ABSTRACT

The study examines the effect of external debt on the economic growth of Cameroon. The model specifies economic growth measured by gross domestic product as dependent on external debt proxy by bilateral debt and multilateral debt. Annual time series data from 1985-2017 was sourced using secondary data and analyzed using ordinary least squared (OLS) estimation technique. It was evidenced that external debt has a significant positive impact on economic growth. Both bilateral debt and multilateral debt have a significant effect on the economic growth of the country. The study demonstrates that increasing external debt reaps the static and dynamic benefits, stimulating rapid national economic growth. Thus recommendations that the government the government should encourage investment and discourage external debt to avoid accumulation of external debt stock overtime and prevent an obscuring of the motive behind external debt for economic growth.  

KEYWORDS: Bilateral Debt, Multilateral Debt and Gross Domestic Product.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

External debt occurs all over the world. External debt refers to money borrowed from a source outside the country in order to better a country’s economic situation. External debt has to be paid in the currency in which it is borrowed and can be obtained from foreign commercial banks, international financial institution like IMF, World Bank and from the government of foreign nations. We find mostly in the world today African and Asian countries borrowing from American and European countries. Today due to some natural disasters that destroy some countries we find countries like Haiti, Japan and others borrowing from foreign countries to restructure their nation or better their economic condition (WWW.Cameroon postline).

A group of low income countries classified as highly indebted poor countries have continued to experience difficulties in managing and servicing for huge stocks of external debt. Over the last four decades, the external debt of many developing countries has risen dramatically due to the chronic current account (import-export gaps), lack of capital (saving–investment gap), and fiscal imbalances (revenue-expenditure gap) (Beyene and Kotosz, 2020,). This growing strain of foreign debt and large debt payments is a persistent problem for the whole world, but an even greater challenge for developing countries (Duodu and Baidoo, 2020; Baidoo et al., 2021; OforiAbebrese, Baidoo, and Olesu, 2021). Developing countries have borrowed a huge amount of external funds as a result of budget deficits, trade deficits, and saving–investment gaps. Given this, researchers and policymakers have investigated the determinants of external debt since the debt crises of the early 1970s. After the 1970s and 1980s, global developments, such as oil price shocks, high-interest rates, low commodity prices, and recessions in developed countries, affected the domestic macroeconomic factors of developing countries (Waheed, 2017).

In past decades, many poor countries were attracted in foreign borrowing in the hope of accelerating growth, increasing production, income, consumption and alleviating poverty. However, they had quite a struggle in making payments on their debts due to factors such as poor economic management, weak governance, armed conflicts and external factors of deteriorating terms of trade and climatic problems. As a result, most of those countries developed a huge external debt problem with almost the entire organization of interactional country members being either low or middle income countries or half of them being severely indebted, the debt problem continues to be a serious obstacle to their development effort and economic growth. Needless to say the debt service of the organization of interactional country members takes up a large (Free Press, 1979).

Over the last decade, statistics show a dramatic increase in external debt in most developing countries, where external debt remains high as a proportion of gross domestic product (GDP). Rapid economic development experienced by developing countries has resulted in an increase in demand for external debt to finance various investment expenditures, including infrastructure and other investments.  However, this requires sustainable external debt to avoid negative impacts on the economy, such as falling foreign investment and currency devaluation, which hampers economic growth. Previous studies reported direct proportional relationship between external debt and economic growth (Balago, 2014; Zaman & Arslan, 2014).  The high level of external debt has a detrimental impact on economic growth, as explicated by the overhang hypothesis and liquidity constraints (Arnone, Bandiera, and Presbitero, 2005). For instance, during the European debt crisis, 2008/2009, countries such as Greece, Portugal, Ireland, Italy and Spain overestimated their capability to pay back debt interest payments after accumulating large amounts of external debt, which suggests the failure of countries’ governance and debt management. These countries are nearly facing bankruptcy due to failure to pay back their debt. 

On the other side of the coin, there is also concern amongst creditors on the future of the debt system. Creditors have worked to find solutions to repayment on loans to be easier. The first step is placing debt relief within an overall framework. Poverty reduction came with the endorsement of the heavily indebted poor country initiative (HIPC) in 1996 by the international monetary fund and the World Bank. It aimed at reducing debts on poorest countries. (Journal of economic cooperation, 2003)

Most of these countries are in sub Saharan Africa. Poor countries such as sub Saharan African countries lack capital. In the frame of a debt cycle hypothesis countries that lack capital are expected to borrow and use foreign savings to increase domestic investment and growth. As income increases, domestic savings will increase and enable the borrowing to pay external debt (American economic review, 1963).

