EXTERNAL DEBT CAPITAL FORMATION AND ECONOMIC GROWTH IN ECOWAS COUNTRIES

ABSTRACT

This study empirically examined the relationship between capital formation, external debt and  economic growth  in  ECOWAS  countries  from  2000  –  2018  using  the  Generalized Method of Moments (GMM) estimator. Empirical results showed that capital formation had a positive and significant impact on economic growth, while external debt had a significant negative  impact  on  economic  growth.  It  was  also  found  that  the  optimal  threshold  for external debt in the ECOWAS countries is 75.95 percent. In addition, it was found that the debt-to-GDP  ratio  of the ECOWAS  countries  were below  the  threshold  value of 75.95 percent except Cape Verde whose threshold value stands at 96.5 and 91.1 percents in 2017 and 2018 respectively  has surpassed the turning point value 75.95 percent. The results also showed  no  significant  Granger  causality  running  from  capital  formation  and  economic growth to external debt. Uni-directional causal relationship between external debt and capital formation was, however found. On the basis of the above, the study recommended that ECOWAS  executives  should  collaborate  with  the  governments  of  member  countries  to pursue adequate governance practices if they are to ensure appropriate and effective external debt management in ways that economic growth will be enhanced instead of economic growth retardation.

CHAPTER ONE

INTRODUCTION

1.1       Background to the study

Human wants are insatiable and the means or resources available for the satisfaction of wants are limited in their supply (Olukunmi, 2007). The above assertion is true in individual and national lives. In order to meet nationwide wants among limited resources, countries might resort to borrowing which generates debt. The cumulative of all claims in contradiction of the government which is held by the private sector of the economy or by foreigners, be it interest bearing or not, less which ever claim held by the government in contrast to private sectors and foreigners is debt (Oyejide, Soyede & Kayode, 1985). The nations resort to borrowing as a result of shortfall in domestic savings to finance productive activities (Ezeabasili, 2006 and Momodu,  2012).  Debt  may  well  be  within  a  country’s  boarder  (Internal)  or  outside (External). A repayable debt owed to non-residents of a country in terms of service, food or foreign  currency  is  defined  as  external  debt  (World  Bank,  2004).  Thus,  its  effect  on investment and economic growth of a nation has remained debatable for policy makers and academics alike. There has not been unanimity on the impact of external debt on economic growth.  The  stimulation  of  an  economy  from  external  debt  or  borrowing  cannot  be questioned if used properly but whenever a country amasses considerable debt, a sensible percentage of public expenditure and foreign exchange earnings will be engrossed by debt servicing and repayment with hefty opportunity costs (Albert, Brain and Palitha, 2005).

It is well acknowledged that external debt can be harmful to economic growth if it gets too high. But how high is too high? 60% was indicated as a threshold beyond which growth will decline by 2% (Reinhart & Rogoff, 2010). The debate still goes on as to the possible impact of public debt accumulation on economic growth. When debt is accumulated over long periods,  it  lowers  the  levels  of  economic  activity  and  hurts  economic  performance  by crowding out private investment and leading to higher long term interest rates and more aggressive  future  taxation  (Chudik  et  al.,  2018).  This  calls  for  concern  especially  in developing countries where it is argued that only sustained annual growth at around 7% could ensure a developmental impact. Thus, developing countries cannot afford that their growth efforts be annihilated by excessive external debt.

In 2017, the International Monetary Fund (IMF) raised the alarm over the rising of public sector debt in African countries (IMF, 2017). Indeed, the IMF found that on average, the ratio of public debt to GDP increased by some 10% points since 2014 to an average of 48% of GDP in 2016 and expected to exceed 50% in 2017. In the ECOWAS region, several countries have been identified with high risk of debt distress. They include Togo, Côte d’Ivoire, Niger, Benin, Cabo Verde, The Gambia, Ghana, Senegal and Sierra Leone (IMF, 2018; and AfDB,

2019). The West Africa Economic Outlook 2018 (AfDB, 2018) also underscore the rise of debt to GDP ratio of the region above 40%. The debt to GDP ratio enable the assessment of a country or region’s capacity to repay its debt. It therefore provides an indication of credit worthiness. It is thus important that it is monitored closely and the extent to which it is annihilating the growth efforts or not is investigated. In line with this, the Authorities of the ECOWAS Commission set a regional threshold at 70% as part of their agreed convergence criteria1(ECOWAS,2001). It is hoped that all the ECOWAS member countries will comply with this threshold among others and pave the way towards the envisaged single currency.

