Applied Journal of Economics, Management, and Social Sciences, 2024, 22-32

Doi: 10.53790/ajmss.v5i4.100
ISSN: 2811-1613
Submitted: August 2024; Revised: September 2024; Accepted: November, 2024

ARTICLE

Effect of Remittances and External Debt on Economic Growth in Sub-

Saharan Africa

Salihu L. Mairafi 1†; Mohammed Ibrahim2†; Zakariyau T. Abdullahi 1†*

1 Department of Banking & Finance, Nasarawa State University, Keffi.

2 Department of Finance, Ahmadu Bello University, Zaria.
†
Authors contributed equally
* Corresponding Author: ztabdullahi@gmail.com
Disclaimer: The contents of this paper are authors’ sole responsibility. They do not represent the view of the institution

Abstract
Foreign capital inflows have been judged to play a critical role in economic growth providing the necessary capital to fuel economic
Sub-Saharan Africa (SSA) has long struggled with volatile and sluggish economic growth, worsened by macroeconomic
challenges such as unpredictable foreign capital inflows. These inflows, particularly remittances and external debt are
critical to financing development and contribute to economic stability. This study examines the effect of remittances and
external debt on economic growth in SSA. To achieve the objectives, panel data was sourced from World Bank
Development Indicators (WDI) for 26 SSA countries from 1998 to 2023. The system Generalized Method of Moments
(GMM) was used to estimate the relationship and address potential endogeneity and unobserved heterogeneity in the
data. The findings from the System GMM model revealed that both remittances and external debt positively and
significantly contribute to economic growth in SSA. The study concludes that remittances enhance household
consumption and investment, while external debt, when effectively managed, is used to finance productive projects
that stimulate economic activity. It is recommended that SSA countries strengthen their financial management and
policy frameworks to maximize the benefits of foreign capital inflows while mitigating potential risks associated with
volatility and debt sustainability.
Keywords: Economic Growth, External Debt, Remittances, Sub-Saharan Africa
JEL: C58, F43, R42

Cite as: Mairafi, S. L., Ibrahim, M., Abdullahi, Z. T. (2024). Effect of remittances and external debt on economic
growth in Sub-Saharan Africa. Applied Journal of Economics, Management, and Social Sciences, 5(4), 22-32

1. Introduction
Sub-Saharan Africa (SSA) has long faced significant (Mairafi et al., 2024). This growth pattern, characterized
macroeconomic challenges that have hindered its ability by brief expansions followed by sharp contractions, has
to achieve sustainable economic growth and improve made it difficult for countries in the region to build
living standards. Among the most pressing issues in the momentum toward long-term development goals. Several
region is the volatile and often sluggish economic growth factors contribute to this challenge, with one key issue
experienced by many SSA countries over the decades being the role of foreign capital inflows—specifically,
 23 | Applied Journal of Economics, Management, and Social Sciences, 2024, Vol. 5, No. 4

remittances and external debt (Ocampo & Griffith- 2020). Similarly, the impact of external debt on economic
Jones, 2022). These forms of foreign capital are essential growth has been found to vary depending on the country's
for financing critical investments and infrastructure debt management and economic policies (Pattillo et al.,
necessary for economic development (Addison & Tarp, 2019). For instance, Ostry et al. (2021) found that
2019). However, the unpredictable nature of these inflows external debt could enhance growth if used for productive
can also contribute to economic instability in SSA (Mairafi investments but could also lead to economic crises if
et al., 2024). For instance, remittances, though often mismanaged.
stable, can fluctuate due to global economic conditions
affecting migrant workers' earnings (Ratha et al., 2020). Given these mixed findings and the gap in the literature
Similarly, external debt, while providing much-needed regarding the combined effects of remittances and
capital, can become a burden if not properly managed, external debt, this study aims to provide a comprehensive
leading to debt crises and fiscal stress (Azenabor et al., analysis of how these forms of foreign capital influence
2021). economic growth in SSA. By examining the interaction
between remittances and external debt, this research
Hence, the reliance on these forms of foreign capital seeks to offer new insights into how these inflows can be
presents both opportunities and risks for SSA countries. harnessed to promote sustainable growth in the region.
Chami et al., (2018) opined that remittances are a crucial The population of the study in this instance consists of all
source of income for many households, often used to SSA countries while 26 SSA countries with complete data
support consumption, education, and healthcare, thereby set were sampled in a panel framework.
contributing indirectly to economic growth. However, their
impact on long-term growth is less clear, as they may not The main objective of this study is to examine the effect
always be channeled into productive investments. On the of remittances and external debt on economic growth in
other hand, external debts are often used to finance large- SSA countries. The specific objectives are to examine the
scale projects that drive economic development, but they individual effect of remittances and external debt on
can also lead to economic vulnerability if the debt- economic growth in Sub Saharan African countries.
servicing costs become unsustainable (Mbaye et al., Literature Review
2018). The volatility of these inflows complicates long-
term planning and economic stability, as countries cannot Conceptual Review
reliably predict the availability of funds to support their
development agendas (World Bank, 2023). Remittances