During the 1970,s sub Saharan countries borrowed all together about USS 4.9 billion to foster their economic conditions but these loans did not promote sustainable growth of output and exports. Nigeria had about 1.6 billion from it, Kenya had 1.3billions from it and others shared the rest. The Volcker recession (free press, 1979) of the early 1980,s and the collapse of the African team of trade ignited the debt crisis. For over a decade, sub Saharan African countries have faced a debt crisis that has retarded growth, undetermined poverty reduction and regarded the environment.

External debt accumulation has been rising over the years with external burden indicators rising steadily in the early 1990, using time series data force up a large. 1970 to 1995, the empirical results indicated that external debt accumulation has a negative impact on economic growth and private investment (IMF Papers).

In 1984, Cameroon was enjoying a period of considerable prosperity meanwhile in 1986, her economic indication suddenly stopped; oil accounted for about 63 percent of total export hence replaced cocoa and coffee which were the main source of income before the crisis.(Bulletin mensuelle, ministere de 1,economie de la planification et de l.ammenagement du territoire, 2001). Due to the fall in their prices in the mid 1980 s export of farms declined, unemployment increased very rapidly, public finance ran out and domestic and external debt rose rapidly there by leading to serious economic crisis concerning financial resources in particular, following the January 1994 devaluation of the cummunaute financier Africaine Frances (CFA). During this period, there has been a deficit in current account which was considered normal. As a result, the government drastically reduced its investment and subsidies in urban sectors and was encouraged to borrow at home from nonbanking sectors, externally from the World Bank (WB) and the international monetary fund (IMF) so as to create an environment conducive for domestic interest. Presently, there are new hopes for Cameroon s economic growth based on the construction of the Chad Cameroon oil pipeline. This project was expected to boast the economy with an estimated GDP growth of about 5.4percent in 2001/2002, 3.3percent in 2007 and 4.3percent in 2008. In the process, little attention was paid to the liabilities and further led to debt crisis in 1994. Despite the sales of government property (privatization) and an increase in agriculture which is the key sector in Cameroon, she cannot still pay her debts. The collapse of oil prices in the 1980’s led to accumulation of large debts both internal and external. Cameroon cannot still pay her debts. The collapse of oil prices in the 1980’s Cameroon’s domestic debt was 1.2 billion franc de la Communaute Financiere Africaine as at 31° December 2001 and 1.5 billion as at 31st December 2005. Corruption and embezzlement (poor resource management), were specifically cited to be the major causes of a continuous increase in Cameroon’s domestic debts and this gives the country a negative image. (bulletin mensuelleministere de l’economie de la planification et de l’ammenagement du territoire,2007)

Despite the tremendous improvement made in the debt situation of most middle income debtor countries, since the onset of the debt crisis in 1982, a group of low income countries classified as HIPC have continued to experience domestic and external debts which in the world including Cameroon. Cameroon is actually experiencing high level of poverty with about 48% of her population living below the poverty line. Economic performance continuous to drop to an extend which the country records a negative GDP growth of 0.5% from 1975-2000 and -10% from 1980-2000 (IMF 2000) that is since independence.

1.2 Statement of the Problem

Developing countries are characterized by economic imbalances among which we can quote budget deficit (Ngabo, 2009). In front of budget deficit, Government can either resort to banknote plate or public debt. Banknote plate is in some cases source of inflation. Thus, despite consequences of debt on the economy, a State finds necessary resorting to it as a means addressing public deficit. The contribution of external debt to economic growth is controversial since it may have a positive or negative effect. Debt is presented by some authors as a burden. Among them some present external debt as a burden for future generations since it requires more taxes in the future. Perkins (2011), states that debt creates crisis while Todaro (2011) argues that external debt has a cost.

Countries with less developed domestic debt markets often rely on external borrowing to meet their financing needs. This is because the domestic debt market is shallow and cannot match the government financing requirements. As a result, their debt portfolio is mainly composed of external debt. Although most countries in East Africa have over time deepened their domestic markets, a large proportion of their foreign borrowing is denominated in foreign currency. While the external financing is mainly from concessional sources, the challenge of managing external debt remains prevalent. For instance, the exchange rate fluctuations drive the debt service higher than projected leaving fewer resources to finance development projects. Chawdhury (2001) admits that external debt may have huge effects on the overall performance of these countries. Mukui (2013) observes that high levels of external debt in Kenya poses a great challenge to the economy given that a large proportion of the export income goes to servicing debts instead of being put into domestic investment. 