Sustainable  economic  growth  and  poverty  reduction  strategies  are  being  hindered  by excessive  external  debt  (Sanusi,  2003;  Maghyere  &  Hashemite,  2003  and  Berensmann,

2004). The supporter of external borrowing argue that external debt has positive influence on the economy base on the fact that external debt will upsurge capital inflow and when used for productive projects, fast-tracks the pace of economic growth. The capital inflow could be linked with technical expertise, access to foreign market, technology, as well as managerial know-how. The above statement is in agreement with the views of the Keynesian Theory of capital accumulation as a catalyst for economic growth. However, there may be a negative impact of external debt on investment through debt projection and credit-rationing problem (Eduardo, 1989). The phenomenon debt extension or overhang is a situation in which sizable resources are used for debt overhauling such that it suppresses economic growth. Therefore, it becomes tax on domestic production such that the sum spent hinders meaningful economic growth actions as it reduces resources available to government to implement growth oriented economic policies. Credit allotting effect occurs when a nation is unable to pay her debts. To narrow savings investment gap, the authorities might increase interest rates consequently affecting new investment and creating greater surplus for debt servicing and repayment. However, this may afterward reduce future growth expectations.

In  similar  vein,  Soludo  (2003)  explains  that  nations  borrow  for  two  broad  categories;

macroeconomic reasons to either finance higher investment or higher consumption and to

bypass hard budget constraint. This entails that an economy borrow to lift economic growth and assuage poverty. Soludo (2003) in Okonjo-Iweala et al (2013) contends that once an initial stock of debt grows to a certain threshold, servicing them becomes a encumbrance, and nations find themselves on the wrong side of the Debt Laffer Curve, with debt thronging out investment  and  growth.  Conversely,  a  nation’s  indebtedness  does  not  necessarily  slow growth, rather it is the country’s inability to optimally utilize these loans to foster economic growth and development and guarantee operational servicing of such debt that impedes the benefits derivable from borrowed capital resources (Bakare, 2011).

Arguably, one of the key economic challenges facing governments in low income nations is debt due to their insistent budget deficit and this has continued to invite the attention of international financial institutions, and bilateral lenders. This has brought about implementation of several initiatives capable of reducing the debt burden which remains a hindrance  to  the  growth  prospects  of  most  Highly  Indebted  Poor  Countries  (HIPCs) economies (Udeh, 2013). These initiatives range from debt postponement to outright annulment.  The  debt  service  burden  has  militated  against  ECOWAS  countries  rapid economic development and worsened the social problems (Audu, 2004).

Elbadawi et al. (1996) maintain that debt servicing was about one third of the public budget spending of ECOWAS nations’, having about three times of its spending on education and nine times on their health funds on servicing unsettled debts. They note that ECOWAS nations were only paying little over half its scheduled debt service. Grants from donor nations were then one- hundredth of the value of debt service. The reality is that there was a lattice transfer of funds from ECOWAS nations to the developed nations.

The case of debt burden on emerging nations can be linked to the early 1980’s after the oil price increase of the 1970’s. It was the outcome of responses by the international community to “oil price shocks”. One of the bequests of Economic Community of West African State (ECOWAS) nations from the crisis has been a rising debt stock and debt service payments, which constituted a major -constraint to economic growth and social development (Elbadawi et al., 1996).

Additionally, the opus of the whole foreign debt of the ECOWAS nations was mainly made up by unpaid principal and interest payment, which have directly affected the composition of current principal balance. This might lead to problem of likely debt overhang crisis if not arrested, which may impede efforts made to restore the economy to the alleyway of recovery

and growth. Since African nations had been sovereign and the substantial debt it had incurred given the number of years, coupled with the prevailing institutions, one can argue that the entire spectrum of the economy has not been adequately active, particularly when compared with the economy of parallel or lesser aged emerging countries. The ECOWAS was set-up on

28  May  1975  when  fifteen  heads  of states  of  West  African  countries  signed  the treaty establishing it at Lagos, Nigeria. The creation of this body was considered significant for the economic improvement of the sub-region which is by virtue of their small sizes and markets.

