Abstract:

Accumulation of external debt is a common phenomenon of developing countries at the early stage of economic development. In this regard, there are two critical theories – the debt overhang theory and crowed out effect – about the effect of external debt on investment. Hence, the main objective of this study is to examine the crowding-out and the debt overhang effect of external debt by analyzing the relationship between external debt and private investment in HIPCs of SSA nations for the period ranging from 1990-2013 using Pooled Mean Group estimation technique. The study shows that external debt accumulation leads to crowding-out of private investment and debt overhang on output. Besides, it recommends that enhancing private investment to achieve rapid and sustainable economic growth is vital. Hence, following appropriate macroeconomic policies that reduce the adverse effect of external debt on private investment is essential.