External debt from all sources has over the years remained sine-qua-non for filling the resource gap in Cameroon. This resource gap is three fold: the domestic savings gap, the foreign exchange gap and the fiscal gap resulting from budget deficits. Cameroon’s debt situation is as a result of embezzlement, corruption and mismanagement of resources.

Empirical evidence suggests that external debt impact the status of economic growth in a nation if the level of external debt is too high, the economy ceases to grow. High external debt retards economic growth by hindering physical capital accumulation and net factor productivity. Chongo (2013) concluded that there is a long run negative relationship between public debt and economic growth which calls for policies that will promote conservative borrowing in order to reduce the negative growth effects of public debt on the country.

Consequently, low growth enlarges the indebtedness reducing net economic revenues paving the way for a vicious cycle. This results in enlarged debt ratios. The debt can be of two forms that is bilateral debt which is discharging a part of debt owed by a nation’s government to another. We also have multilateral debt, dismissing a portion or whole of the outstanding amount owed to the international financial institutions.

Cameroon recorded debt to gross domestic product of 19.90 percent of the country’s gross domestic product in 2014.External debt to Cameroon’s GDP averaged 46.75percent from 1990 until 2014 reaching an all-time high of 131.44 percent in1994 and a record of 9.30 percent in 2008 due to debt cancellation but the country’s debt increased from 3.9 percent in 2011 to 7.6 percent in 2013.This represents an increase of 900 billion as debt. This money was borrowed to increase the welfare, boost investment in order to increase productivity and for infrastructural development and to alleviate poverty, globally to boost economic growth. (CIA world fact book).

The World Bank and the international monetary fund have raised concern over Cameroons debt. Cameroon spends more than it earns. The Bretton wood institution is raising a situation where Cameroon might slip back to the doldrums a5 a heavily indebted poor country. It is worth that it was only in 2006 that multilateral donors cancelled Cameroons debt when it went through scrutiny of highly indebted poor country initiatives.

Debt relief to Cameroon under HIPC will be approximately USS1267 billion in net present value terms equivalent to 27percent in net present value reduction of Cameroon Us debt after traditional debt relief. This will reduce Cameroon s future debt service payment by about USS4.9 billion in nominal terms. The USS 1267 billion in reduced debt is attributed to multi-lateral, bilateral and commercial creditors. (IMF external relation department).

According to the IMF institution, the situation is due to limitations in the public treasury and lack of priority spending in the management of public finances. The result has been the nonpayment of bills within 60days time frame provided by the 2012 finance law. In 2012, the first year that the government instituted the 60day deadline for the repayment of bills, nonpayment of bills imposed public debt of 200billion fefa according to the IMF report number 13/279. That is what made the economic growth in Cameroon to be weak in 2013 that is 5.5 percent (Mario De Zamaroczy).He revealed that this was because in 2013, Cameroon borrowed 400billion from the IMF to finance fuel subsidies but this was not successful. (WWW.CameroonPost Line)

External finance is necessary to increased investment that otherwise would not be possible because of the drain of external interest payments and low savings. But despite this huge external debt Cameroon is actually experiencing a high level of poverty with about 48 percent of her population living below the poverty line. In the midst of the researcher’s findings and other works that were done by other researchers, their findings have not been clear on the exact relationship that exists between external debt and economic growth because their research always combined external and internal debt. They don’t go further to establish and evaluate the specific channels through which external debt affects economic growth. Therefore, this study will bridge the gap by finding the exact relationship that exists between external debt and economic growth by bringing out the exact channels through which external debt can affect economic growth of Cameroon.

1.3 Research Questions

Main Research Question

What is the effect of external debt on the economic growth of Cameroon?

Specific Research Questions

In line with this, the following sub – research questions will contribute in getting an answer to the main research question.

1. To what extent does bilateral debt affects economic growth in Cameroon?
2. To what extent does multilateral trade affects economic growth in Cameroon?

1.4 Objectives of the Study

The main aim of this study is to access the effect of external debt on the economic growth in Cameroon. The specific objectives are as follow;

1. To assess the effect of bilateral debt on economic growth in Cameroon.
2. To examine to effect of multilateral debt on economic growth in Cameroon.

1.5 Hypotheses of the Study

A hypothesis is stating the objectives in a way in which it can be tested. The main aim of this study is to assess the impact of external debt on economic growth in Cameroon, hence the hypotheses are

1. H₀₁: The bilateral debt has no significant effect on economic growth in Cameroon.
2. H₀₂: The multi-lateral debt has no significant influence on economic growth in Cameroon.