The fifteen member states, though were members of different colonies, have strong historical and cultural relationships. Most of the nations in the sub-region have very low income per capita, and bears the load of hefty external debts.  These nations have diverse levels of economic growth and resources. Also, the ECOWAS economies represent 25 percent of Africa’s land area, which covers a surface area of about 6,142,000 sq. km. 34 percent of Africa’s total population is within the shores of ECOWAS nations, and stretches from the southern boundaries of the Sahara desert to the Atlantic Ocean along the Gulf of Guinea to Biafra and from the eastern shores of the Atlantic from Senegal to Lake Chad. The climatic and geographical conditions of these nations range from equatorial rain to hot desert belt (Jones, 2002). The Economic Community of West African States (ECOWAS), in French it is called Communaut-eonomique des Etats de l’Ouest, (CEDEAO) comprises of Benin, Burkina Faso, Cape Verde, Gambia, Ghana, Guinea, Guinea Bissau, Ivory Coast, Liberia, Mali, Niger, Nigeria, Senegal, sierra Leone and Togo. ECOWAS has two regional economic groupings’. West Africa Monetary Zone(WAMZ) her members are Gambia, Ghana, Guinea, Nigeria, Sierra Leone and Liberia ii. West African Economic and Monetary Union (WAEMU) also known as UEMOA from its name in French, Union economique et monetaireoust-africaine with a member countries of Benin, Burkina Faso, Cote d’Ivoire, Mali, Niger, Senegal, Togo and Guinea-Bissau (ECOWAS,2015). For the purpose of this study, we are going to concentrate on fifteen ECOWAS countries namely Nigeria, Ghana, Sierra leonne, Gambia, Liberia,  Benin,  Burkina  Faso,  Cote  d’Ivoire,Niger,  Guinea  Bissau,  Togo,  Senegal,  cape verde, Guinea, Ivory coast and Mali.

1.2       Statement of the Problem

Although a substantial proportion of Sub-Sahara Africa debts and ECOWAS countries inclusive are development related, the ability to service them does not only depend on growth and  development  in  the  debtor  countries,  but  also  on  a  healthy  and  expanding  world

economy. Neither of these conditions was obtained during the 1980s (Abbott, 1993). The presumed growth and development did not take place, and instead of promoting the growth and development process, the development loans retarded it by pre-empting a rising share of their restricted foreign exchange resources for debt-service payments.

ECOWAS sub-region has continued to experience worsening economic conditions that encouraged high levels of foreign borrowing to augment deficient domestic savings and capital formation to stimulate domestic investment, production and growth. The growth performance has been very disappointing due mostly to the increased outflow of resources in debt service payments. The acquired loans did not yield a rate of return higher than the cost of borrowing to repay the debt. Moreover, the region’s economies have had a history of debt- servicing difficulties due to insufficient domestic resources. This was showed by the fact that on numerous occasions the nations were in debt-service arrears. The high external debt- service has depleted the savings and foreign exchange earnings that could have been used in domestic investments and in the provision of social services for the growing population. All these are symptoms of high debt-to-GDP ratio that is up to or near the optimal threshold. The region’s mounting debt stocks have discouraged the inflow of foreign resources in the form of foreign direct investment for fear of high taxation rates and macroeconomic policy distortions. Instead of attracting resources from abroad, domestic resources flee to the developed nations either for safe keeping or to be invested. Domestic capital flees abnormal risks at home or escapes the control of domestic authorities.

