When Does Debt Hinder Growth? Threshold Effects of External Borrowing in Sub-Saharan Africa

Abstract

The relationship between external debt and economic growth has long attracted scholarly debate, yet the precise threshold at which debt becomes harmful remains underexplored, particularly in Sub-Saharan Africa. Previous studies largely emphasised linear relationships, overlooking the possibility of nonlinear dynamics in the debt–growth nexus. This study aimed to examine the nonlinear impact of external debt on economic growth in SSA, with the specific objective of identifying the debt threshold beyond which borrowing turns detrimental. Using the Dynamic Panel Threshold Model and data spanning 1996–2023 across SSA countries, the study estimated regime-specific effects of external debt while accounting for growth persistence and macroeconomic fundamentals. The results revealed a clear threshold effect at 60.07% of GDP. When external debt remained below this level, its negative impact on growth was weak and statistically insignificant, implying that moderate borrowing could complement domestic resources under sound fiscal management. However, once debt exceeded the threshold, its adverse effect became strong and statistically significant, consistent with the debt overhang hypothesis. At high debt levels, fiscal space contracted, productive investment declined, and growth determinants such as capital formation, labour, and human capital weakened. The study concluded that external debt supports growth in SSA only within sustainable limits but acts as an impediment once thresholds are breached. To address slow growth, persistent fiscal deficits, and rising debt burdens, policymakers must strengthen debt management frameworks, enhance domestic revenue mobilisation, and allocate borrowed funds to productive and growth-enhancing sectors.