External debt, institutions, and economic growth: new evidence from emerging markets and low-income countries

This study investigates the relationship between external debt and economic growth in 86 EMEs and LICs, using the GMM dynamic panel estimation approach with annual data spanning 2002-2019. Particular consideration was placed on the role of institutions in explaining the external debt-growth nexus. The result shows robust evidence that institutions matter in unlocking the growth impact of external debt; without quality institutions, external debt accumulation would only negatively impact economic growth. The study also shows that external debt, where regulatory quality is strong, would yield negative growth effects in the long term as the private sector becomes the strong engine of growth. Further, the study indicates that given an appropriate institutional framework, considering a domestic-external debt portfolio of 48:52 and 42:58 for EMEs and LICs, respectively, may be optimal for growth. The study recommends effective fighting of corruption and terrorism and the need to foster synergy across the countries in combating rising terrorism and other violent crimes. The study also advocates promoting private sector development to spur domestic resource mobilisation to bridge the financing gap and reduce government deficit financing constraints.