While there is extensive literature on the impact of foreign Remittances refer to the transfer of money or goods by
capital on economic growth in SSA, much of it has migrant workers to their families or friends in their home
focused on remittances and external debt in isolation, countries. These transfers serve as an essential source
often overlooking the combined effects of these capital of income for many households in developing countries,
sources (Meyer & Shera, 2017; Ratha & Mohapatra, contributing to poverty reduction, improving living
2022). This narrow focus has been identified as a standards, and supporting economic development
limitation in literature. For instance, Ketkar and Ratha (Jongwanich & Kohpaiboon, 2019). Remittances can
(2019) argue that existing studies often emphasize be sent through various channels, including banks,
remittances' positive effects on poverty reduction while money transfer operators, online platforms, or informal
neglecting their broader economic impact. Similarly, channels such as hand-delivery.
Becker et al. (2021) note that analyses of external debt World Bank (2024) described remittances as “transfers
often fail to account for the interplay between debt and and compensation of employees. Personal transfers
other forms of foreign capital, such as remittances, which consist of all current transfers in cash or in kind made or
could influence overall economic outcomes. received by resident households to or from non-resident
Moreover, empirical findings regarding the effects of households”. This definition distinguishes between two
remittances and external debt on economic growth have main components of remittance: personal transfers and
been mixed. Some studies have shown that remittances compensation of employees. Personal transfers include
can significantly boost economic growth by increasing any current transfers of money or goods between
household consumption and investment in human capital households, which can be either sent or received. The
(Adams & Cuecuecha, 2013). Others, however, suggest compensation of employees’ component covers wages
that remittances may have only a marginal impact on and salaries sent home by migrant workers, representing
growth, as they are often spent on consumption rather a significant part of remittances from those employed
than productive investments (Giuliano & Ruiz-Arranz, abroad.
 24 | Applied Journal of Economics, Management, and Social Sciences, 2024, Vol. 5, No. 4

