Siyasal: Journal of Political Sciences

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DOI :10.26650/siyasal.2020.29.2.0015   IUP :10.26650/siyasal.2020.29.2.0015    Full Text (PDF)

Sustainability of External Debt: The Case of ECOWAS Countries

Selçuk Akçay, Nebi Çelik

External debt sustainability is a pressing issue in developing countries, particularly for Highly Indebted Poor Countries (HIPC). The main purpose of this study is to investigate the sustainability of external debt in the Economic Community of West African States (ECOWAS). To test external debt sustainability, unit root test and Johansen & Juselius (1990) co-integration and panel unit root and panel cointegration tests are employed. The unit root tests show that the total external debt to export ratio is not stationary in all countries verifying the unsustainability of external debts. Further, co-integration tests results based on time series and panel data indicate that total external debt stock and export are not co-integrated suggesting that external debt is not sustainable in all countries. Based on our results some policy recommendations are proposed.

Keywords: External debt sustainability, Time series, Panel data, ECOWAS
DOI :10.26650/siyasal.2020.29.2.0015   IUP :10.26650/siyasal.2020.29.2.0015    Full Text (PDF)

Dış Borçların Sürdürülebilirliği: ECOWAS Ülkeleri Örneği

Selçuk Akçay, Nebi Çelik

Dış borçların sürdürülebilirliği, gelişmekte olan ülkeler ve özellikle de Ağır Borçlu Yoksul Ülkeler (HIPC) için önemli bir sorundur. Bu çalışmanın temel amacı, Batı Afrika Devletleri Ekonomik Topluluğu (ECOWAS) için dış borçların sürdürülebilirliğini araştırmaktır. Sürdürülebilirliği test etmek için, kırılmasız ve kırılmalı birim kök testleri ile Johansen ve Juselius (1990) eşbütünleşme testi ve panel veri yöntemi (panel birim kök ve panel eşbütünleşme testleri) kullanılmıştır. Birim kök testlerinde toplam dış borcun ihracata oranının durağan olmaması, ECOWAS ülkelerinde dış borçların sürdürülemez olduğunu göstermiştir. Ayrıca, eşbütünleşme testleri toplam dış borç stoku ile ihracatın eşbütünleşik olmadığını, dolayısıyla tüm ülkelerde dış borçların sürdürülemez olduğunu ortaya koymuştur. Elde edilen bulgulara dayalı bazı politika önerilerinde bulunulmuştur. 

Keywords: Dış borç sürdürülebilirliği, Zaman serisi, Panel veri, ECOWAS

EXTENDED ABSTRACT


The sustainability of foreign debt especially in the Highly Indebted Poor Countries (HIPC) and developing countries is an important issue that policymakers, international financial institutions, and scholars ponder over. Since the 1980s, external debt is unsustainable in many African countries. This study mainly aims to investigate the sustainability of external debt in the Economic Community of West African States (ECOWAS). The external debt accumulation occurred in ECOWAS countries during the periods of coups, draught, and global financial crises in tandem with a lack of foreign exchange reserves and low export revenues made it hard to pay back their external debts. The sustainability of external debts is important for several reasons in ECOWAS countries. First, it prevents the debt crisis. Second, it improves the level of foreign investors’ confidence in the region. Third, it enables countries to access external finance easily. Finally, it maintains macroeconomic stability and economic growth. 

The external debt sustainability is mainly measured in three ways in the literature, namely, debt ratio analysis, stationary tests, and cointegration tests. The debt ratio analysis is based on IMF’s Debt Sustainability Analysis (DSA) including total debt stock/ GDP, total debt stock/export, the net present value of debt service/export, and the net present value of debt service/revenues. The second method relies on the stationarity of the debt series. Provided that external debt series is not stationary, then it implies that it is increasing without bound over the years, which suggests that subsequent external debt will also increase without bound, indicating that external debt is unsustainable. The last method considers the cointegration relationship between debt stocks and export. Accordingly, while the presence of cointegration suggests debt sustainability, the nonexistence of cointegration refers to the unsustainability of external debt.

To investigate external debt sustainability in the ECOWAS region, we used both time series and panel data analysis. In the first step of the econometric analysis, unit root tests (without breaks and breaks) are employed. In the second step, we carry out the Johansen-Jusselius procedure to verify the cointegration relationship between external debt stock and export, using time series data for each of the 12 countries in our sample. In the third step, panel data analysis is carried out. At this stage, initially, the cross-section dependency and slope homogeneity tests are conducted, then based on these tests’ results appropriate panel unit root and panel cointegration tests are used. 