Extensive debt-driven capital flight has taken place in ECOWAS Sub-region. For example, in Ghana the rate of capital flight to GNP and capital flight to external debt in 1991 was 25 percent and 41 percent respectively (Valpy & Cobham, 2000). The resources that could have been used to build health care centres, schools and other social infrastructures are being used in debt service payments. Public sector investment, which provides employment for the majority of the population, has fallen considerably as a result of the external debt burden. The overall trend of regional debt to GDP ratio from 1990 to 2016 depicts although it was increasing in the early 90s. Regional debt to GDP ratio (hereafter debt) increased sharply from 138.54% in 1990 to 255.69% in 1994 which was an 84.56% increase in just five years. The year 1994 coincided with the devaluation of the CFA francs, the currency shared among eight of the fifteen ECOWAS countries. From 1994 going forward the debt indicator was downward sloping. This declining trend continued and it was only in 2007 that it reached a

level below 100%. It stood at 80.15%. In 2016, the debt indicator stood at 32.17%. This trend of the debt indicator is in contrast with the trends of per capita GDP and inflation. Indeed, these two indicators were both upward sloping throughout the period of analysis. Per capita GDP rose from US$ 669.84 (constant 2010 US$) in 1990 to US$ 904.52 in 2016 which was an increase of 35% over the period of analysis.

Looking at investment at the regional level, it’s observable that it has been very low. Indeed, it  was  below  20%  from  1990  till  2010  where  it  rose  to  21%  and  remained  in  the neighborhood of 20% till 2016. The highest investment rate stood at 21.48% of GDP and was achieved in 2012.

Considering individual countries’ recent trends of the debt variable and fiscal balance with the view to ascertaining their path towards the regional thresholds set at 70% and 3% for the debt and the fiscal deficit variables respectively.

In Benin republic, public debt stood at 56.1% in 2018 from 49.7% in 2016, a 12.9% increase over just two years. This was a continuous increase over a period of five years. At the same time, the country’s external debt which stood at 21.4% in 2016 rose to 26.5% in 2018 which is a 23.8% increase over a period of two years. External debt is expected to continue its rise in 2019 up to 27.3%.  The country’s external  debt is about 48.6% of total public debt. Although country’s authorities are projecting a decline of total public debt starting from

2019, ensuring that it remains on that declining path will not be easy since it will require keeping the fiscal deficit2, which stood at 4.0% in 2018, below 3% of GDP to be in line with the ECOWAS criterion (IMF 2019a). The risk of debt distress is assessed as moderate.

In Burkina Faso, public debt stood at 42.5% in 2018 and is expected to stabilize around to 42

% in 2019 (IMF,2019b). The country’s external debt which was at 26.5% in 2016 has fallen to 23.8% in 2018 and it is about 56% of total public debt. The country’s fiscal deficit which stood at 4.7% in 2018 is still above the ECOWAS threshold and is expected to be brought down to 3% in 2019.

In Cape Verde, government debt is quite high. Indeed, it stood at 127.7% in 2018 and it is expected to slightly decrease to 125.3% in 2019. The country’s external debt is also on the high side. It stood at 91.4% in 2016 and remained at that level in 2018. This is above the regional threshold and the external debt is above the level that Reinhart and Rogoff (2010) considered to be excessive. External debt is about 71.6% of the country’s total debt. Despite this  high  level  of  government  debt,  the  country’s  fiscal  balance  is  within  the  regional

threshold. Indeed, the fiscal deficit stood at 2.7% in 2018 and it is expected to be 2.3% in

2019.

In Cote d’Ivoire, public debt is still on an upward sloping trend. It stood at 53.2 in 2018 up from the 48.4% registered in 2016 (IMF,2019c). This is the highest level since the 2012

HIPC debt restructuring. 2019 is expected to be the turning point to reverse the upward trend of debt. External debt is also on the rise. Indeed, it moved from 27.7% of GDP in 2016 to

35.9% in 2018 which is a 29.6% increase over two years. The country’s deficit stood at 4% above the regional threshold. It is expected to be brought back to the regional target of 3%. The country’s risk of debt distress is still classified as moderate.

The Gambia’s total debt is also on the high side. Indeed, it is above 80% of GDP. In 2018, it stood at 83.2% and expected to fall 78.7% in 2019 still above the regional threshold. The country’s external debt stood at 40.9% in 2016 and rose to 44.2% in 2018. It is expected to fall to 42.3% in 2019. It represents about 53% of government’s debt. The country’s fiscal balance is not encouraging. Indeed, the fiscal deficit has been in the neighbourhood of 6% over the past three years i.e. 2016 to 2018. For 2018, it stood at 6.6%. It is expected to drop to

0.2% in 2019 to comply with the regional target but this looks a bit unrealistic.