Bucevska (2022) view remittances as “sum of two Empirical Review

different items from the Balance of Payments (BOP):
personal transfers, which are current transfers in cash or Remittances and Economic Growth
in-kind between resident and non-resident households."
This definition situates remittances within the framework Bucevska (2022) empirically investigates the role of
of the Balance of Payments, which records all economic remittances in stimulating economic growth in six
transactions between residents and non-residents. It Southeast European (SEE) countries: Albania, Bosnia
specifies that remittances include personal transfers, and Herzegovina, Croatia, Montenegro, North
which encompass all forms of current transfers—both Macedonia, and Serbia, covering the period from 2008 Q1
cash and goods—that do not require a quid pro quo. to 2020 Q2. Using panel regression with fixed effects, the
study accounts for cross-sectional heterogeneity among
Taylor and Mora (2023) defined remittances to include all these nations. The results indicate a significant positive
current transfers in cash or in kind made or received by impact of remittances on economic growth in the region,
resident households to or from non-resident households. underscoring the importance of remittances in stimulating
This definition broadens the concept to include not only economic activity even during periods of crisis, such as
money sent by migrants but also any transfers received, the global financial crisis and the COVID-19 pandemic.
providing a more comprehensive view of the financial While the use of fixed-effects models helps account for
exchanges between migrants and their home countries. unobserved heterogeneity, it may not fully address the
By mentioning both "made" and "received" transfers, it potential endogeneity between remittances and economic
encapsulates the bidirectional flow of resources, which growth. Remittances might both influence and be
might include, for example, families back home sending influenced by growth, leading to possible biased
goods or money to migrants abroad as well. estimates. The study could have strengthened its findings
by employing more robust econometric techniques such
External Debt
as Instrumental Variable (IV) estimation or system
External debt refers to the total amount of debt a country Generalized Method of Moments (GMM).
owes to foreign creditors, which can include foreign
governments, international financial institutions such as Ur Rehman and Hysa (2021) investigate the effects of
the International Monetary Fund (IMF) and the World financial development and remittances on economic
Bank, as well as private sector entities like banks and growth in six Western Balkan countries (WBC) from 2000
bondholders (Agyeman et al., 2022). to 2017. Using the System GMM method, they examine
how financial development (measured by the broad
According to Wijeweera et al. (2005), external debt is the money stock ratio) and remittances interact to influence
total debt owed to foreign creditors by a country. This economic growth. The results show that both remittances
includes all financial obligations a country owes to foreign and financial development positively impact growth, but
entities. This definition provides a broad view of external the interaction between them has a negative effect,
debt, emphasizing that it encompasses total debt owed to suggesting that remittances might crowd out the financial
foreign creditors. It highlights that external debt includes sector’s role in economic growth in less developed
all financial obligations, which covers various forms of financial systems. The study’s limited data on financial
liabilities such as loans, bonds, and other financial system depth in Western Balkan countries could lead to
instruments. misinterpretations of the interaction effects. Additionally,
Ellyne & Flinch (1990) view gross external debt as “the the study would benefit from a deeper exploration of
amount, at any given time, of disbursed and outstanding institutional quality as a mediating factor between
financial liabilities owed to non-residents." This definition remittances, financial development, and growth,
specifies gross external debt as the total amount of considering the variability of financial sector robustness
disbursed and outstanding financial liabilities. The term across countries.
disbursed refers to funds that have been made available
to the borrower, while outstanding indicates the portion of Sutradhar (2020) investigates the impact of workers'
the debt that remains unpaid. remittances on economic growth in four South Asian
countries—Bangladesh, Pakistan, Sri Lanka, and India—
over the period 1977 to 2016. Using the fixed-effect panel
method, the study finds a negative effect of remittances
on economic growth in Bangladesh, Pakistan, and Sri
Lanka, while observing a positive impact in India. The
study suggests that remittances in the former countries
 25 | Applied Journal of Economics, Management, and Social Sciences, 2024, Vol. 5, No. 4