Our study contributes to the existing literature mainly in three ways. First, to our best knowledge, the literature on external debt sustainability is scarce for ECOWAS countries; therefore, our study aims to fill the gap in this area. Second, this study employs both unit root tests without breaks and breaks. Finally, it not only relies on time series data but also on panel data analysis. 

The time-series results are as follows. The unit root tests based on ADF (1981) and PP (1988) show that debt stock, export, and debt stock/export series are not stationary. LeeStrazicich’s LM (2003) unit root test also reveals that debt stock/export is not stationary in all countries. The results of both ADF, PP, and Lee-Strazicich LM unit root tests suggest that external debt is not sustainable in the ECOWAS region. Moreover, JohansenJusselius (1999) cointegration test suggests that debt stocks and exports are not moving together in the long run. Turning to panel data results, the panel unit root test shows that debt stock and export are not stationary. Further, the panel cointegration test (Westerlund, 2007) indicates that debt stock and export are not moving together, suggesting that the external debt of the ECOWAS region is not sustainable. 

Based on the obtained results we propose the following recommendations. The authorities in ECOWAS countries should implement policies aimed at promoting domestic savings, export, and particularly productivity in export-oriented sectors. In ECOWAS countries, maintaining fiscal discipline is important for external debt sustainability. Accordingly, the budget and current account deficits should be reduced. Finally, since the rule of law is weak and corruption is rife in the public sector in many ECOWAS countries, national resources, and borrowed funds could be directed to corrupt public officials’ pockets and white elephant projects. Therefore, policymakers in ECOWAS countries should implement policies aimed at promoting good governance and well-functioning institutions, which makes it possible to monitor the borrowing procedures and use of foreign debts.


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APA

Akçay, S., & Çelik, N. (2020). Sustainability of External Debt: The Case of ECOWAS Countries. Siyasal: Journal of Political Sciences, 29(2), 207-230. https://doi.org/10.26650/siyasal.2020.29.2.0015


AMA

Akçay S, Çelik N. Sustainability of External Debt: The Case of ECOWAS Countries. Siyasal: Journal of Political Sciences. 2020;29(2):207-230. https://doi.org/10.26650/siyasal.2020.29.2.0015


ABNT

Akçay, S.; Çelik, N. Sustainability of External Debt: The Case of ECOWAS Countries. Siyasal: Journal of Political Sciences, [Publisher Location], v. 29, n. 2, p. 207-230, 2020.


Chicago: Author-Date Style

Akçay, Selçuk, and Nebi Çelik. 2020. “Sustainability of External Debt: The Case of ECOWAS Countries.” Siyasal: Journal of Political Sciences 29, no. 2: 207-230. https://doi.org/10.26650/siyasal.2020.29.2.0015


Chicago: Humanities Style

Akçay, Selçuk, and Nebi Çelik. “Sustainability of External Debt: The Case of ECOWAS Countries.” Siyasal: Journal of Political Sciences 29, no. 2 (Apr. 2024): 207-230. https://doi.org/10.26650/siyasal.2020.29.2.0015


Harvard: Australian Style

Akçay, S & Çelik, N 2020, 'Sustainability of External Debt: The Case of ECOWAS Countries', Siyasal: Journal of Political Sciences, vol. 29, no. 2, pp. 207-230, viewed 25 Apr. 2024, https://doi.org/10.26650/siyasal.2020.29.2.0015


Harvard: Author-Date Style

Akçay, S. and Çelik, N. (2020) ‘Sustainability of External Debt: The Case of ECOWAS Countries’, Siyasal: Journal of Political Sciences, 29(2), pp. 207-230. https://doi.org/10.26650/siyasal.2020.29.2.0015 (25 Apr. 2024).


MLA

Akçay, Selçuk, and Nebi Çelik. “Sustainability of External Debt: The Case of ECOWAS Countries.” Siyasal: Journal of Political Sciences, vol. 29, no. 2, 2020, pp. 207-230. [Database Container], https://doi.org/10.26650/siyasal.2020.29.2.0015


Vancouver

Akçay S, Çelik N. Sustainability of External Debt: The Case of ECOWAS Countries. Siyasal: Journal of Political Sciences [Internet]. 25 Apr. 2024 [cited 25 Apr. 2024];29(2):207-230. Available from: https://doi.org/10.26650/siyasal.2020.29.2.0015 doi: 10.26650/siyasal.2020.29.2.0015


ISNAD

Akçay, Selçuk - Çelik, Nebi. “Sustainability of External Debt: The Case of ECOWAS Countries”. Siyasal: Journal of Political Sciences 29/2 (Apr. 2024): 207-230. https://doi.org/10.26650/siyasal.2020.29.2.0015



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Submitted14.02.2020
Accepted15.09.2020
Published Online30.10.2020

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