In Ghana, the second rebasing of GDP that took place in 2018 brought the Debt to GDP ratio which was at 71.8% in 2017 above the regional threshold to 57.3%. Government debt stood at 59.6% in 2018. External debt dropped slightly from 29.9% in 2016 to 27.9% in 2018. But it is expected to rise again in 2019 to 29.9% its level in 2016. The external debt is about

46.8% of total public debt. The country’s fiscal balance is of concern. Indeed, the fiscal deficit stood at 7% in 2018 and is expected to be at 5.5% in 2019 thus missing the set regional threshold. The risk of debt distress remains high for the country (IMF,2019d).

In Guinea, government’s outstanding debt stood at 60% of GDP in 2005 and was reduced to

44.2% over the 2010-2015 period and was further brought down to 42 and 40% in 2016 and

2017 respectively. It stood at 38.7% in 2018. External debt stood at 22.2% in 2016 and is down to 21.1 in 2018. Despite this downward trend, both total debt and external debt are expected to climb to 46% and 30.7% respectively in 2019 (IMF,2019e). The risk of overall debt distress is assessed as moderate (IMF,2019f). The country’s deficit has remained below the ECOWAS threshold set at 3%. Indeed, it stood at 2% in 2018.

In Guinea Bissau, government debt has been alternating ups and downs. Indeed, it averaged

53.8% over the 2010-2015 period, rose to 57.9% in 2016 and to 53.9% in 2017. It stood in

2018 at 56.1% and it is expected to fall back to 54.9% in 2019. External debt is on the rise. Indeed, from 20.8% in 2017, it stood at 22.7% and expected to rise at 23.4% in 2019. The

country’s fiscal deficit is above the ECOWAS threshold. It stood at 5.6% in 2018 although the country authorities have vowed to bring it under control around 2.8% in 2019.

In Liberia, government debt is on the rise. Indeed, from 28.3% in 2016 it stood at 40.5% in

2018, which is a 43.1% increase in two years. The debt is expected to reach 46.7% in 2019.

The country’s external debt followed similar trend. Indeed from 20.1% in 2016 it rose to

28.7% in 2018 (which is about 43% increase over two years) and represented 70.8% of total debt. At the same time Liberia’s fiscal balance is not improving. Indeed, the country is running a fiscal deficit of 5.6% up from the 3.6% registered in 2016. This trend is worrisome because at this pace, the country will not meet the convergence criteria in 2019.

In Mali, government debt stood at 36.6% in 2018. This is a slight increase compared to the

35.4% registered in 2017 and it is not expected to increase much in 2019. The authorities are also trying to contain any rise in external debt. It stood at 23.3% in 2018. On the fiscal balance side, although the fiscal deficit stood at 4.7% in 2018, it is expected to be brought down to 3% in 2019 the ECOWAS threshold.

Niger is one of the country that has experienced a high increase in government debt. Indeed, it move from 43.7% in 2016 to 55.1% in 2018 which is a 26% increase in two years. External debt also moved from 29.4% in 2016 to 36.2% in 2018 and it is expected to fall to 34.8% in

2019. External debt represented 59.2% of the country’s total debt in 2018. The fiscal balance situation is not good either. Indeed, it moved from 6.1% in 2016 to 4.9% in 2018. Despite this downward trend, the deficit is still above the Community’s threshold.

In Nigeria, government debt is the lowest in the ECOWAS region. It stood at 28.4% in 2018 and is expected to reach 30% in 2019. The country’s external debt is also on the lower side. It stood at 8.8% in 2018. The problem in Nigeria could be with the fiscal balance where it has been above the threshold for some years. It stood at 4.5% in 2018 and is expected to be at

5.1% in 2019 a worsening situation.

In Senegal, government debt is also on the rise. Indeed from 47.7% in 2016 it stood at 64.4% in 2018 which is a 35% increase over just two years. The country’s external debt is on a similar trend. Indeed, it went from 31.2% in 2016 to 43.6% in 2018, a 39.7% increase over two years and it is expected to reach 44.9% in 2019. External debt represented about 67.7 % of total debt in 2018. The fiscal deficit stood at 3.4% in 2018 and is expected to fall to 3% in

2019.