may not be productively invested, leading to a weaker panel methods, its generalized approach might overlook
impact on growth. The study's focus on only four South specific institutional or economic frameworks unique to
Asian countries limits the generalizability of the findings to each West African country. The findings could be more
other emerging or developed economies. The cultural and insightful if the analysis had been tailored to account for
economic contexts of these countries are unique and may local factors such as governance, political stability, or
not reflect broader global trends. Additionally, the use of exchange rate volatility in individual countries.
a fixed-effect model may not adequately address
endogeneity issues, which could have been mitigated by External Debt and Economic Growth
employing techniques like GMM.
Arjun and Mishra (2024) investigate the relationship
Cazachevici et al. (2020) examines the impact of between external debt and economic growth across 18
expatriate workers’ remittances on economic growth in emerging economies from 1996 to 2020, focusing on the
low- and middle-income countries. Analyzing 95 studies moderating role of institutional quality. They employ OLS
and 538 regression equations, the authors find that regression to analyze the data and find that an increase
approximately 40% of studies report a positive effect of in external debt negatively impacts economic growth.
remittances on growth, 40% report no effect, and 20% However, this adverse effect is moderated by
report a negative effect. The analysis reveals significant improvements in institutional quality, particularly in areas
publication bias favoring positive results, suggesting that such as anti-corruption measures, voice and
the impact of remittances on growth may be more accountability, and perceptions of the rule of law. The
nuanced than is often reported. The aggregation bias study concludes that institutional reforms can help
inherent in meta-analyses could lead to the countries manage the detrimental effects of external debt
oversimplification of complex relationships between by fostering transparency and better governance, thus
remittances and growth, particularly in diverse country improving economic growth outcomes. However, the use
contexts. The results did not capture context-specific of OLS regression fails to address the potential
factors such as institutional quality, governance, or endogeneity between external debt and economic
economic policies, which are crucial to understanding the growth, where both variables may be mutually influencing
varied impacts of remittances on growth. each other. This methodological flaw could lead to biased
estimates. Moreover, the study does not account for
Abduvaliev and Bustillo (2020) evaluate the influence external shocks or global economic conditions that may
of remittances on economic growth and poverty reduction affect both debt levels and growth, thus limiting the scope
in 10 post-Soviet states, focusing on the Commonwealth of its findings.
of Independent States (CIS). Using panel data from 1990
to 2018, the study finds that a 1% increase in remittance Manasseh et al. (2022) assess the impact of external
flows leads to a 0.25% increase in per capita GDP and a debt and its volatility on economic growth in 30 Sub-
2% decrease in poverty severity. The results suggest that Saharan African (SSA) countries over the period 1997–
remittances play a crucial role in elevating income levels 2020. They use the Dynamic System Generalized Method
and stabilizing consumption patterns in the CIS. The of Moments (GMM) to analyze how fluctuations in
study’s focus on post-Soviet states may not capture the external debt and governance quality interact to influence
broader implications of remittances in regions with economic growth. Their findings indicate that both
differing political and economic structures. Furthermore, external debt and its volatility negatively affect economic
the reliance on remittances as the primary source of growth, with debt volatility exacerbating the adverse
foreign capital limits the scope of the study, as other impacts. However, they also find that governance quality
external flows such as FDI or foreign aid may also play (i.e., strong institutional frameworks) can help mitigate
critical roles in influencing economic growth and poverty. these negative effects by improving resource allocation
and reducing uncertainty, ultimately promoting growth.
Adjei et al. (2020) investigate the relationship between One limitation of the study is its focus solely on external
remittances and economic growth in seven West African debt as a source of foreign capital, neglecting other
countries (Burkina Faso, Ghana, Guinea, Guinea-Bissau, important forms such as Foreign Direct Investment (FDI),
Mali, Nigeria, and Togo) from 2004 to 2018. Using which may also significantly impact growth. Additionally,
dynamic panel econometric techniques, including GMM, the precision challenge in measuring governance quality
the study finds that remittances have a significant positive and how it interacts with debt complicates the study's
effect on economic growth in the region, with remittance conclusions, as governance metrics can be subjective or
inflows enhancing both household consumption and inconsistently measured across countries.
investment. Although the study uses advanced dynamic
 26 | Applied Journal of Economics, Management, and Social Sciences, 2024, Vol. 5, No. 4

