper is to re-examine the relationship between debt and growth for SSA, by using Granger causality to test between debts, economic growth and budget deficit. In addition, we will be using the Vector Error Correction Model (VECM) and Augmented Vector Autoregressive (VAR) to test the presence of co-integration.
It will not be surprising that burden of debt will have a major influence the economic growth. Nonetheless, both developed countries and developing countries are continuously financing themselves through debts, as for instance, government debt, public debt and external debt. Back in 2005, G8 summit was held at Gleneagles, all the following meetings including the international community had agreed to further the debt cancelation to the HIPCs. As a result, the Multilateral Debt Relief Initiative (MDRI) was introduced as a new policy tool to provide additional support and financing to the world's poorest and most indebted countries. All countries reaching completion point under the HIPC Initiative will receive up-front and irrevocable cancelation of their external debt owed to the World Bank, the African Development Bank and the IMF (International Development Association and International Monetary Fund, 2007). Up-to-date, in May 2010, United State has accumulated to a staggering level of debt, US$ 1300 billion, which is considered as hazardous towards the economy as a whole. Besides that, Europe debt crisis was supported by China, otherwise there will be another dramatic tragedy that causing major problem towards the nation. (TheStar, 2010).
Bivariate Granger causality tests by Dhakal et al (1996) involving four Asian countries (India, Nepal, Pakistan and Thailand) and four African countries (Botswana, Kenya, Malawi and Tanzania), using data from 1960 to 1990, failed to find any causal relationship between foreign aid and economic growth in any of these countries. Girijasankar (2008) found that a long run relationship exists between aid on growth to be negative for 6 poorest and highly aid dependent African countries, namely the Central African Republic, Malawi, Mali, Niger, Sierra Leone and Togo. Yaya (2010) obtained the result likely mixed. In Côte d’Ivoire, Senegal and Togo, he did not find any causality evidence between budget deficit and growth, but there was two-way causality in Benin, Burkina Faso and Mali, deficits having adverse effects on growth.
Economist and researchers are paying more attention on developed and rich countries but yet, what about the poor countries such as Sub-Saharan Africa (SSA)? Therefore, our main concern will be focusing on SSA countries, to examine why it is not well...