Sierra Leone is another ECOWAS country with rising government debt. Indeed, from 55.5% in 2016, it jumped to 71.3% in 2018 which is a 28.5% increase in just two years. Similarly, external debt also rose from 36.7% in 2016 to 42.9% in 2018 and represented 60.2% of total

debt in that year. The country’s fiscal balance is also of concern given its high level. Indeed, it stood at 6.8% in 2018 and is expected to be at 4.3% in 2019 missing the regional threshold. In  Togo,  efforts  are  underway  to  bring  government  debt  under  control.  Indeed,  it  has decreased from 81.1% in 2016 to 74.6% in 2018 which is an 8% reduction. Government debt is expected to be reduced further in 2019 down to the regional threshold. External debt on the other side is on the rise. It went from 19.2% in 2016 to 23.6% in 2018, an increase of 22.9% over two years and is expected to reach 25.9% in 2019. On the fiscal balance, the country has also made efforts to bring the deficit within the acceptable limit of the regional threshold. It is expected to be below that threshold in 2019 at 1.5%.

It results from the above that at the regional level government debt indicator is below the set regional threshold of 70%. This is also true for individual member states with the exception of Cape Verde, The Gambia, Sierra Leone and Togo. Although the level of government debt may appear not to be a concern in light of the threshold, it is the persistent and rapid accumulation of public debt that is of concern as argued by Chudik et al (2018). External debt is also on the rise at the regional level as well as at the individual country level with the exception of Mali, Ghana and Burkina Faso.

Similarly,  human  capital  and  technology  as  a  key  factor  in  promoting  growth  and development is no longer affordable for similar reasons (Richards, Nwannaet al., 2003). Even though Structural Adjustment Programmes have been implemented since many years ago, the economies are still weak, vulnerable and not sufficiently transformed to maintain hastened growth and development. For example, in many countries of the region, the total debt stock in

1999 was almost equal in size to their GDP and the cost of debt-service relative to export earnings was more than 25 percent of the countries’ export earnings. In 2000 for example, an estimated cost of external debt-service by the Ghanaian ministry of finance was found to be equivalent to 55 percent of government’s total tax revenues, which implies that the government could no longer meet its domestic expenditures from domestic revenue without additional borrowing from foreign sources. Similarly, Cape Verde’s external debt-to-GDP ratio stands at 96.5 and 91.1 percents in 2017 and 2018 respectively (International Monetary Fund, 2019), which could be too high for a developing economy.

Furthermore, since governments could no longer generate enough revenue to service foreign debts due to the deteriorating terms of trade and the narrow tax base, debt-service obligation could only be met by reducing expenditures in priority areas such as education, health care

systems, welfare and social services or by additional foreign borrowing. This has resulted to high fiscal deficits and inflation rates. Moreover, low public investment has resulted to lower overall investment since public investment is a significant proportion of total domestic investment in ECOWAS Sub-Region and may also be complementary to private investment. Lower overall investment means reduced potential for medium and long-term growth. Is there a regional threshold for external debt beyond which any additional borrowing will hamper the region’s economic performance?

Iyoha (1996), Fosu, (1996) and Milton, (1999) are some of the studies that have examined the relationship between external debt and economic growth in the Sub-Saharan African Countries. Amoatag and Amoako (1996) concentrated on some selected African countries. Babu et al (2014), did a study on external debt and economic growth but his focus was on East African Countries  while Suma (2007) who did a study on ECOWAS Sub-Saharan African Countries, concentrated equally on external debt crisis, investment and economic growth. This study, therefore, complements previous studies by investigating the impact of external debt, capital formation and economic growth in ECOWAS countries.

1.3 Research Question

The following research questions will guide the study:

i.     What  is  the  Impact  of  external  debt  and  capital  formation  on  economic  growth  in

ECOWAS Countries?

ii.    What is the optimal external debt threshold for ECOWAS Countries?

iii.   What is the direction of causality between external debt, capital formation and economic growth in ECOWAS Countries?

1.4 Research Objectives

The broad objective of this study is to examine the relationship between external debt, capital formation and economic growth in ECOWAS Countries. However, specifically the study intends:

i.         To ascertain the impact of external debt  and capital formation on economic growth in

ECOWAS Countries

ii.        To ascertain the optimal external debt threshold for ECOWAS Countries

iii.         To find out the direction of causality between external debt, capital formation and economic growth in ECOWAS Countries.