Makun (2021) explores the relationship between external level, the burden of repayment and interest costs
debt and economic growth in Fiji from 1980 to 2018, using outweighs the benefits, leading to a decline in growth. The
the neoclassical growth framework and the selection of countries in the panel appears arbitrary, as
Autoregressive Distributed Lag (ARDL) model. The study the study does not provide a clear rationale or systematic
investigates both linear and nonlinear associations criteria for choosing the sample. Additionally, the lack of
between external debt and economic growth over the long sensitivity analysis leaves questions about the robustness
term. The findings show that external debt negatively of the results, particularly regarding whether the threshold
affects growth in a linear model, confirming the crowding- effect is consistent across different subgroups of
out effect of debt. In the nonlinear analysis, the study countries or time periods.
reveals that once external debt surpasses a certain
threshold, it becomes detrimental to growth, reflecting the Theoretical Literature
debt overhang hypothesis. The threshold analysis
emphasizes that while some debt may be necessary for Solow – Swan Exogenous Growth theory
development, excessive borrowing leads to inefficiencies
The theoretical framework of this study is that of the
and economic stagnation. While the ARDL model is
Solow-Swan exogenous growth model. The Solow-Swan
effective for examining long-run relationships, it does not
exogenous growth model, introduced in 1956 by Robert
adequately address endogeneity issues that may arise
Solow and Trevor Swan, provides a fundamental
from the interaction between external debt and growth.
framework for analyzing the effect of foreign capital
Additionally, the study lacks a post-estimation sensitivity
inflows on economic growth (Solow, 1956).
analysis, which could have tested the robustness of the
results across different model specifications. The model highlights the critical role of foreign capital
inflows in boosting economic growth by increasing the
Mohsin et al. (2021) examine the relationship between capital stock (Joseph & Obikaonu, 2021). Furthermore,
external debt and economic growth in South Asian the model emphasizes the role of technological progress
countries (Afghanistan, Bangladesh, Bhutan, India, in achieving sustainable long-term economic growth
Pakistan, Sri Lanka, Maldives, and Nepal) from 2000 to which can be improved through foreign capital such as
2018. Using multiple econometric techniques, including external debt for infrastructural development and
panel OLS, fixed effects, quantile regression, and robust remittances (Ratha & Mohapatra, 2022). This aligns with
output regression, the study finds that while external debt the Solow-Swan theory, which explains the importance of
generally has a negative impact on economic growth, combining foreign capital with efforts to enhance
external debt stock exhibits a positive relationship with productivity through innovation and skill development.
growth under certain conditions. This suggests that
countries with better debt management practices may Methodology
leverage external debt for development without facing the This study adopts ex post facto research design. The
typical growth trade-offs. The study also explores how independent variables are remittances and external debt,
debt servicing costs can undermine the positive effects of while the dependent variable is economic growth proxied
debt stock accumulation. Despite the study’s use of a with Real Gross Domestic Product (RGDP). The study
broad range of econometric techniques, it fails to address employed annual secondary data which were sourced
endogeneity concerns that arise from the complex from the World Bank Development Indicator database
relationship between external debt and economic growth. between 1998 and 2023 for 26 countries. The General
The contradictory results between debt stock and overall Method of Moment was employed to estimate the
debt also suggest potential omitted variable bias, as other relationship given that it addresses potential endogeneity
factors, such as political stability or fiscal policies, may be and heterogeneity issues in the model.
influencing the results.
The basic model is as stated in equation (1):
Zaghdoudi (2020) investigates the nonlinear relationship
𝑅𝐺𝐷𝑃𝑖𝑡 = 𝛼 + 𝛷𝑅𝐺𝐷𝑃𝑖𝑡−1 + 𝛽1 𝑅𝑖𝑚𝑖𝑡𝑡𝑎𝑛𝑐𝑒𝑠𝑖𝑡 + 𝛽2 𝐸𝑋𝑇𝐷𝑖𝑡
between external debt and economic growth in middle-
+ 𝜆𝑖 + 𝜇𝑖𝑡 ………… (1)
and low-income countries from 2002 to 2016. Utilizing a
dynamic panel threshold model, the study finds that where; 𝑦𝑖𝑡 = Real GDP and 𝛼 is the intercept, 𝛷 = the
external debt has a threshold level (15.28%), beyond coefficient of the lagged Real GDP. 𝑅𝑒𝑚𝑖𝑡𝑡𝑎𝑛𝑐𝑒𝑠𝑖,𝑡
which it starts to negatively affect economic growth. represent remittances, 𝐸𝑋𝑇𝐷𝑖𝑡 represent external debt.
Below this threshold, external debt can contribute
positively to growth by financing development projects Equation (1) can be remodeled to capture more efficient
and infrastructure. However, once the debt surpasses this moment conditions as given in equation (2 & 3).
 27| Applied Journal of Economics, Management, and Social Sciences, 2024, Vol. 5, No. 4

E[𝑅𝐺𝐷𝑃𝑖,𝑡−𝑗 (𝜇𝑖,𝑡 − 𝜇𝑖,𝑡−1 )] = 0; if t =4, ….T, j ≥ 3…… (2) 𝜇𝑖𝑡 = Residuals

𝜆𝑖 = individual country-specific effects in the panel,
E[𝑅𝑒𝑚𝑖𝑡𝑡𝑎𝑛𝑐𝑒𝑠, 𝐸𝑋𝑇𝐷𝑖,𝑡−𝑗 (𝜇𝑖,𝑡 − 𝜇𝑖,𝑡−1 )] = 0; if, t =4, ….T, 𝛽1−2 , = coefficients of the independent variables.
j ≥ 3, …… (3)
Results and Discussion
Where:
RGDP = Real Gross Domestic Product This section will present and discuss the result from the
Remittances = Remittances findings. The section starts with presentation and
EXTD = External Debt discussion of the results focusing first on the preliminary
t = Periods covered by the study test and gradually moving to the actual estimated result.
α = Intercept of the regression,

Table 1: Descriptive Statistics

Variables Mean Std. Dev Min Max Skewness Kurtosis Prob.

