An empirical analysis of the impact of external debt and Government debt on economic growth in South Africa : 1970-2015

Abstract

The management of debt has always been a major concern for many developing countries in the world, including South Africa. Debt is amongst the main macro-economic indicators that provide an image of the country in international markets. This study analyses the relationship between government and external debt on economic growth in South Africa from 1970 to 2015. The study's macro-economic background is examined by reviewing the trends of debt and growth in South Africa. The study reviews the literature on debt and economic growth, where an empirical model linking the theoretical and empirical literature is estimated, making use of the ARDL co integration method. The variables specified in the methodology include gross domestic product (GDP), foreign debt (FD), total loan debt of national government (GD), gross national expenditure (EXP), and gross fixed capital formation (INV). The results obtained by the study indicate that FD and INV have a negative impact on growth, while GD and EXP have a positive impact on economic growth in South Africa. In order to confirm that the model is in accordance with the classical linear regression assumptions, diagnostic and stability tests were conducted. The ARDL test revealed that there is a co integration relationship between government debt, external debt and economic growth in South Africa. Therefore, it is evident that sound government debt management leads to economic growth and prosperity.