1.5       Research Hypotheses

The following hypothesis guides the study:

H01: External debt and capital formation have no significant impact on economic growth in

ECOWAS Countries

H02: There exists no optimal external public debt threshold for ECOWAS Countries

H03: There is no causal relationship between external debt, capital formation and economic growth

1.6     Significance of the Study

This research work will be beneficial in abundant ways; first, the paper adds marginally to the empirical literature by providing the basic understanding of the concept of external debt, capital formation and its bearing on economic growth in the selected countries. Secondly, the study will be relevant to policy makers especially in the area of economic planning. More so, to firms, it will help them to know empirically the condition of the economic environment that they will invest their resources. It will equally aid the foreign investor to know whether our economic system is friendly for foreign establishment. On the part of government and its agencies, it will help them to make an informed decision based on whether it is profitable and growth sustaining to incur public external debt, corporate bodies and individuals will enjoy it most  since  it  will  help  them  to  know  how  government  and  its  agencies  manage  their economy. This work will also help economic managers to better understand the extent to which external debt and economic growth correlate so as to adopt efficient policy instruments towards achieving set targets that are germane to growth and development. It will also be useful to international development partners and donors to better appreciate external debt and growth nexus for control and regulation purposes in order to minimize any adverse effect that may accompany external debt in ECOWAS Countries.

1.7        Scope and Limitations of the Study

This work focuses on the relationship between external debt, capital formation and economic growth in ECOWAS countries (Nigeria, Ghana, Sierra Leone, Senegal, Cape Verde, Gambia, Liberia, Benin, Burkina Faso, Cote d’Ivoire, Niger, Guinea Bissau, Ivory Coast, Togo and Mali), they are selected on the premise of being ECOWAS member States (they belong to the same economic block) and also on the availability of data. Furthermore, these countries share basic structural characteristics via GDP per capita as well as GDP to debt ratio are within a specific threshold. The period 2000 – 2018 will be covered in this study for the ECOWAS countries. The study undertakes a panel analysis, since a panel model allows us to control for individual heterogeneity, gives more informative data, more variability, less collinearity among variables, and more efficiency (Baltagi, 2008). The variables of interest are capital formation, external debt, external debt services and economic growth. Capital formation was proxied by gross fixed capital formation, while external debt and external debt services are direct variables, and economic growth was proxied by GDP growth rate.

One  of  the  limitations  of  the  study  is  the  fact  that  it  focused  on  ECOWAS  countries, therefore, may not provide findings that may be peculiar to any particular country, or may not be generalized to other regions such as the East African Countries. Also, this study focused on  the  relationship  between  capital  formation,  external  debt,  and  economic  growth. Therefore,  empirical  evidence  on  the  relationship  between  domestic  debt  and  economic growth is not within the scope of this study. Notwithstanding, this study provided empirical evidence on the relationship between external debt, capital formation and economic growth of ECOWAS countries as a group. The study informed us of the  optimal threshold for external debt in the ECOWAS countries.

1.8        Organization of the Study

This research work consists of five chapters. Chapter one introduces the core variables in the topic and  reveals  the problems  that  have arisen  which  the  study  seeks  to  address.  The objectives, research hypotheses, scope and significance of the study are also in this chapter. Chapter two covers discussions about the concept of external debt, capital formation and economic  growth.  Debt  theories,  capital  formation  and  economic  growth  theories  are reviewed under theoretical literature with the aim of identifying potential mechanism by which external debt cum capital formation affect economic growth. Also chapter three provides econometric investigation of the impact of external debt on economic growth and

the impact of capital formation on economic growth using the system GMM estimation technique. Moreso, chapter four details presentation and discussion of result, the descriptive statistics of the variable, preestimation test, estimation and post estimation test. The various model were subjects to various econometric test and the optimal externl debt threshold was established for ECOWAS countries and the long run causal relationship of the economic variables were equally discussed. In chapter five, the summary of findings and conclusions of the study was discussed and economic policy relevance of the major findings were equally established. Areas for further studies focusing on the optimal external debt threshold for ECOWAS subregions were equally itemized and the contribtion to knowledge established for the study.

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