Rgdp 47800000.0 90800000 697000.0 551000000.0 0.271 3.618 0.180
extd 15700000.0 25600000.0 276000.0 191000000.0 1.854 6.879 0.200
Remittance 2.028 2.408 19.43 25.97 -0.006 2.665 0.130
($10,000)
Source: Author Schematization based on Stata output

Table 1 presents the descriptive statistics result. The distribution is heavily skewed to the right, with more
result from Table 1, revealed that the mean value of occurrences of lower external debt levels and a few
RGDP is $47.8 million, indicating the average size of the exceptionally high values. The kurtosis of 6.879 suggests
economy during the period under review. The standard a leptokurtic distribution with significantly heavier tails
deviation of $9.8 million demonstrates substantial than a normal distribution, indicating the presence of
variability in economic output, implying significant extreme values in external debt.
fluctuations in the country’s economic performance. The
minimum value of RGDP is $697,000, while the maximum The mean remittance is 2.028, which corresponds to
reaches $551 million, indicating a wide range between the $20,280 when, reflecting the average amount of
smallest and largest economic outputs recorded. The remittances received during the period. The standard
skewness of 0.271 suggests a slightly positive skew, deviation of 2.408 (equivalent to $24,080) highlights
meaning the distribution is almost symmetrical but with a moderate variability in remittance inflows. The minimum
few higher RGDP values. The kurtosis of 3.618, slightly value of 19.43 ($194,300) and the maximum value of
above the normal threshold of 3. The probability value of 25.97 ($259,700) indicate a relatively small range of
0.180 suggests that the data is normally distributed. remittance inflows compared to the other variables. The
skewness of -0.006 suggests that the distribution of
Similarly, the mean of external debt is $15.7 million. The remittances is almost perfectly symmetrical, with no
standard deviation is $25.6 million, indicating high significant skew toward either high or low values. The
volatility in debt levels, suggesting that the country’s kurtosis of 2.665, slightly below the normal value of 3,
external debt fluctuated significantly. The minimum implies that the distribution is nearly normal with thinner
external debt is $276,000, while the maximum value is tails, suggesting fewer extreme values in remittances.
$191 million, highlighting a substantial gap between the The probability value of 0.130 indicates that the
lowest and highest debt levels. The skewness of 1.854 distribution does not significantly differ from normality.
indicates a strong positive skew, meaning that the
Multicollinearity Test

Table 2: Multicollinearity test using the Variance Inflation (VIF)

Variables VIF 1/VIF

Remittances 1.45 0.432
LEXTD 1.64 0.523
Mean VIF 1.58
Source: Author Schematization based on Stata output
 28 | Applied Journal of Economics, Management, and Social Sciences, 2024, Vol. 5, No. 4

Table 3: Correlation Matrix

LRGDP Remittances LEXTD

LRGD 1
Remittances 0.159*** 1
LEXTD 0.742*** -0.031** 1
Note: Significance is indicated as follows: ***, ** and * for 1%, 5% and 10% respectively.

The Variance Inflation Factor (VIF) results indicate that The correlation matrix shows a positive and significant
multicollinearity is not a significant concern in this model, relationship between LRGDP and external debt (LEXTD)
as the VIF values for remittances (1.45) and external debt with a correlation of 0.742, indicating that higher external
(Lextd) (1.64) are well below the common threshold of 10. debt is associated with higher real GDP. There is also a
The mean VIF of 1.58 further confirms that the weak but significant positive correlation between LRGDP
independent variables are not highly correlated with each and remittances (0.159). However, the negative
other, allowing for reliable regression estimates. correlation between remittances and LEXTD (-0.031) is
weak and suggests a slight inverse relationship, though
its practical significance may be minimal.

