ERF 27th Annual Conference
External Debt and Growth in Highly Leveraged MENA Countries When Interest Rates Are Falling
No.
ERF27_141
Publisher
ERF
Date
May, 2021
Topic
G. Financial Economics
Due to the outbreak of the COVID-19 pandemic, external debt of developing countries and economies in transition accumulated debt that that is worth US$9.9 trillion. This is the greatest level on record given the time period and is more than twice the level of the US$4.4 trillion debt registered in the aftermath of the 2008-2009 global financial crisis. Fueled by a policy of Central Bank quantitative easing, a clear declining trend in interest rates has emerged in world markets. Both yields on government bonds and interbank offer rates dropped precipitously in many European countries including Japan and have recently turned negative. A combination of lower interest rates and sluggish economic growth in developing countries has translated into a sharp rise in the ratio of external debt to income from an average of 61% in 2015 to 82% in 2019 in six highly leveraged countries in MENA. Using a panel quantile regression technique, we explore the relationship between external debt and economic growth by delving into the experiences of highly indebted countries in the MENA region (Bahrain, Egypt, Jordan, Lebanon, Morocco and Tunisia) during 2006-2019. Our findings provide a support for the hypothesis that high debt reduces economic growth, underscoring that these countries failed to utilize the external debt wisely and prudently. While this effect seems not homogeneous across the various quantile levels, it is necessary to take into account the economic circumstances of countries when accumulating debt. Our result remain robust after controlling for endogeneity.
Research Fellows
Mahmoud Haddad
Professor, The University of Tennessee at Martin,...
Research Fellows
Shawkat Hammoudeh
Associate Professor, Department of Economics, Drexel University
Research Fellows
Sam Hakim
Analytics Edge
Authors
Refk Selmi
Associate Professor of Finance and Data Science,...