Differential Impacts of Bilateral and Multilateral Concessional Debts on Public Investment in Sub-Saharan Africa

Abstract

The relationship between concessional debt and public investment in developing economies has been traditionally modeled with linear and symmetric assumptions. This study examines the potentially asymmetric effects of bilateral and multilateral concessional debts on public investment in 32 sub-Saharan African countries from 1985 to 2020, addressing a critical gap in understanding debt-investment dynamics in developing contexts. Using linear and non-linear Panel ARDL models, the analysis reveals significant asymmetries. Positive shocks to bilateral concessional debt are associated with a 0.14% increase in public investment, while negative shocks lead to a 0.05% decrease. For multilateral concessional debt, a 1% increase corresponds to a 0.26% rise in public investment, compared to a 0.7% increase for a 1% decrease. This counterintuitive finding suggests that reductions in multilateral debt might stimulate improved domestic resource mobilization or increased efficiency in public spending. The Pooled Mean Group estimation shows a positive relationship between multilateral concessional debts and public investment in both short and long run, with stronger long-run effects. Institutional quality significantly impacts investment outcomes, with a 1% decline in the institutional quality index leading to a 0.2% short-run and 0.5% long-run decrease in public investment. These findings challenge conventional wisdom and highlight the complex interplay between concessional debt, institutional quality, and public investment in sub-Saharan Africa. The results underscore the need for tailored, country-specific policy approaches that consider the asymmetric effects of different debt types and the crucial role of institutional frameworks in leveraging concessional financing for sustainable development.

JEL classification: C51, H54, E6