Table 4: Panel Unit Root test Using IPS and Fisher Approach/ AIC Criteria

Fisher @ First
Variables IPS @ Level Fisher @ Level
IPS @ 1st Difference Difference
Statistics/P-value
Statistics/P-value Statistic/P-value Statistics/ P-value

LRGDP -6.968(0.000)*** -9.252 (0.000)*** -5.452 (0.000)*** -8.833 (0.000)***

LEXTD -4.227 (0.025)** -11.136 (0.000)*** -4.192 (0.031)** -10.552 (0.000)***
LRemm -1.5944 (0.054)* -10.831 (0.000)*** -2.244 (0.064)* -9.920 (0.000)***
Notes: The P-value is enclosed in the parentheses. All variables are logged, and significance is indicated as follows:
***, ** and * for 1%, 5%, and 10%, respectively.

Table 5: Kao and Pedroni Cointegration Test

Kao-cointegration z-test (p-value)

Modified Dickey-Fuller t -4.259 (0.000)
Dickey-Fuller t -2.185 (0.041)
Augmented Dickey-Fuller -1.780 (0.094)
Unadjusted Modified Dickey-Fuller t -4. 015 (0.000)
Unadjusted Dickey-Fuler t -2.847 (0.006)
Pedroni Cointegration
Modified Phillips-Perron t 7.284 (0.000)
Phillips-Perron t -2.632 (0.018)
Augmented Dickey-Fuller t -4.041 (0.012)
Source: Author

The panel unit root test results using both the IPS and difference. This ensures that the data is suitable for further
Fisher approaches reveal that LRGDP and LRemm are time series or panel data analysis.
stationary at the level, as indicated by their p-values being
less than the 0.05 significance level. This suggests that The cointegration test results, using both the Kao and
these variables do not have a unit root and are stable over Pedroni approaches, provide strong evidence of a long-
time in their level form. After first differencing, all term equilibrium relationship among the variables. The
variables, including those that were not initially stationary, significant p-values across the various tests (e.g.,
became significant, confirming their stationarity at the first Modified Dickey-Fuller t-test with a p-value of 0.000 in
both Kao and Pedroni tests) indicate that the null
 29 | Applied Journal of Economics, Management, and Social Sciences, 2024, Vol. 5, No. 4

hypothesis of no cointegration can be rejected. This together over time, maintaining a stable long-term
suggests that despite being non-stationary at their levels, relationship.
the variables are cointegrated, meaning they move
Table 6: Estimated models OLS, Fixed Effect, and System GMM:
RGDP = Dependent Variable
Variables 1 2 3 4
(OLS) (Fixed Effect) (Difference GMM) (System GMM)
lrgdp 0.677*** (0.000) 0.641*** (0.000) 0.622** (0.000) 0.609*** (0.000)
Remittances 0.078** (0.024) 0.071** (0.022) 0.041** (0.033) 0.071*** (0.021)
LEXTD 0.311*** (0.007) 0.056*** (0.000) 0.083** (0.032) 0.143** (0.014)
_cons 6.43*** (0.000) 14.93** (0.033) 8.62*** (0.023) 24.7*** (0.061)
Observation 228 228 228 228
F* (P-value) (0.000)*** (0.000) (0.000) (0.000)
AR (1) 0.427 0.117
AR (2) 0.268 0.216
Sargan test 0.273 0.216
Hansen test 0.210 0.317
P-value in parentheses, p<0.10=*, P<0.05 = **, p<0.01 = ***, eqtn(1) represent the OLS model, (2) represents fixed effect, (3)
represents difference GMM model, (4) represents system GMM.

Table 6 presents the results of an analysis of the impact

Similarly, the coefficient for external debt (LEXTD) is
of foreign capital inflows on economic growth in Sub-
0.143, which is also positive and significant. This implies
Saharan Africa (SSA), with real GDP (RGDP) as the
that a 1 percent increase in external debt results in a 14.3
dependent variable. The independent variables include
percent increase in economic growth. The elasticity
remittances (remittances) and external debt (LEXTD).
indicates that, in this context, external borrowing has been
The results are reported across four different models:
effectively utilized to spur growth. The funds acquired
Ordinary Least Squares (OLS), Fixed Effects, Difference
through external debt are likely being channeled into
GMM, and System GMM. While the OLS (column 1),
productive investments such as infrastructure, education,
Fixed Effects (column 3), and Difference GMM (column
and healthcare, which in turn stimulate economic activity
3), models provide useful benchmarks, the focus of the
and contribute to long-term economic development.
discussion is on the System GMM results (Column 4),
which are particularly important due to their ability to
address endogeneity and control for unobserved The validity of the System GMM results, confirmed by the
heterogeneity. AR(1), AR(2), Sargan, and Hansen tests, indicates that
the model effectively addresses potential endogeneity
The results from the System GMM model reveal important issues, making these economic interpretations robust and
economic insights into the factors influencing real GDP reliable. This suggests that policymakers should consider
(RGDP). The positive and significant coefficient of lagged the long-term effects of GDP, the beneficial role of
GDP (0.609) indicates strong persistence in economic remittances, and the careful management of external debt
growth, meaning that past economic performance has a in formulating strategies for sustained economic growth.
substantial and lasting influence on current GDP. This The findings of this study align with existing empirical
suggests that economies with higher growth in previous literature on the positive impact of foreign capital inflows
periods are likely to continue growing, highlighting the on economic growth in Sub-Saharan Africa (SSA). The
importance of maintaining consistent economic policies present study finding is consistent with the work of
and conditions that support sustained growth. The Adams and Cuecuecha (2019) and Giuliano and Ruiz-
positive and significant coefficient for remittances (0.071) Arranz (2020), who found that remittances positively
suggests that a 1 percent increase in remittances leads to contribute to economic growth by increasing household
a 7.1 percent increase in economic growth. This elasticity consumption and investment. Similarly, the findings on
indicates that remittances from individuals working external debt align with those of Ostry et al. (2021), who
abroad play a role in fostering economic development in concluded that external debt could enhance economic
the receiving country. These inflows not only boost growth when used for productive investments, indicating
household consumption but also provide vital capital for that debt has been effectively utilized in SSA to stimulate
small businesses and investment in productive sectors, economic activity.
thus supporting overall economic growth.
 30 | Applied Journal of Economics, Management, and Social Sciences, 2024, Vol. 5, No. 4

Conclusion and Recommendations are contingent on its sustainable management.

Mismanagement or excessive borrowing can lead to debt
The study concludes that both remittances and external distress, which may undermine long-term economic
debt have significant and distinct contributions to stability. Therefore, SSA countries must develop strong
economic growth in Sub-Saharan Africa (SSA). fiscal policies to ensure that external debt is utilized
Remittances play a vital role by providing households with efficiently and that debt levels remain sustainable.
additional income that can be used for consumption or
reinvested in small businesses, which in turn stimulates Based on these findings, the study recommends that SSA
local economic activity. The inflow of remittances not only countries adopt targeted financial policies that maximize
helps improve the standard of living for recipients but also the economic benefits of both remittances and external
acts as an important source of capital for micro- debt. For remittances, creating financial products and
entrepreneurship and local investments, fostering services that encourage savings and investments can
broader economic development. Given this, it is crucial for help channel these funds into areas that support
policymakers to implement mechanisms that channel sustained economic growth. For external debt,
remittances into more productive sectors of the economy, governments should focus on improving public financial
such as formal investment opportunities, rather than management systems and ensuring transparency in
relying solely on their use for consumption. borrowing practices. Additionally, external debt should be
directed toward projects with high economic returns to
On the other hand, external debt has also shown to ensure that borrowed funds contribute effectively to
positively influence economic growth, if it is effectively national development and do not jeopardize debt
managed and allocated towards productive projects. The sustainability. By strengthening financial management
study concludes that when external debt is directed frameworks and maintaining fiscal discipline, SSA
towards infrastructure, education, healthcare, or other countries can leverage foreign capital inflows to support
critical development projects, it can significantly enhance sustained, long-term economic growth while minimizing
economic activity and improve long-term growth associated risks.
prospects. However, the benefits of external borrowing

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